Draft Registration Statement
Table of Contents

As confidentially submitted to the Securities and Exchange Commission on February 12, 2016.

This draft registration statement has not been publicly filed with the Securities and Exchange Commission

and all information herein remains strictly confidential.

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

BlackLine, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   7372   46-3354276
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
 

(I.R.S. Employer

Identification Number)

21300 Victory Boulevard, 12th Floor

Woodland Hills, CA 91367

(818) 223-9008

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Therese Tucker, Chief Executive Officer

Mark Partin, Chief Financial Officer

BlackLine, Inc.

21300 Victory Boulevard, 12th Floor

Woodland Hills, CA 91367

(818) 223-9008

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Jeffrey D. Saper, Esq.

Katharine A. Martin, Esq.

Allison B. Spinner, Esq.

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, CA 94304

(650) 493-9300

    

Karole Morgan-Prager, Esq.

Chief Legal Officer

BlackLine, Inc.

21300 Victory Boulevard, 12th Floor

Woodland Hills, CA 91367

(818) 223-9008

  

Steven B. Stokdyk, Esq.

Latham & Watkins LLP

355 South Grand Avenue

Los Angeles, CA 90071

(213) 485-1234

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class
of Securities to
be Registered
  Shares
to be
Registered(1)
  Proposed
Maximum
Offering Price
Per Share
  Proposed
Maximum
Aggregate
Offering Price(2)
  Amount of
Registration Fee

Common Stock, $0.01 par value per share

      $   $   $

 

 

(1) Includes the additional shares that the underwriters have the option to purchase.
(2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) under the Securities Act, as amended.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated February 12, 2016.

            Shares

 

LOGO

BlackLine, Inc.

Common Stock

 

 

This is an initial public offering of shares of common stock of BlackLine, Inc.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $            and $            . We intend to apply to list the common stock on             under the symbol “BL”.

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, may elect to comply with certain reduced public company reporting requirements in future reports after the completion of this offering.

 

 

See “Risk Factors” on page 16 to read about factors you should consider before buying shares of the common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

        Per Share      Total  

Initial public offering price

    $                        $                    

Underwriting discounts and commissions(1)

    $                    $                

Proceeds, before expenses, to BlackLine, Inc.

    $                    $                

 

(1) See the section titled “Underwriting” for a description of the compensation payable to the underwriters.

To the extent that the underwriters sell more than             shares of common stock, the underwriters have the option to purchase up to an additional             shares from BlackLine, Inc. at the initial public offering price less the underwriting discounts and commissions.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on             , 2016.

 

Goldman, Sachs & Co.      Credit Suisse

Pacific Crest Securities

           a division of KeyBanc Capital Markets

  Raymond James    William Blair       Baird

 

 

Prospectus dated             , 2016


Table of Contents

TABLE OF CONTENTS

Prospectus

 

     Page  

Prospectus Summary

     1   

Summary Consolidated Financial Data

     10   

Risk Factors

     16   

Special Note Regarding Forward-Looking Statements

     45   

Industry and Market Data

     46   

Use of Proceeds

     47   

Dividend Policy

     48   

Capitalization

     49   

Dilution

     51   

Selected Consolidated Financial Data

     54   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     59   

Business

     91   

Management

     105   

Executive Compensation

     116   

Certain Relationships and Related Party Transactions

     126   

Principal Stockholders

     131   

Description of Capital Stock

     133   

Shares Eligible for Future Sale

     140   

Material United States Federal Income Tax Consequences to Non-U.S. Holders of our Common Stock

     142   

Underwriting

     147   

Legal Matters

     152   

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     152   

Experts

     152   

Where You Can Find More Information

     153   

Index to Consolidated Financial Statements

     F-1   

Through and including             , 2016 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

i


Table of Contents

For investors outside the United States: Neither we nor the underwriters have done anything that would permit our initial public offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside of the United States.

 

ii


Table of Contents

PROSPECTUS SUMMARY

This summary highlights selected information appearing elsewhere in this prospectus. You should read the following summary together with the more detailed information appearing in this prospectus, including our consolidated financial statements and related notes, and the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related notes included elsewhere in this prospectus, before deciding whether to purchase shares of our common stock. Unless the context otherwise requires, the terms “BlackLine, Inc.,” “the company,” “we,” “us” and “our” in this prospectus refer to the consolidated operations of BlackLine, Inc. and its consolidated subsidiaries as a whole, references to “Silver Lake” refers to either or both of Silver Lake Sumeru Fund, L.P. and Silver Lake Technology Investors Sumeru, L.P., and references to “Iconiq” refer to any or all of Iconiq Strategic Partners, L.P., ICONIQ Strategic Partners-B, L.P. and Iconiq Strategic Partners Co-Invest, L.P., BL Series.

BlackLine, Inc.

Overview

We have created a comprehensive cloud-based software platform designed to transform and modernize accounting and finance operations for organizations of all types and sizes. Our secure, scalable platform supports critical accounting processes such as the financial close, account reconciliation, intercompany accounting and controls assurance. By introducing software to automate these processes and to enable them to function continuously, we empower our customers to improve the integrity of their financial reporting, achieve efficiencies and enhance real-time visibility into their operations.

Critical accounting and finance processes underlie the integrity of an organization’s financial reports. The lack of effective accounting and finance tools can result in inefficient and cumbersome processes and, in some cases, accounting errors, restatements and write-offs, as well as material weaknesses and significant deficiencies. Traditional enterprise resource planning, or ERP, systems do not generally provide effective solutions for processes handled outside of an organization’s general ledger, such as balance sheet account reconciliation, intercompany transaction accounting and the broader financial close process. Many organizations also use multiple ERPs and other financial systems without a platform to efficiently integrate them. As a result, organizations rely on spreadsheets and other labor-intensive processes to manage these tasks. We believe that we are creating a new category of powerful software that is capable of replacing this outdated approach, which is unsuited for the increasing regulatory complexity and transaction volumes encountered by many modern businesses. We believe our customers benefit from cost savings through improvements in process management and staff productivity, in addition to a faster financial close.

Our mission is to transform how corporate accounting and finance departments operate. Our approach modernizes what historically has been done through batch processing and manual controls typically applied only during the month, quarter or year-end financial close, and delivers dynamic workflows embedded within a real-time, highly automated framework, a process we refer to as “continuous accounting.” It also enables up-to-date analytics, provides industry-benchmarked metrics and is designed to help customers run more leanly while achieving greater accuracy, control and transparency. Our software integrates with and obtains data from more than 30 different ERP systems, including NetSuite, Oracle, SAP and Workday, as well as many other financial systems and applications such as bank accounts, sub-ledgers and in-house databases.

 

 

1


Table of Contents

We believe the need for our software has been driven by growing business and information technology complexities, transaction volumes and expanding regulatory requirements. According to a study we commissioned with Frost & Sullivan, in 2015 there were more than 46,000 corporate organizations in North America and more than 165,000 worldwide that are in our addressable market with revenues greater than $50 million. According to Frost & Sullivan, these companies employ over 13 million accounting and finance personnel, with over 5.5 million in North America alone, all of whom could be potential users of our software platform. Based on its assessment of the number of corporate organizations, accounting and finance personnel globally and certain assumptions regarding pricing of our products, Frost & Sullivan estimates that our total addressable market in 2015 was $7.2 billion in North America and $9.4 billion in Europe, Asia Pacific and Latin America, and is expected to grow to a global total addressable market of $19.7 billion by 2018.

We sell our software solutions primarily through our direct sales force, which leverages our relationships with technology vendors, professional services firms and business process outsourcers, to expand our sales process and market reach. Our distribution strategy is based on a land-and-expand model and is designed to capitalize on the ease of use and ease of implementation. Our customers include large public and private organizations and small and medium-size businesses across a variety of industries, including healthcare, technology, telecom, financial services, consumer retail and industrial equipment and services. As of September 30, 2015, we had over 119,000 individual users in approximately 100 countries across more than 1,200 customers.

We have experienced significant revenue growth and adoption of our platform in recent periods. We had revenues of $23.4 million for the period from January 1, 2013 to September 2, 2013, $8.6 million for the period from September 3, 2013 to December 31, 2013 and $51.7 million for the year ended December 31, 2014. For the nine months ended September 30, 2014 and 2015, we had revenues of $35.6 million and $59.1 million, respectively. We incurred net losses of $10.0 million for the period from January 1, 2013 to September 2, 2013, $6.7 million for the period from September 3, 2013 to December 31, 2013, $16.8 million for the year ended December 31, 2014, $11.0 million for the nine months ended September 30, 2014 and $17.5 million for the nine months ended September 30, 2015. See “Summary Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information included in this prospectus for a discussion of our financial performance.

Industry Background

Accounting is a Universal and Mission-Critical Function

Organizations need reliable financial information to plan and execute business initiatives, measure operational progress and satisfy regulatory and financial obligations. For each period-end, enterprise accounting functions typically record, process, reconcile, consolidate and report financial transactions that are consolidated into useable financial information. Traditionally, many accounting processes, such as balance sheet account reconciliation, intercompany transaction accounting and the broader financial close calendar, have been managed and tracked with spreadsheets that were manually reconciled on a periodic basis, which can often be labor-intensive, inefficient and subject to error.

Modern Business is Increasingly Complex

Organizations of all sizes are operating in an increasingly fast-moving global business environment. Accountants must process and verify transactions that occur both within and across

 

 

2


Table of Contents

international borders, involve multiple currencies and require compliance with varying legal, regulatory and tax frameworks. It is common for enterprises to have thousands of different accounts — potentially comprising billions of records—and to use numerous different financial and operational systems to store data.

The Risk of Regulatory Non-Compliance is Significant

Public accounting follows a variety of rules and rigorous standards that are highly specific, apply differently across industries and geographies and, in some cases, provide conflicting guidance. The resulting tangle of stringent and changing regulations typically requires that organizations maintain more than one set of records, invest heavily in implementing and monitoring internal controls and undergo expensive and time-consuming audits. Incorrect financial information can have severe repercussions, ranging from damage to an enterprise’s reputation to expensive remediation and investor lawsuits.

Companies Lack Real-Time, Actionable Data from Their Accounting Departments

As complexity, transaction volume and regulatory scrutiny increase, management teams often find themselves without clear and immediate insight into their accounting and finance processes and results. By the time data is manually compiled, it is often days or weeks out-of-date, limiting the ability to effectively track and analyze fluctuations and trends, detailed metrics on individual and team performance and transaction risk profiles. Such lack of visibility limits the ability of accounting managers to influence ongoing accounting operations, which can lead to costly errors such as unreconciled balances or unapproved fund transfers.

Accounting Professionals Face Compressed Deadlines and a Heightened Expectation of Accuracy

Many organizations, and public companies in particular, have adopted a practice of reporting financial information by a fixed date following their quarter close. Given limited resources, an accelerated timetable can put immense pressure on a company’s accounting function. Accounting professionals are expected not only to address business and regulatory challenges but also to achieve completeness and accuracy of operating results to ensure financial integrity.

Traditional Accounting Processes and Tools are Inefficient

The processes and software solutions traditionally employed by accountants, such as general ledgers and ERP systems, do not provide effective solutions for critical, non-general ledger accounting and finance processes such as balance sheet account reconciliation, intercompany transaction accounting and the overall management of the financial close process. Most core accounting and financing systems are designed as batch transaction repositories without the ability to consume and process continuous streams of data. In addition, most organizations use multiple ERPs and many other financial systems across their information technology environments. Traditionally available accounting tools are inflexible, expensive to configure and maintain and do not scale easily. As a result, we are addressing a clear need for new, scalable accounting and finance tools that can consume and process continuous streams of data, store this data and allow accountants to have a more streamlined, continuous approach to accounting.

 

 

3


Table of Contents

Our Solution

We provide a powerful, cloud-based software platform that is designed to automate and streamline accounting and finance operations. Key elements of our solution include:

Comprehensive Platform.    We offer an integrated suite of applications that deliver a broad range of capabilities that would otherwise require the purchase and use of multiple products to support critical accounting processes such as the financial close, account reconciliations, intercompany accounting and controls assurance. Our platform consists of seven core cloud-based products, including Account Reconciliation, Task Management, Transaction Matching, Journal Entry, Variance Analysis, Consolidation Integrity Manager and Daily Reconciliation. Customers typically purchase these products in packages that we refer to as solutions, but they have the option to purchase these products individually. Current solutions include our Reconciliation Management and Financial Close Management, Intercompany Hub and Insights.

Enterprise Integration.    Our platform integrates with a wide variety of general ledger systems, financial systems and in-house databases, customer applications and data, and over 30 ERP systems including NetSuite, Oracle, SAP and Workday. In addition, for companies with multiple systems and complex needs, we can connect with any number of general ledger systems simultaneously, resolving many of the issues associated with consolidating data across systems.

Independence.    Our platform is not dependent on any single operating system and works with most major ERP systems our customers may use. Our cross-system functionality allows us to reach a broader group of customers.

Ease of Use.    Our platform is designed by accountants for accountants to be intuitive and easy to use. Our user-friendly interface provides clear visualization of accounting and finance data, enables user collaboration and streamlines business processes.

Innovation.    Our ability to develop innovative products has been a key driver of our success and organic growth. Through a history and culture of thought leadership, we have created a new category of powerful software that automates and streamlines antiquated, manual accounting processes to better meet our clients’ diverse and rapidly changing needs, and we continue to focus on providing advanced solutions to time and labor intensive accounting practices. Examples of recent innovations include the launches of our Intercompany Hub and Insights solutions.

Security.    We have embedded robust security features in our platform designed to meet or exceed both industry standards and the stringent security requirements of our customers.

Key Benefits to our Customers

Our platform provides the following benefits to our customers:

Flexibility and Scalability.    Our unified cloud platform is designed for modern business environments and has broad applicability across large and small organizations in any industry. The platform supports complex corporate structures, provides integration across all core financial systems, manages multiple currencies and languages and scales to support high transaction volumes.

Embedded Controls and Workflow.    Our platform embeds key controls within standardized, repeatable and well-documented workflows to help ensure compliance with complex regulatory environments and to increase confidence in financial reports.

 

 

4


Table of Contents

Real-time Visibility.    With configurable dashboards, user-defined reporting and the ability to locate individual reconciliations, journals and tasks, we provide users with real-time visibility into the status, progress and quality of accounting processes.

Automation and Efficiency.    Our platform can ingest data from a variety of sources and apply powerful, rules-driven automation to reconciliations, journals and transactions. This streamlines accounting processes, minimizes manual data entry and improves individual productivity to help ensure that accounting processes are completed on time. As a result, this automation allows users to focus on value-added activities instead of process management.

Continuous Processing.    Our platform helps organizations embed quality control, compliance and financial integrity into their day-to-day accounting processes. Activities such as account reconciliation and variance analysis can be performed in real-time, thus reducing the risk of error and creating a more agile accounting environment.

Growth Strategy

Our principal growth strategies include the following:

Continue to Innovate and Expand our Platform.    Our ability to develop new, market-leading applications and functionalities is integral to our success, and we intend to continue extending the functionality and range of our applications to bring new solutions to accounting and finance.

Enhance Our Leadership Position in the Enterprise Market and Mid-Market Customer Base.    We believe we have a leading position in both the enterprise market and the mid-market. We intend to leverage our brand, history of innovation and customer focus to maintain and grow our leadership position in the enterprise market, which we define as companies with greater than $500 million in annual revenue. In addition, we believe that mid-market businesses, which we define as companies with between $50 and $500 million in annual revenue, are particularly underserved and that our platform can help these businesses modernize their accounting and finance processes efficiently and effectively. We have made recent investments to grow our mid-market sales team, and we plan to leverage our network of resellers to grow our mid-market business globally.

Increase Customer Spend through Expanded Usage and Adoption of Additional Products.    We pursue a land-and-expand sales model and believe there is significant opportunity to increase sales of our solutions within our existing customer base. Our pricing model is designed to allow us to capture additional revenue as our customers’ usage of our platform grows, providing us with an opportunity to increase the lifetime value of our customer relationships.

Expand Our International Operations and Customer Footprint.    We believe that we have a significant opportunity to expand the use of our cloud-based products outside the United States. We have an established presence in Australia, Canada, England, France, Germany and Singapore and we intend to invest in further expanding our footprint in these and other regions.

Extend Our Relationships and Distribution Channels.    We have established strong relationships with technology vendors such as SAP and NetSuite, professional services firms such as Deloitte & Touche and KPMG, and business process outsourcers such as Cognizant, Genpact and IBM. In particular, we offer our customers an integrated SAP-endorsed business solution through our relationship with SAP. We intend to continue to strengthen and expand our existing relationships, seek new relationships and further expand our distribution channels to help us expand into new markets and increase our presence in existing markets.

 

 

5


Table of Contents

Risks Affecting Us

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

   

if we are unable to attract new customers and expand sales to existing customers our business growth could be slower than we expect and our business may be harmed;

 

   

our business and growth depend substantially on customers renewing their subscription agreements with us and any decline in our customer renewals could adversely affect our future operating results;

 

   

we have a history of losses in recent periods and we may not be able to generate sufficient revenue to achieve or sustain profitability;

 

   

we have experienced rapid growth and organizational change in recent periods and if we fail to manage our growth effectively, we may be unable to execute our business plan;

 

   

if we are not able to provide successful enhancements, new features and modifications to our software solutions, our business could be adversely affected;

 

   

we derive substantially all of our revenues from a limited number of software solutions, and our future growth is dependent on their success;

 

   

if our relationships with technology vendors and business process outsourcers is not successful, our business and growth will be harmed;

 

   

if our security controls are breached or unauthorized access to customer data is otherwise obtained, our software solutions may be perceived as insecure, we may lose existing customers or fail to attract new customers, and we may incur significant liabilities;

 

   

interruptions or performance problems associated with our software solutions, platform and technology may adversely affect our business and operating results; and

 

   

if our software contains serious errors or defects, we may lose revenue and market acceptance and may incur costs to defend or settle product liability claims.

Investment by Silver Lake and Iconiq

We operated as BlackLine Systems, Inc., which we refer to as the “Predecessor,” from 2001 until September 2013. On September 3, 2013, BlackLine, Inc., which we refer to as the “Successor,” acquired BlackLine Systems, Inc. in connection with an investment by Silver Lake and Iconiq, which we refer to as the “Acquisition.” The Successor was created for the sole purpose of acquiring the Predecessor and had no prior operations. We refer to Silver Lake and Iconiq collectively as our “Investors” and, in connection with the Acquisition, our Investors obtained a controlling interest in us.

After giving effect to this offering, our Investors will beneficially own approximately             % of our issued and outstanding common stock or             % of our issued and outstanding common stock (assuming full exercise of the underwriters’ option to purchase additional shares). The majority of the remaining issued and outstanding common stock, after giving effect to this offering, will be beneficially owned by Therese Tucker, our Chief Executive Officer, and Mario Spanicciati, our Chief Strategy Officer. Therese Tucker and Mario Spanicciati will beneficially own approximately             % and             % of our issued and outstanding common stock, respectively, or             % and             % of our issued and outstanding common stock (assuming full exercise of the underwriters’ option to purchase additional shares), respectively. We refer to our Investors, Therese Tucker and Mario Spanicciati collectively as our “Principal Stockholders.”

 

 

6


Table of Contents

Presentation of Our Financial Statements

The Acquisition was accounted for as a business combination under GAAP, which resulted in a change in accounting basis as of the date of the Acquisition. As a result, our consolidated financial statements for periods after September 3, 2013 are presented on a different basis than that for the periods before September 3, 2013, due to the application of purchase accounting as of September 3, 2013, and therefore are not comparable. We refer to the period from January 1, 2013 to September 2, 2013 as the 2013 Predecessor Period and the period from September 3, 2013 to December 31, 2013 as the 2013 Successor Period. Please refer to “Summary Consolidated Financial Data” on page 10 of this prospectus for further information.

Corporate Information

Our principal executive offices are located at 21300 Victory Boulevard, 12th Floor, Woodland Hills, CA 91367. The phone number of our principal executive offices is (818) 223-9008, and our main corporate website is www.blackline.com. Information contained on, or that can be accessed through, our website does not constitute a part of this prospectus or the registration statement of which this prospectus forms a part, and is not incorporated by reference herein. We have included our website address in this prospectus solely for informational purposes and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase shares of our common stock.

The names “BlackLine,” “BlackLine Systems,” “Intercompany Hub,” and our logo are our trademarks. This prospectus also contains trademarks and trade names of other businesses that are the property of their respective holders. We have omitted the ® and ™ designations, as applicable, for the trademarks we name in this prospectus.

 

 

7


Table of Contents

THE OFFERING

 

Common stock offered by us

             Shares

 

Common stock to be outstanding immediately after this offering

             Shares

 

Option to purchase additional shares of common stock from us

             Shares

 

Use of proceeds

The principal purposes of this offering are to obtain additional capital and increase our financial flexibility, create a public market for our stock and increase our visibility in the marketplace. We currently intend to use the net proceeds we receive from this offering to repay the entire outstanding balance under our credit facility and for general corporate purposes, including working capital, research and development activities, sales and marketing activities, general and administrative matters and capital expenditures and to fund our growth plans. As of September 30, 2015, the outstanding principal balance under our credit facility was approximately $29.2 million. We may also, in our discretion, use a portion of the net proceeds for the acquisition of, or investment in, businesses, products, services or technologies that complement our business, although we have no current commitments or agreements to enter into any acquisitions or investments. See “Use of Proceeds.”

 

Risk Factors

See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

 

Proposed symbol

“BL”

The number of shares of our common stock that will be outstanding after this offering is based on 203,295,765 shares of our common stock outstanding as of September 30, 2015, and excludes:

 

   

28,988,384 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock outstanding as of September 30, 2015, with a weighted-average exercise price of $1.69 per share;

 

   

2,500,000 shares of our common stock issuable upon the exercise of warrants to purchase shares of our common stock outstanding as of September 30, 2015, with an exercise price of $1.00 per share; and

 

   

             shares of our common stock reserved for future issuance under our stock-based compensation plans, consisting of (i) 312,750 shares of common stock reserved for future awards under the 2014 Equity Incentive Plan, or our 2014 Plan, as of September 30, 2015 (which will terminate as of the completion of this offering and no awards will be granted under our 2014 Plan thereafter), (ii)              shares of common stock reserved for issuance under our 2016 Employee Equity Incentive Plan, or our 2016 Plan, which will become effective on the date of this prospectus and (iii)              shares of common stock reserved for issuance under our 2016 Employee Stock Purchase Plan, or our 2016 ESPP, which will become effective on the date of this prospectus. Stock options to purchase an aggregate of 775,500 shares of our

 

 

8


Table of Contents
 

common stock, with an exercise price of $3.00 per share were granted after September 30, 2015 under our 2014 Plan and the number of shares reserved for future issuance under our 2014 Plan was increased to 1,361,125 shares subsequent to September 30, 2015. Any shares that, as of the effective date of the registration statement of which this prospectus forms a part, have been reserved but not issued pursuant to awards granted under our 2014 Plan and are not subject to any awards granted under our 2014 Plan, plus any shares covering awards granted under our 2014 Plan that, on or after the effective date of the registration statement of which this forms a part, expire or terminate without having been exercised in full or are forfeited to or repurchased by us, will become available for issuance under our 2016 Plan, with the maximum number of shares to be added to our 2016 Plan, from our 2014 Plan equal to              shares. Our 2016 Plan and our 2016 ESPP also provide for automatic annual increases in the number of shares reserved under the plans, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

Except as otherwise indicated, all information in this prospectus assumes:

 

   

a one-for-            reverse split of our common stock to be effected prior to the effectiveness of the registration statement of which this prospectus forms a part;

 

   

the filing and effectiveness of our amended and restated certificate of incorporation in Delaware and the adoption of our amended and restated bylaws, each of which will occur immediately prior to the completion of this offering;

 

   

no exercise of outstanding options or warrants subsequent to September 30, 2015; and

 

   

no exercise by the underwriters of their option to purchase up to an additional              shares of our common stock from us.

 

 

9


Table of Contents

SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables summarize our consolidated financial data. You should read this summary consolidated financial data together with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

On September 3, 2013, we acquired BlackLine Systems, Inc., which we refer to as the Acquisition. Prior to the Acquisition, we had no significant operations. As a result, the consolidated financial statements for the periods from January 1, 2013 to September 2, 2013 are presented as BlackLine Systems, Inc., which we refer to as the Predecessor, and all subsequent periods are presented as BlackLine, Inc., which we refer to as the Successor. The Successor financial statements reflect a new basis of accounting as a result of the Acquisition and therefore are not comparable to the Predecessor financial statements. We refer to the period from January 1, 2013 to September 2, 2013 as the 2013 Predecessor Period and the period from September 3, 2013 to December 31, 2013 as the 2013 Successor Period.

The consolidated statements of operations data for the 2013 Predecessor Period is derived from the audited consolidated financial statements of the Predecessor that are included elsewhere in this prospectus. The consolidated statements of operations data for the 2013 Successor Period and the year ended December 31, 2014 and the consolidated balance sheet data as of December 31, 2013 and 2014 are derived from the audited consolidated financial statements of the Successor included elsewhere in this prospectus. The consolidated statements of operations data for the nine months ended September 30, 2014 and 2015 and the consolidated balance sheet data as of September 30, 2015 are derived from the unaudited interim condensed consolidated financial statements of the Successor included elsewhere in this prospectus. Our unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which consist only of normal recurring adjustments, necessary for the fair statement of those unaudited condensed consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future.

 

 

10


Table of Contents

Consolidated Statements of Operations Data:

 

                    Year Ended     Nine Months Ended  
    2013         2013     December 31,     September 30,  
    Predecessor Period         Successor Period     2014     2014     2015  
    (In thousands, except share and per share data)  

Revenues

           

Subscription and support

  $ 21,977          $ 7,723      $ 49,029      $ 33,513      $      56,666   

Professional services

    1,407            860        2,648        2,090        2,467   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    23,384            8,583        51,677        35,603        59,133   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues

             

Subscription and support

    4,442            4,346        14,380        10,511        14,220   

Professional services

    1,145            499        2,218        1,684        2,162   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues(1)

    5,587            4,845        16,598        12,195        16,382   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    17,797            3,738        35,079        23,408        42,751   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

             

Sales and marketing(1)

    10,453            6,895        31,837        20,840        39,694   

Research and development(1)

    4,738            2,225        9,705        6,730        12,938   

General and administrative(1)

    6,978            2,827        11,716        8,405        14,968   

Acquisition related costs

    5,586            1,634                        
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    27,755            13,581        53,258        35,975        67,600   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (9,958         (9,843     (18,179     (12,567     (24,849
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Other expense

             

Interest expense, net

    (22         (781     (3,047     (2,262     (2,466

Change in fair value of the common stock warrant liability

                      (3,700     (1,970     (170
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Other expense, net

    (22         (781     (6,747     (4,232     (2,636
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (9,980         (10,624     (24,926     (16,799     (27,485

Provision for (benefit from) income taxes

    21            (3,954     (8,174     (5,827     (9,958
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (10,001       $ (6,670   $ (16,752   $ (10,972   $ (17,527
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted

  $ (0.12       $ (0.03   $ (0.08   $ (0.05   $ (0.09
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding, basic and diluted

    82,250,000            200,094,118        200,445,411        200,261,813        202,753,714   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share, basic and diluted (unaudited)(2)

          $          $     
         

 

 

     

 

 

 

Pro forma weighted average common shares, basic and diluted (unaudited)

             
         

 

 

     

 

 

 

 

 

11


Table of Contents

 

(1) The following table presents the stock-based compensation expense included in each respective expense category:

 

                        Year Ended      Nine Months Ended  
     2013           2013      December 31,      September 30,  
     Predecessor Period           Successor Period      2014      2014      2015  
     (in thousands)  

Cost of revenues

   $ 86            $       $ 249       $ 170       $ 351   

Sales and marketing

     124                      1,059         717         1,747   

Research and development

     330                      229         182         420   

General and administrative

     360                      480         332         1,352   
  

 

 

         

 

 

    

 

 

    

 

 

    

 

 

 
   $ 900            $  —       $ 2,017       $ 1,401       $ 3,870   
  

 

 

         

 

 

    

 

 

    

 

 

    

 

 

 
(2) Pro forma basic and diluted net loss per share has been computed to give effect to the number of additional shares that would have been required to be issued to repay the outstanding credit facility balance, including the 1% prepayment premium, assuming the issuance of such shares at the assumed initial public offering price of $             per share which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Also, the numerator in the pro forma basic and diluted net loss per share calculation has been adjusted to reverse the interest expense, net of tax on the credit facility. The pro forma net loss per share does not include the proceeds to be received from the assumed initial public offering, or shares expected to be sold in the initial public offering, except for those shares necessary to be issued to repay the credit facility.

Consolidated Balance Sheet Data:

 

     As of December 31,      As of September 30, 2015  
     2013      2014      Actual      Pro Forma(1)  
     (in thousands)  

Cash and cash equivalents

   $ 14,855       $ 25,707       $ 18,015       $                        

Total assets

     276,492         286,184         287,128      

Deferred revenue

     17,328         34,574         47,041      

Long-term debt

     23,132         25,673         27,681      

Total stockholders’ equity

     193,852         183,947         171,646      

 

(1) The pro forma balance sheet gives effect to (i) the issuance of              shares of our common stock in this offering, at an assumed initial public offering price of $             per share which is the midpoint of the estimated offering price range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, (ii) the retirement of 235,000 shares of treasury stock and (iii) the use of proceeds from the offering to repay all principal amounts outstanding under our credit facility, including the 1% prepayment premium each as if such events had occurred on September 30, 2015.

 

 

12


Table of Contents

Key Metrics

We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.

 

     December 31,     September 30,  
     2013     2014     2014     2015  

Dollar-based net revenue retention rate

     120     118     118     120

Number of customers (as of end of period)

     738        987        905        1,219   

Number of users (as of end of period)

     67,387        93,665        86,154        119,912   

Dollar-based net revenue retention rate.     We believe that dollar-based net revenue retention rate is an important metric to measure the long-term value of customer agreements and our ability to retain and grow our relationships with existing customers over time. We calculate dollar-based net revenue retention rate as the implied monthly subscription revenue at the end of a period for the base set of customers from which we generated subscription revenue in the year prior to the calculation, divided by the implied monthly subscription revenue one year prior to the date of calculation for that same customer base. This calculation does not reflect implied monthly subscription revenue for new customers added during the one year period but does include the effect of customers who terminated during the period. We define implied monthly subscription revenue as the total amount of minimum subscription and support revenue contractually committed to, under each of our customer agreements over the entire term of the agreement, divided by the number of months in the term of the agreement.

Number of customers.    We believe that our ability to expand our customer base is an indicator of our market penetration and the growth of our business. We define a customer as an entity with an active subscription agreement as of the measurement date. In situations where an organization has multiple subsidiaries or divisions, each entity that is invoiced as a separate entity is treated as a separate customer. For the 2013 Predecessor Period, the 2013 Successor Period, the year ended December 31, 2014 and the nine months ended September 30, 2015, no single customer accounted for more than 10% of our total revenues.

Number of users.    Since our customers generally pay fees based on the number of users of our platform within their organization, we believe the total number of users is an indicator of the growth of our business.

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the non-GAAP measures below are useful in evaluating our business. These non-GAAP financial measures provide consistency and comparability with our past performance, facilitate period-to-period comparisons of operations and facilitate comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
         2013             2014         2014     2015  
     (in thousands, except percentages)  

Non-GAAP Revenues

   $ 38,012      $ 56,629      $ 40,555      $ 59,133   

Non-GAAP Gross Profit

   $ 29,714      $ 46,419      $ 33,134      $ 47,706   

Non-GAAP Gross Margin

     78.2     82.0     81.7     80.7

Non-GAAP Cash Provided by (Used in) Operations

   $ 1,886      $ 8,943      $ 7,141      $ (150

 

 

13


Table of Contents

Non-GAAP Revenues.    We define non-GAAP revenues as our GAAP revenues adjusted for the impact of purchase accounting resulting from the Acquisition. Upon the Acquisition, deferred revenue at the Acquisition date was recorded at fair value, resulting in a reduction from its then carrying value. This reduction resulted in reduced revenue in the 2013 Successor Period and for the year ended December 31, 2014. Our non-GAAP revenues for the year ended December 31, 2013 combines the GAAP revenues for the 2013 Predecessor Period and the 2013 Successor Period adjusted for by the purchase accounting adjustment. We believe that presenting non-GAAP revenues is useful to investors as it more fully reflects our core revenue growth rate during 2013 and 2014 and allows a direct comparison of revenues between periods. The purchase accounting adjustments to revenues related to the Acquisition will not affect our revenues for the year ended December 31, 2015 or future periods.

Non-GAAP Gross Profit and Non-GAAP Gross Margin.    We define non-GAAP gross profit as our non-GAAP revenues less our GAAP cost of revenue adjusted for the amortization of acquired developed technology resulting from the Acquisition and stock-based compensation. We define non-GAAP gross margin as our non-GAAP gross profit divided by our non-GAAP revenues. We believe that presenting non-GAAP gross margin is useful to investors as it eliminates the impact of items that we do not consider indicative of our core operating performance and that have been impacted by purchase accounting, and allows a direct comparison of gross margin between periods.

Non-GAAP Cash Provided by (Used in) Operations.    We define non-GAAP cash provided by (used in) operations as our GAAP net cash provided by (used in) operating activities adjusted for the acquisition related costs resulting from the Acquisition. Our non-GAAP cash provided by operations for the year ended December 31, 2013 combines the GAAP net cash provided by (used in) operations for the 2013 Predecessor Period and 2013 Successor Period reduced by acquisition related costs. We believe that presenting non-GAAP cash provided by (used in) operations is useful to investors as it eliminates the impact of non-recurring costs associated with the Acquisition and allows a direct comparison of operating cash flow between periods. The acquisition related costs resulting from the Acquisition did not affect our cash provided by operations for the year ended December 31, 2014 and will not affect our cash provided by (used in) operations in future periods.

Reconciliation of Non-GAAP Financial Measures

Our non-GAAP financial measures have limitations as analytical tools and you should not consider them in isolation or as a substitute for an analysis of our results under GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their nearest GAAP equivalents. First, non-GAAP revenues, non-GAAP gross profit, non-GAAP gross margin and non-GAAP cash provided by (used in) operations are not substitutes for revenue, gross profit, gross margin and net cash provided by (used in) operating activities, respectively. Second, these non-GAAP financial measures may not provide information directly comparable to measures provided by other companies in our industry, as those other companies may calculate their non-GAAP financial measures differently, particularly related to adjustments for acquisition accounting and non-recurring expenses. Third, these non-GAAP measures exclude certain recurring expenses that have been and will continue to be significant expenses of our business.

 

 

14


Table of Contents

The following table presents a reconciliation of revenues, gross profit, gross margin and net cash provided by (used in) operating activities, the most comparable GAAP measures, to non-GAAP revenues, non-GAAP gross profit, non-GAAP gross margin and non-GAAP cash provided by (used in) operations:

 

     2013
Predecessor
Period
         2013
Successor
Period
    Year Ended
December 31,
    Nine Months Ended
September 30,
 
            2013
Combined
    2014     2014      2015  
     (in thousands, except percentages)  

Non-GAAP Revenues:

                

Revenues

   $ 23,384           $ 8,583      $ 31,967      $ 51,677      $ 35,603       $ 59,133   

Purchase accounting adjustment to revenue

                 6,045        6,045        4,952        4,952           
  

 

 

        

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Non-GAAP Revenues

   $ 23,384           $ 14,628      $ 38,012      $ 56,629      $ 40,555       $ 59,133   
  

 

 

        

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Non-GAAP Gross Profit:

                  

Gross Profit

   $ 17,797           $ 3,738      $ 21,535      $ 35,079      $ 23,408       $ 42,751   

Purchase accounting adjustment to revenue

                 6,045        6,045        4,952        4,952           

Amortization of developed technology

                 2,048        2,048        6,139        4,604         4,604   

Stock-based compensation expense

     86                    86        249        170         351   
  

 

 

        

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Non-GAAP Gross Profit

   $ 17,883           $ 11,831      $ 29,714      $ 46,419      $ 33,134       $ 47,706   
  

 

 

        

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Gross Margin

     76.1          43.6     67.4     67.9     65.7      72.3

Non-GAAP Gross Margin

     76.5          80.9     78.2     82.0     81.7      80.7

Non-GAAP Cash Provided by (Used in) Operating Activities:

                  

Net cash provided by (used in) operating activities

   $ 1,240           $ (6,574   $ (5,334   $ 8,943      $ 7,141       $ (150

Acquisition related costs

                 7,220        7,220                         
  

 

 

        

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Non-GAAP Cash Provided by (Used in) Operating Activities

   $ 1,240           $ 646      $ 1,886      $ 8,943      $ 7,141       $ (150
  

 

 

        

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

 

15


Table of Contents

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks, together with all of the other information contained in this prospectus, including our financial statements and related notes, before making a decision to invest in our common stock. Any of the following risks could have a material adverse effect on our business, operating results, and financial condition and could cause the trading price of our common stock to decline, which would cause you to lose all or part of your investment.

Risks Related to Our Business

If we are unable to attract new customers and expand sales to existing customers, our business growth could be slower than we expect and our business may be harmed.

Our future growth depends in part upon increasing our customer base. Our ability to achieve significant growth in revenues in the future will depend, in large part, upon the effectiveness of our sales and marketing efforts, both domestically and internationally. We may have difficulty attracting a potential client that has already invested substantial personnel and financial resources to integrate on-premise software into its business, as such organizations may be reluctant or unwilling to invest in a new product. If we fail to attract new customers or maintain and expand those customer relationships, our revenues will grow more slowly than expected and our business will be harmed.

Our future growth also depends upon our ability to add users and sell additional products to our existing customers. It is important for the future growth of our business that our existing customers make additional significant purchases of our products and add additional users to our platform. Our business also depends on retaining existing customers. If we do not retain customers, our customers do not purchase additional products or we do not add additional users to our platform, our revenues may grow more slowly than expected, may not grow at all or may decline. Additionally, increasing incremental sales to our current customer base may require additional sales efforts that are targeted at senior management. There can be no assurance that our efforts would result in increased sales to existing customers or additional revenues.

Our business and growth depend substantially on customers renewing their subscription agreements with us and any decline in our customer renewals could adversely affect our future operating results.

Our initial subscription period for the majority of our customers is one year. In order for us to continue to increase our revenue, it is important that our existing customers renew their subscription agreements when the initial contract term expires. Although our agreements typically include automatic renewal language, our customers may cancel their agreements at the expiration of the initial term. In addition, our customers may renew for fewer users, renew for shorter contract lengths or renew for fewer products or solutions. Our customers’ renewal rates may decline or fluctuate as a result of a variety of factors, including their satisfaction or dissatisfaction with our software or professional services, our pricing or pricing structure, the pricing or capabilities of products or services offered by our competitors, the effects of economic conditions or reductions in our customers’ spending levels. As the markets for our existing solutions mature, or as current and future competitors introduce new products or services that compete with ours, we may experience pricing pressure and be unable to renew our agreements with existing customers or attract new customers at prices that are profitable to us. If this were to occur, it is possible that we would have to change our pricing model, offer price incentives or reduce our prices. If our customers do not renew their agreements with us or renew on terms less favorable to us, our revenues may decline.

 

16


Table of Contents

We have a history of losses in recent periods and we may not be able to generate sufficient revenue to achieve or sustain profitability.

We have incurred net losses in recent periods, including net losses of $10.0 million for the 2013 Predecessor Period, $6.7 million for the 2013 Successor Period, $16.8 million for the year ended December 31, 2014 and $17.5 million for the nine months ended September 30, 2015. We had an accumulated deficit of $40.9 million at September 30, 2015. We may not be able to generate sufficient revenue to achieve and sustain profitability. We also expect our costs to increase in future periods as we continue to expend substantial financial and other resources on:

 

   

development of our cloud-based platform, including investments in research and development, product innovation to expand the features and functionality of our software solutions and improvements to the scalability and security of our platform;

 

   

sales and marketing, including expansion of our direct sales force and our relationships with technology vendors, professional services firms, business process outsourcers and resellers;

 

   

additional international expansion in an effort to increase our customer base and sales; and

 

   

general administration, including legal, accounting and other expenses related to being a public company.

These investments may not result in increased revenue or growth of our business. If we fail to continue to grow our revenue, we may not achieve or sustain profitability.

We have experienced rapid growth and organizational change in recent periods and if we fail to manage our growth effectively, we may be unable to execute our business plan.

We increased our number of full-time employees from 183 as of December 31, 2013 to 420 as of September 30, 2015 as we have experienced growth in number of customers and expanded our operations. Our growth has placed, and may continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We intend to further expand our headcount and operations both domestically and internationally, with no assurance that our business or revenue will continue to grow. Continuing to create a global organization and managing a geographically dispersed workforce will require substantial management effort, the allocation of valuable management resources and significant additional investment in our infrastructure. We will be required to continually improve our operational, financial and management controls and our reporting procedures and we may not be able to do so effectively, which could negatively affect our results of operations and overall business. In addition, we may be unable to manage our expenses effectively in the future, which may negatively impact our gross margins or operating expenses in any particular quarter. Moreover, if we fail to manage our anticipated growth and change in a manner that preserves the key aspects of our corporate culture, the quality of our software solutions may suffer, which could negatively affect our brand and reputation and harm our ability to retain and attract customers.

Our quarterly results may fluctuate, and if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.

Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control. If our quarterly financial results fall below the expectations of investors or any securities analysts who may follow our stock, the price of our common stock could decline substantially. Some of the important factors that may cause our revenue, operating results and cash flows to fluctuate from quarter to quarter include:

 

   

our ability to attract new customers and retain and increase sales to existing customers;

 

   

the number of new employees added;

 

17


Table of Contents
   

the rate of expansion and productivity of our sales force;

 

   

changes in our or our competitors’ pricing policies;

 

   

the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business;

 

   

new products, features or functionalities introduced by us and our competitors;

 

   

significant security breaches, technical difficulties or interruptions to our platform;

 

   

the timing of customer payments and payment defaults by customers;

 

   

general economic conditions that may adversely affect either our customers’ ability or willingness to purchase additional products or services, delay a prospective customer’s purchasing decision or affect customer retention;

 

   

changes in foreign currency exchange rates;

 

   

the impact of new accounting pronouncements; and

 

   

the timing and the amount of grants or vesting of equity awards to employees.

Many of these factors are outside of our control, and the occurrence of one or more of them might cause our revenue, operating results, and cash flows to vary widely. As such, we believe that quarter-to-quarter comparisons of our revenue, operating results and cash flows may not be meaningful and should not be relied upon as an indication of future performance.

If we are not able to provide successful enhancements, new features or modifications to our software solutions, our business could be adversely affected.

If we are unable to provide enhancements and new features for our existing solutions or new solutions that achieve market acceptance or that keep pace with rapid technological developments, our business could be adversely affected. The success of enhancements, new products and solutions depends on several factors, including timely completion, introduction and market acceptance. We must continue to meet changing expectations and requirements of our customers and, because our platform is designed to operate on a variety of systems, we will need to continuously modify and enhance our solutions to keep pace with changes in Internet-related hardware and other software, communication, browser and database technologies. Our platform is also designed to integrate with existing enterprise resource planning, or ERP, systems such as NetSuite, Oracle, SAP and Workday, and will require modifications and enhancements as these systems change over time. Any failure of our solutions to operate effectively with future platforms and technologies could reduce the demand for our solutions or result in customer dissatisfaction. Furthermore, uncertainties about the timing and nature of new solutions or technologies, or modifications to existing solutions or technologies, could increase our research and development expenses. If we are not successful in developing modifications and enhancements to our solutions or if we fail to bring them to market in a timely fashion, our solutions may become less marketable, less competitive or obsolete, our revenue growth may be significantly impaired and our business could be adversely affected.

We derive substantially all of our revenues from a limited number of software solutions, and our future growth is dependent on their success.

We currently derive and expect to continue to derive substantially all of our revenues from our Financial Close Management and Reconciliation Management solutions. As such, the continued growth in market demand for these solutions is critical to our continued success. We have recently introduced two new software solutions, Intercompany Hub and Insights, but cannot be certain that they will generate significant revenues. In addition, those solutions are designed to be used with our

 

18


Table of Contents

Financial Close Management and Reconciliation Management solutions and will not be sold independently. Accordingly, our business and financial results will be substantially dependent on a limited number of solutions.

If our relationships with technology vendors and business process outsourcers are not successful, our business and growth will be harmed.

We depend on, and anticipate that we will continue to depend on, various strategic relationships in order to sustain and grow our business. We have established strong relationships with technology vendors such as SAP and Netsuite, professional services firms such as Deloitte & Touche and KPMG, and business process outsourcers such as Cognizant, Genpact and IBM to supplement marketing, delivery and implementation of our applications. These relationships enable us to increase the speed of deployment and offer a wider range of integrated services to our customers. In particular, we offer our customers an integrated SAP-endorsed business solution in connection with our relationship with SAP. Under our agreement with SAP, which we entered into in 2013, we pay SAP a fee based on a percentage of revenues for new customers that use an SAP ERP system. We continue to pay SAP a fee for these customers over the term of their subscription agreements. For the nine months ended September 30, 2015, revenues from customers under this agreement accounted for $6.1 million, or approximately 10%, of our total revenues. If we are unsuccessful in maintaining our relationship with SAP, or if we are unsuccessful in supporting or expanding our relationships with other companies, our business would be adversely affected.

Identifying, negotiating and documenting relationships with other companies require significant time and resources. Our agreements with technology vendors are typically limited in duration, non-exclusive, cancellable upon notice and do not prohibit the counterparties from working with our competitors or from offering competing services. For example, our agreement with SAP can be terminated upon 180 days’ notice. Our competitors may be effective in providing incentives to third parties to favor their products or services or to prevent or reduce subscriptions to our platform. If we are unsuccessful in establishing or maintaining our relationships, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating results would suffer. Even if we are successful, we cannot assure you that these relationships will result in improved operating results.

If our security controls are breached or unauthorized access to customer data is otherwise obtained, our software solutions may be perceived as insecure, we may lose existing customers or fail to attract new customers, and we may incur significant liabilities.

Use of our platform involves the storage, transmission and processing of our customers’ proprietary data, including highly confidential financial information regarding their business and personal or identifying information regarding their customers or employees. Our platform is at risk for breaches as a result of third-party action, employee, vendor or contractor error, malfeasance or other factors. If any unauthorized access to or a security breach of our platform occurs, or is believed to occur, such an event could result in the loss of data, loss of business, severe reputational damage adversely affecting customer or investor confidence, regulatory investigations and orders, litigation, indemnity obligations, damages for contract breach or penalties for violation of applicable laws or regulations. Security breaches could also result in significant costs for remediation that may include liability for stolen assets or information and repair of system damage that may have been caused, incentives offered to customers or other business partners in an effort to maintain business relationships after a breach, and other liabilities.

We incur significant expenses to prevent security breaches, including deploying additional personnel and protection technologies, training employees, and engaging third-party experts and contractors. If a high profile security breach occurs with respect to another provider of software as a service, or SaaS, our clients and potential clients may lose trust in the security of our platform or in the SaaS business model generally, which could adversely impact our ability to retain existing clients or

 

19


Table of Contents

attract new ones. Even in the absence of any security breach, customer concerns about security, privacy, or data protection may deter them from using our platform for activities that involve personal or other sensitive information. Our errors and omissions insurance policies covering certain security and privacy damages and claim expenses may not be sufficient to compensate for all potential liability. Although we maintain cyber liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all.

Because the techniques used to obtain unauthorized access or to 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. We may also experience security breaches that may remain undetected for an extended period.

Because data security is a critical competitive factor in our industry, we make numerous statements in our privacy policy and customer agreements, through our certifications to privacy standards and in our marketing materials, providing assurances about the security of our platform including detailed descriptions of security measures we employ. Should any of these statements be untrue or become untrue, even through circumstances beyond our reasonable control, we may face claims of misrepresentation or deceptiveness by the U.S. Federal Trade Commission, state and foreign regulators and private litigants. Our errors and omissions insurance coverage covering security and privacy damages and claim expenses may not be sufficient to compensate for all liability.

Interruptions or performance problems associated with our software solutions, platform and technology may adversely affect our business and operating results.

Our continued growth depends in part on the ability of our existing and potential customers to access our platform at any time. Our platform is proprietary, and we rely on the expertise of members of our engineering, operations and software development teams for its continued performance. We have experienced, and may in the future experience, disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, introductions of new functionality, human or software errors, capacity constraints due to an overwhelming number of users accessing our platform simultaneously, denial of service attacks or other security related incidents. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. Because of the seasonal nature of financial close activities, increasing complexity of our platform and expanding user population, it may become difficult to accurately predict and timely address performance and capacity needs during peak load times. If our platform is unavailable or if our users are unable to access it within a reasonable amount of time or at all, our business would be harmed. In addition, our infrastructure does not currently include the real-time mirroring of data. Therefore, in the event of any of the factors described above, or other failures of our infrastructure, customer data may be permanently lost. Our customer agreements typically include performance guarantees and service level standards that obligate us to provide credits in the event of a significant disruption in our platform. To the extent that we do not effectively address capacity constraints, upgrade our systems and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business and operating results may be adversely affected.

If our software contains serious errors or defects, we may lose revenue and market acceptance and may incur costs to defend or settle product liability claims.

Complex software such as ours often contains errors or defects, particularly when first introduced or when new versions or enhancements are released. Despite internal and third-party testing and testing by our customers, our current and future software may contain serious defects, which could result in lost revenue or a delay in market acceptance.

 

20


Table of Contents

Since our customers use our platform for critical business functions such as assisting in the financial close or account reconciliation process, errors, defects or other performance problems could result in damage to our customers. They could seek significant compensation from us for the losses they suffer. Although our customer agreements typically contain provisions designed to limit our exposure to product liability claims, existing or future laws or unfavorable judicial decisions could negate these limitations. Even if not successful, a product liability claim brought against us would likely be time-consuming and costly and could seriously damage our reputation in the marketplace, making it harder for us to sell our products.

We depend on our executive officers and other key employees and the loss of one or more of these employees or an inability to attract and retain highly-skilled employees could adversely affect our business.

Our success depends largely upon the continued services of our executive officers and other key employees. We rely on our leadership team in the areas of research and development, operations, security, marketing, sales and general and administrative functions. In particular, our founder and Chief Executive Officer provides our strategic direction and has built and maintained what we believe is an attractive workplace culture. Any failure to preserve our culture could negatively affect our ability to recruit and retain personnel. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. Key members of our current management and finance teams have only been working together for a relatively short period of time. If we are not successful in integrating these key employees into our organization, such failure could disrupt our business operations. We do not have employment agreements with our executive officers or other key personnel that require them to continue to work for us for any specified period and, therefore, they could terminate their employment with us at any time. The loss of one or more of our executive officers or key employees, especially our founder and Chief Executive Officer, could have an adverse effect on our business.

In addition, to execute our growth plan, we must attract and retain highly-qualified personnel. Competition for personnel is intense, especially for engineers experienced in designing and developing software applications and experienced sales professionals. We have, from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees or we have breached their legal obligations, resulting in a diversion of our time and resources. Likewise, if competitors hire our employees, we may divert time and resources to deterring any breach by our former employees or their new employers of their legal obligations. Given the competitive nature of our industry, we have both received and asserted such claims in the past. In addition, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived value of our equity awards declines, it may adversely affect our ability to recruit and retain highly-skilled employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be adversely affected.

If our industry does not continue to develop as we anticipate or if potential customers do not continue to adopt our platform, our sales would not grow as quickly as expected, or at all, and our business and operating results and financial condition would be adversely affected.

We operate in a rapidly evolving industry focused on modernizing financial and accounting operations. Our solutions are relatively new and have been developed to respond to an increasingly global and complex business environment with more rigorous regulatory standards. If organizations do not increasingly allocate their budgets to financial automation software as we expect or if we do not succeed in convincing potential customers that our platform should be an integral part of their overall

 

21


Table of Contents

approach to their accounting processes, our sales may not grow as quickly as anticipated, or at all. Our business is substantially dependent on enterprises recognizing that accounting errors and inefficiencies are pervasive and are not effectively addressed by legacy solutions. Future deterioration in general economic conditions may also cause our customers to cut their overall information technology spending, and such cuts may disproportionately affect software solutions like ours to the extent customers view our solutions as discretionary. If our revenue does not increase for any of these reasons, or any other reason, our business, financial condition and operating results may be materially adversely affected.

The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.

The market for accounting and financial software and services is highly competitive and rapidly evolving. Our competitors vary in size and in the breadth and scope of the products and services they offer. We often compete with other vendors of financial automation software such as Trintech and Runbook. We also compete with large, well-established, enterprise application software vendors, such as Oracle, whose Hyperion software contains components that compete with our platform. In the future, a competitor offering ERP software could include a free service similar to ours as part of its standard offerings or may offer a free standalone version of a service similar to ours. Further, other established software vendors not currently focused on accounting and finance software and services may expand their services to compete with us.

Our competitors may have greater name recognition, longer operating histories, more established customer and marketing relationships, larger marketing budgets and significantly greater resources than we do. They may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements. In addition, some of our competitors have partnered with, or have acquired, and may in the future partner with or acquire, other competitors to offer services, leveraging their collective competitive positions, which makes, or would make, it more difficult to compete with them.

With the introduction of new technologies, the evolution of our platform and new market entrants, we expect competition to intensify in the future. Increased competition generally could result in reduced sales, reduced margins, losses or the failure of our platform to achieve or maintain more widespread market acceptance, any of which could harm our business.

Our financial results may fluctuate due to our long and variable sales cycle.

Our sales cycle generally varies in duration between four to nine months and, in some cases, even longer depending on the size of the potential customer. The sales cycle for our global enterprise customers is generally longer than that of our mid-market customers. Factors that may influence the length and variability of our sales cycle include:

 

   

the need to educate potential customers about the uses and benefits of our software solutions;

 

   

the need to educate potential customers on the differences between traditional, on-premise software and SaaS solutions;

 

   

the relatively long duration of the commitment customers make in their agreements with us;

 

   

the discretionary nature and timing of potential customers’ purchasing and budget cycles and decisions;

 

   

the competitive nature of potential customers’ evaluation and purchasing processes;

 

   

announcements or planned introductions of new products by us or our competitors; and

 

   

lengthy purchasing approval processes of potential customers.

 

22


Table of Contents

We may incur higher costs and longer sales cycles as a result of large enterprises representing an increased portion of our revenue. In this market, the decision to subscribe to our solutions may require the approval of more technical and information security personnel and management levels within a potential customer’s organization, and if so, these types of sales require us to invest more time educating these potential customers. In addition, larger organizations may demand more features and integration services and have increased purchasing power and leverage in negotiating contractual arrangements with us, which may contain restrictive terms favorable to the larger organization. As a result of these factors, these sales opportunities may require us to devote greater research and development, sales, product support and professional services resources to individual customers, resulting in increased costs and reduced profitability, and would likely lengthen our typical sales cycle, which could strain our resources.

In addition, more sales are closed in the last month of a quarter than other times. If we are unable to close sufficient transactions in a particular period, or if a significant amount of transactions are delayed until a subsequent period, our operating results for that period, and for any future periods in which revenue from such transaction would otherwise have been recognized, may be adversely affected.

We recognize revenue over the term of our customer contracts and, consequently, downturns or upturns in new sales may not be immediately reflected in our operating results and may be difficult to discern.

We recognize subscription revenue ratably over the terms of our customers’ agreements, most of which have one-year terms but an increasing number of which have up to three-year terms. As a result, most of the revenue we report in each quarter is derived from the recognition of deferred revenue relating to subscriptions entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any single quarter may have a small impact on our revenue results for that quarter. However, such a decline will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our platform, and potential changes in our pricing policies or rate of expansion or retention, may not be fully reflected in our results of operations until future periods. We may also be unable to reduce our cost structure in line with a significant deterioration in sales. In addition, a significant majority of our costs are expensed as incurred, while revenue is recognized over the life of the agreement with our customer. As a result, increased growth in the number of our customers could continue to result in our recognition of more costs than revenue in the earlier periods of the terms of our agreements. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.

We have identified material weaknesses in our internal controls over financial reporting and, if our remediation of these material weaknesses is not effective, or if we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and the price of our common stock.

As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires that we evaluate and determine the effectiveness of our internal control over financial reporting and, beginning with our second annual report following this offering, which will cover our year ending December 31, 2017, provide a management report on internal control over financial reporting. A material weakness is a deficiency or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.

 

23


Table of Contents

During 2015, we identified material weaknesses in our internal control over financial reporting. We identified a material weakness related to an insufficient complement of resources with an appropriate level of accounting knowledge, experience and training commensurate with our structure and financial reporting requirements. This lack of an effective control environment contributed to material weaknesses from the lack of controls over the selection of certain accounting policies and procedures and segregation of duties. Specifically, we did not have policies and controls designed to address the accounting for unusual or complex transactions, or the initial selection of, and the ongoing monitoring of changes in, accounting policies. Further, we did not maintain sufficiently designed segregation of duties including controls over journal entries such that there was a reasonable possibility that a material misstatement would not be prevented or detected on a timely basis.

These material weaknesses contributed to the restatement and revision of previously issued 2013 financial statements and audit adjustments in the 2014 financial statements principally, but not limited to, the following areas: capitalization of internal use software costs, accounting for and valuation of warrants issued with our debt facility, cut-off of transactions between the Predecessor and Successor Periods established as a result of the Acquisition and accounting for the new basis of accounting arising from the Acquisition, including the valuation of the fair value deferred revenue assumed at the acquisition date, forecasting of contingent consideration and the determination of the useful lives of intangible assets.

These deficiencies could result in additional misstatements to our accounts and disclosures in our consolidated financial statements that could be material and would not be prevented or detected on a timely basis.

We cannot assure you that the measures we have taken to date, and are continuing to implement, will be sufficient to remediate the material weaknesses we have identified or avoid potential future material weaknesses. If the steps we take do not correct the material weaknesses in a timely manner, we will be unable to conclude that we maintain effective internal controls over financial reporting. Accordingly, there could continue to be a reasonable possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis.

The process of designing and implementing internal control over financial reporting required to comply with Section 404 of the Sarbanes-Oxley Act will be time consuming, costly and complicated. If during the evaluation and testing process, we identify one or more other material weaknesses in our internal control over financial reporting or determine that existing material weaknesses have not been remediated, our management will be unable to assert that our internal control over financial reporting is effective. Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may conclude that there are material weaknesses with respect to our internal controls or the level at which our internal controls are documented, designed, implemented or reviewed. If we are unable to assert that our internal control over financial reporting is effective, or when required in the future, if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected and we could become subject to litigation or investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.

We rely on a limited number of data centers to deliver our cloud-based software solutions and any disruption of service at these centers could harm our business.

We manage our software solutions and serve most of our customers using a cloud-based infrastructure that is operated by a limited number of third-party data center facilities in North America

 

24


Table of Contents

and Europe. We do not control the operation of these facilities. Any changes in third-party service levels at our data centers or any disruptions or delays from errors, defects, hacking incidents, security breaches, computer viruses or other intentional bad acts or performance problems could harm our reputation, damage our customers’ businesses, and adversely affect our business and operating results. Our data centers are also vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events. If our data centers were compromised or unavailable or our users were unable to access our solutions for any reason, our business and operations would be materially and adversely affected.

Our customers have experienced minor disruptions and outages in accessing our solutions in the past, and may in the future experience, disruptions, outages and other performance problems. Although we expend considerable effort to ensure that our platform performance is capable of handling existing and increased traffic levels, the ability of our cloud-based solutions to effectively manage any increased capacity requirements depends on our third-party providers. Our third-party data center providers may not be able meet such performance requirements, especially to cover peak levels or spikes in traffic, and as a result, our customers may experience delays in accessing our solutions or encounter slower performance in our solutions, which could significantly harm the operations of these facilities. Interruptions in our services might reduce our revenue, cause us to issue credits to customers, subject us to potential liability, and cause customers to terminate their subscriptions or harm our renewal rates.

If we do not accurately predict our infrastructure capacity requirements, our customers could experience service shortfalls. The provisioning of additional cloud hosting capacity and data center infrastructure requires lead time. As we continue to add data centers, restructure our data management plans, and increase capacity in existing and future data centers, we may move or transfer our data and our customers’ data. For example, in early 2016 we began hosting customers at a data facility located in Las Vegas, Nevada. Despite precautions taken during such processes and procedures, any unsuccessful data transfers may impair the delivery of our service, and we may experience costs or downtime in connection with the transfer of data to other facilities which may lead to, among other things, customer dissatisfaction and non-renewals. The owners of our data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, we may be required to transfer to new data center facilities, and we may incur significant costs and possible service interruption in connection with doing so.

Failure to effectively expand our sales capabilities could harm our ability to increase our customer base.

Increasing our customer base and sales will depend, to a significant extent, on our ability to effectively expand our sales and marketing operations and activities. We are substantially dependent on our direct sales force to obtain new customers. From January 1, 2014 to September 30, 2015, our sales and marketing teams increased from 68 to 204 employees. We plan to continue to expand our direct sales force both domestically and internationally. We believe that there is significant competition for experienced sales professionals with the sales skills and technical knowledge that we require. Our ability to achieve significant revenue growth in the future will depend, in part, on our success in recruiting, training, and retaining a sufficient number of experienced sales professionals. New hires require significant training and time before they achieve full productivity, particularly in new sales segments and territories. Our recent hires and planned hires may not become as productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business. Our business will be harmed if our sales expansion efforts do not generate a significant increase in revenue.

 

25


Table of Contents

If we are unable to develop and maintain successful relationships with resellers, our business, operating results and financial condition could be adversely affected.

We believe that continued growth in our business is dependent upon identifying, developing, and maintaining strategic relationships with companies that resell our solutions. We plan to expand our small but growing network of resellers and to add new resellers, in particular to help grow our mid-market business globally. Our agreements with our existing resellers are non-exclusive, meaning resellers may offer customers the products of several different companies, including products that compete with ours. They may also cease marketing our solutions with limited or no notice and with little or no penalty. We expect that any additional resellers we identify and develop will be similarly non-exclusive and not bound by any requirement to continue to market our solutions. If we fail to identify additional resellers, in a timely and cost-effective manner, or at all, or are unable to assist our current and future resellers in independently selling our solutions, our business, results of operations, and financial condition could be adversely affected. If resellers do not effectively market and sell our solutions, or fail to meet the needs of our customers, our reputation and ability to grow our business may also be adversely affected.

If we are not able to maintain and enhance our brand, our business, operating results and financial condition may be adversely affected.

We believe that maintaining and enhancing our reputation for accounting and finance software is critical to our relationships with our existing customers and to our ability to attract new customers. The successful promotion of our brand attributes will depend on a number of factors, including our marketing efforts, our ability to continue to develop high-quality software, and our ability to successfully differentiate our platform from competitive products and services. Our brand promotion activities may not ultimately be successful or yield increased revenue. In addition, independent industry analysts provide reviews of our platform, as well as products and services offered by our competitors, and perception of our platform in the marketplace may be significantly influenced by these reviews. If these reviews are negative, or less positive as compared to those of our competitors’ products and services, our brand may be adversely affected.

The promotion of our brand requires us to make substantial expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive, as we expand into new markets and as more sales are generated. To the extent that these activities yield increased revenue, this revenue may not offset the increased expenses we incur. If we do not successfully maintain and enhance our brand, our business may not grow, we may have reduced pricing power relative to competitors, and we could lose customers or fail to attract potential customers, all of which would adversely affect our business, results of operations and financial condition.

Our long-term success depends, in part, on our ability to expand the sales of our solutions to customers located outside of the United States, and thus our business is susceptible to risks associated with international sales and operations.

We currently maintain offices and/or have sales personnel in the United Kingdom, Australia, Singapore, France and Canada, and we intend to build out our international operations. We derived approximately 14% of our revenues from sales outside the United States in the nine months ended September 30, 2015. Any international expansion efforts that we may undertake may not be successful. In addition, conducting international operations in new markets subjects us to new risks that we have not generally faced in the United States. These risks include:

 

   

localization of our solutions, including translation into foreign languages and adaptation for local practices and regulatory requirements;

 

26


Table of Contents
   

lack of familiarity and burdens of complying with foreign laws, legal standards, regulatory requirements, tariffs and other barriers;

 

   

unexpected changes in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade restrictions;

 

   

differing technology standards;

 

   

longer accounts receivable payment cycles and difficulties in collecting accounts receivable;

 

   

difficulties in managing and staffing international operations and differing employer/employee relationships;

 

   

fluctuations in exchange rates that may increase the volatility of our foreign based revenue;

 

   

potentially adverse tax consequences, including the complexities of foreign value added tax (or other tax) systems and restrictions on the repatriation of earnings;

 

   

uncertain political and economic climates; and

 

   

reduced or varied protection for intellectual property rights in some countries.

These factors may cause our international costs of doing business to exceed our comparable domestic costs. Operating in international markets also requires significant management attention and financial resources. Any negative impact from our international business efforts could negatively impact our business, results of operations and financial condition as a whole.

We use third-party contractors outside of the United States to supplement our research and development capabilities, which may expose us to risks, including risks inherent in foreign operations.

We use third-party contractors outside of the United States to supplement our research and development capabilities. We currently use third-party contractors located in Romania and China. Managing operations that are remote from our U.S. headquarters is difficult and we may not be able to manage these third-party contractors successfully. If we fail to maintain productive relationships with these contractors generally, we may be required to develop our solutions in a less efficient and cost-effective manner and our product release schedules may be delayed while we hire software developers or find alternative contract development resources. Additionally, while we take precautions to ensure that software components developed by our third-party contractors are reviewed and that our source code is protected, misconduct by our third-party contractors could result in infringement or misappropriation of our intellectual property. Furthermore, any acts of espionage, malware attacks, theft of confidential information or other malicious cyber incidents attributed to our third-party contractors may compromise our system infrastructure, expose us to litigation and lead to reputational harm that could result in a material adverse effect on our financial condition and operating results.

Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.

Our success and ability to compete depend in part upon our intellectual property. We currently have one patent application, which may not result in an issued patent. We primarily rely on copyright, trade secret and trademark laws, trade secret protection, and confidentiality or license agreements with our employees, customers, partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate.

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. In the past, we have utilized demand letters as a means

 

27


Table of Contents

to assert and resolve claims regarding potential misuse of our proprietary or trade secret information. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management, and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our failure to secure, protect and enforce our intellectual property rights could adversely affect our brand and adversely impact our business.

Suits by third parties for alleged infringement of their proprietary rights could cause us to incur significant expenses or liabilities.

There is considerable patent and other intellectual property development activity in our industry. Our future success depends in part on not infringing upon the intellectual property rights of others. From time to time, our competitors or other third parties may claim that our solutions and underlying technology infringe or violate their intellectual property rights, and we may be found to be infringing upon such rights. We may be unaware of the intellectual property rights of others that may cover some or all of our technology. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our solutions or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or other companies in connection with any such litigation and to obtain licenses, modify our solutions, or refund subscription fees, which could further exhaust our resources. In addition, we may incur substantial costs to resolve claims or litigation, whether or not successfully asserted against us, which could include payment of significant settlement, royalty or license fees, modification of our solutions, or refunds to customers of subscription fees. Even if we were to prevail in the event of claims or litigation against us, any claim or litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and other employees from our business operations. Such disputes could also disrupt our solutions, adversely impacting our customer satisfaction and ability to attract customers.

We use open source software in our products, which could subject us to litigation or other actions.

We use open source software in our products and may use more open source software in the future. From time to time, there have been claims challenging the use of open source software against companies that incorporate open source software into their products. As a result, we could be subject to suits by parties claiming misuse of, or a right to compensation for, what we believe to be open source software. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional research and development resources to change our products. In addition, if we were to combine our proprietary software products with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary software products. If we inappropriately use open source software, we may be required to re-engineer our products, discontinue the sale of our products or take other remedial actions.

If the market for SaaS solutions develops more slowly than we expect or declines, our business would be adversely affected.

The market for SaaS solutions is less mature than the market for on-premise software applications, and the adoption rate of SaaS solutions may be slower at companies in industries with heightened data security interests or business practices requiring highly customizable application software. Many organizations have invested substantial personnel and financial resources to integrate traditional on-premise solutions into their businesses, and therefore may be reluctant or unwilling to

 

28


Table of Contents

purchase SaaS solutions. In addition, some organizations have been reluctant to use cloud-based solutions because they have concerns regarding the risks associated with the reliability or security of the technology delivery model associated with these solutions. Because our solutions involve the aggregation, storage and use of confidential information and related data, including highly confidential financial data, some customers may be reluctant or unwilling to migrate to our cloud-based solutions.

It is difficult to predict customer adoption rates and demand for our software solutions, the future growth rate and size of the market or the entry of competitive products or services. The expansion of the SaaS solutions market depends on a number of factors, including the cost, performance and perceived value associated with SaaS, as well as the ability of SaaS providers to address data security and privacy concerns. Government agencies have adopted, or may adopt, laws and regulations regarding the collection and use of personal information obtained from consumers and other individuals, or may seek to access information on our platform, either of which may reduce the overall demand for our platform. If we or other SaaS providers experience data security incidents, loss of customer data, disruptions in delivery, or other problems, the market for SaaS solutions, including our platform, may be negatively affected. If SaaS solutions do not continue to achieve market acceptance, or there is a reduction in demand for SaaS solutions caused by a lack of customer acceptance, technological challenges, data security or privacy concerns, governmental regulation, competing technologies and products, or decreases in information technology spending, it would result in decreased revenue and our business would be adversely affected.

Privacy and data security concerns, and data collection and transfer restrictions and related domestic or foreign regulations may limit the use and adoption of our solutions and adversely affect our business.

Personal privacy, information security, and data protection are significant issues in the United States, Europe and many other jurisdictions where we offer our platform. The regulatory framework governing the collection, processing, storage and use of business information, particularly information that affects financial statements, and personal data, is rapidly evolving and any failure or perceived failure to comply with applicable privacy, security, or data protection laws or regulations may adversely affect our business.

The U.S. federal and various state and foreign governments have adopted or proposed requirements regarding the collection, distribution, use, security and storage of personally identifiable information and other data relating to individuals, and federal and state consumer protection laws are being applied to enforce regulations related to the online collection, use and dissemination of data. Some of these requirements include obligations on companies to notify individuals of security breaches involving particular personal information, which could result from breaches experienced by us or by organizations with which we have formed strategic relationships. Even though we may have contractual protections with such organizations, notifications related to a security breach could impact our reputation, harm customer confidence, hurt our expansion into new markets or cause us to lose existing customers.

Further, many foreign countries and governmental bodies, including the European Union, or EU, where we conduct business and have offices, have laws and regulations concerning the collection and use of personal data obtained from their residents or by businesses operating within their jurisdiction. These laws and regulations often are more restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of data that identifies or may be used to identify or locate an individual, such as names, email addresses and, in some jurisdictions, Internet Protocol, or IP, addresses. With regard to data transfers of personal data from our European employees and customers to the United States, we have historically relied on our adherence to the U.S. Department of Commerce’s Safe Harbor Privacy Principles and compliance

 

29


Table of Contents

with the U.S.-EU and U.S.-Swiss Safe Harbor Frameworks as agreed to and set forth by the U.S. Department of Commerce, and the European Union and Switzerland, which established means for legitimizing the transfer of personal data by companies doing business in Europe from the EU to the U.S. As a result of the October 6, 2015 European Court of Justice opinion in Case C-362/14 (Schrems v. Data Protection Commissioner) or, the ECJ Ruling, the U.S.-EU Safe Harbor Framework was deemed an invalid method of compliance with EU restrictions on data transfers. We have taken certain measures to legitimize our transfers of personal data, both internally and on behalf of our customers, from the EU to the United States in the wake of the ECJ Ruling. Our means for transferring personal data from the EU may not be adopted by all of our customers and may be subject to legal challenge by data protection authorities, and we may experience reluctance or refusal by European customers to use our solutions due to potential risk exposure as a result of the ECJ Ruling. We and our customers face a risk of enforcement actions taken by EU data protection authorities regarding data transfers from the EU to the United States.

We also expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, the EU, and other jurisdictions, and we cannot yet determine the impact such future laws, regulations and standards may have on our business. Such laws and regulations are often subject to differing interpretations and may be inconsistent among jurisdictions. These and other requirements could reduce demand for our service, increase our costs, impair our ability to grow our business, or restrict our ability to store and process data or, in some cases, impact our ability to offer our service in some locations and may subject us to liability. Further, in view of new or modified federal, state or foreign laws and regulations, industry standards, contractual obligations and other legal obligations, or any changes in their interpretation, we may find it necessary or desirable to fundamentally change our business activities and practices or to expend significant resources to modify our software or platform and otherwise adapt to these changes. We may be unable to make such changes and modifications in a commercially reasonable manner or at all, and our ability to develop new products and features could be limited.

Our customers also expect that we comply with regulatory standards that may place additional burdens on us. Our customers expect us to meet voluntary certifications or adhere to standards established by third parties, such as the SSAE 16, SOC1 and SOC2 audit processes, and may demand that they be provided a report from our auditors that we are in compliance. If we are unable to maintain these certifications or meet these standards, it could adversely affect our customers’ demand for our service and could harm our business.

The costs of compliance with and other burdens imposed by laws, regulations and standards may limit the use and adoption of our service and reduce overall demand for it, or lead to significant fines, penalties or liabilities for any noncompliance. Privacy, information security, and data protection concerns, whether valid or not valid, may inhibit market adoption of our platform, particularly in certain industries and foreign countries.

We depend and rely upon SaaS applications from third parties to operate our business and interruptions or performance problems with these technologies may adversely affect our business and operating results.

We rely heavily on SaaS applications from third parties in order to operate critical functions of our business, including billing and order management, enterprise resource planning, and financial accounting services. If these services become unavailable due to extended outages, interruptions, or because they are no longer available on commercially reasonable terms, our expenses could increase, our ability to manage finances could be interrupted and our processes for managing sales of our solutions and supporting our customers could be impaired until equivalent services, if available, are identified, obtained, and implemented, all of which could adversely affect our business.

 

30


Table of Contents

We rely on third-party computer hardware and software that may be difficult to replace or which could cause errors or failures of our software solutions.

We rely on computer hardware purchased or leased and software licensed from third parties in order to deliver our software solutions. This hardware and software may not continue to be available on commercially reasonable terms, if at all. Any loss of the right to use any of this hardware or software could result in delaying or preventing our ability to provide our software solutions until equivalent technology is either developed by us or, if available, identified, obtained and integrated. In addition, errors or defects in third-party hardware or software used in our software solutions could result in errors or a failure, which could damage our reputation, impede our ability to provide our platform or process information, and adversely affect our business and results of operations.

We face exposure to foreign currency exchange rate fluctuations that could harm our results of operations.

We conduct transactions, particularly intercompany transactions, in currencies other than the U.S. dollar, primarily the British pound and the Euro. As we grow our international operations, we expect the amount of our revenues that are denominated in foreign currencies to increase in the future. Accordingly, changes in the value of foreign currencies relative to the U.S. dollar could affect our revenue and operating results due to transactional and translational remeasurements that are reflected in our results of operations. As a result of such foreign currency exchange rate fluctuations, it could be more difficult to detect underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading price of our common stock could be adversely affected.

We do not currently maintain a program to hedge transactional exposures in foreign currencies. However, in the future, we may use derivative instruments, such as foreign currency forward and option contracts, to hedge exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments.

We are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing requirements and subject us to liability if we are not in full compliance with applicable laws.

Our solutions are subject to export controls, including the Commerce Department’s Export Administration Regulations and various economic and trade sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls. Obtaining the necessary authorizations, including any required license, for a particular export or sale may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. The U.S. export control laws and economic sanctions laws prohibit the export, reexport or transfer of specific products and services to U.S. embargoed or sanctioned countries, governments and persons. Even though we take precautions to prevent our solutions from being provided to U.S. sanctions targets, our solutions could be sold by resellers despite such precautions. Failure to comply with the U.S. export control, sanctions and import laws could have negative consequences, including government investigations, penalties and reputational harm. We and our employees could be subject to civil or criminal penalties, including the possible loss of export or import privileges; fines, and, in extreme cases, the incarceration of responsible employees or managers. In addition, if our resellers fail to obtain appropriate import, export or re-export licenses or authorizations, we may also be adversely affected through reputational harm and penalties.

 

31


Table of Contents

In addition, various countries regulate the import of encryption technology, including through import permitting/licensing requirements, and have enacted laws that could limit our ability to distribute our solutions or could limit our customers’ ability to implement or access our solutions in those countries. Changes in our solutions or changes in export, sanctions and import regulations may create delays in the introduction and sale of our solutions in international markets, prevent our customers with international operations from accessing our solutions or, in some cases, preventing the export or import of our solutions to some countries, governments or persons altogether. Any change in export or import regulations, economic sanctions or related laws, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our solutions, or in our decreased ability to export or sell our solutions to existing or potential customers with international operations. Any decreased use of our solutions or limitation on our ability to export or sell our solutions would likely adversely affect our business, financial condition and results of operations.

We may acquire or invest in companies, but we may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such transactions.

We may evaluate and consider potential strategic transactions, including mergers with or into other companies, and acquisitions of, or investments in, businesses, technologies, services, products, and other assets in the future. We also may enter into relationships with other businesses to expand our products and services, which could involve preferred or exclusive licenses, additional channels of distributions or discount pricing.

Any acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to work for us, their software is not easily adapted to work with our platform, or we have difficulty retaining the customers of any acquired business due to changes in ownership, management or otherwise. Acquisitions may also disrupt our business, divert our resources, and require significant management attention that would otherwise be available for development of our existing business. Moreover, the anticipated benefits of any acquisition, investment, or business relationship may not be realized or we may be exposed to unknown risks or liabilities.

Negotiating these transactions can be time-consuming, difficult, and expensive, and our ability to complete these transactions may often be subject to approvals that are beyond our control. Consequently, these transactions, even if announced, may not be completed. For one or more of those transactions, we may:

 

   

issue additional equity securities that would dilute our existing stockholders;

 

   

use cash that we may need in the future to operate our business;

 

   

incur large charges or substantial liabilities;

 

   

incur debt on terms unfavorable to us or that we are unable to repay;

 

   

encounter difficulties retaining key employees of the acquired company or integrating diverse software codes or business cultures; and

 

   

become subject to adverse tax consequences, substantial depreciation, or deferred compensation charges.

 

32


Table of Contents

Changes in laws and regulations related to the Internet and cloud computing or changes to Internet infrastructure may diminish the demand for our solutions, and could have a negative impact on our business.

The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication, and business applications. Federal, state, or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Regulators in some industries have also adopted, and may in the future adopt regulations or interpretive positions regarding the use of SaaS and cloud computing solutions. For example, some financial services regulators have imposed guidelines for the use of cloud computing services that mandate specific controls or require financial services enterprises to obtain regulatory approval prior to utilizing such software. Changes in these laws or regulations could require us to modify our solutions in order to comply with these changes. In addition, government agencies or private organizations have imposed and may impose additional taxes, fees, or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally, or result in reductions in the demand for Internet-based solutions and services such as ours. In addition, the use of the Internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease-of-use, accessibility, and quality of service. The performance of the Internet and its acceptance as a business tool has been adversely affected by “viruses,” “worms,” and similar malicious programs and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the Internet is adversely affected by these issues, demand for our solutions could decline.

Incorrect or improper implementation or use of our solutions could result in customer dissatisfaction and negatively affect our business, results of operations, financial condition, and growth prospects.

Our platform is deployed in a wide variety of technology environments and into a broad range of complex workflows. Our platform has been integrated into large-scale, enterprise-wide technology environments, and specialized use cases, and our success depends on our ability to implement our platform successfully in these environments. We often assist our customers in implementing our platform, but many customers attempt to implement even complex deployments themselves or use a third-party service firm. If we or our customers are unable to implement our platform successfully, or are unable to do so in a timely manner, customer perceptions of our platform and company may be impaired, our reputation and brand may suffer, and customers may choose not to renew or expand the use of our platform.

Our customers and third-party resellers may need training in the proper use of our platform to maximize its potential. If our platform is not implemented or used correctly or as intended, including if customers input incorrect or incomplete financial data into our platform, inadequate performance may result. Because our customers rely on our platform to manage their financial close and other financial tasks, the incorrect or improper implementation or use of our platform, our failure to train customers on how to efficiently and effectively use our platform, or our failure to provide adequate product support to our customers, may result in negative publicity or legal claims against us. Also, as we continue to expand our customer base, any failure by us to properly provide these services will likely result in lost opportunities for additional subscriptions to our platform.

 

33


Table of Contents

Any failure to offer high-quality product support may adversely affect our relationships with our customers and our financial results.

In deploying and using our solutions, our customers depend on our support services team to resolve complex technical and operational issues. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for product support. We also may be unable to modify the nature, scope and delivery of our product support to compete with changes in product support services provided by our competitors. Increased customer demand for product support, without corresponding revenue, could increase costs and adversely affect our operating results. Our sales are highly dependent on our business reputation and on positive recommendations from our existing customers. Any failure to maintain high-quality product support, or a market perception that we do not maintain high-quality product support, could adversely affect our reputation, our ability to sell our solutions to existing and prospective customers, our business, operating results, and financial position.

Unfavorable conditions in our industry or the global economy could limit our ability to grow our business and negatively affect our operating results.

Our operating results may vary based on the impact of changes in our industry or the global economy on us or our customers. The revenue growth and potential profitability of our business depend on demand for business software applications and services generally and for accounting and finance systems in particular. Weak economic conditions affect the rate of accounting and finance and information technology spending and could adversely affect our customers’ or potential customers’ ability or willingness to purchase our cloud platform, delay purchasing decisions, reduce the value or duration of their subscription contracts, or affect attrition rates, all of which could adversely affect our operating results. If economic conditions deteriorate, our customers and prospective customers may elect to decrease their accounting and finance and information technology budgets, which would limit our ability to grow our business and negatively affect our operating results.

We provide service level commitments under our customer contracts, and if we fail to meet these contractual commitments, our revenues could be adversely affected.

Our customer agreements typically provide service level commitments. If we are unable to meet the stated service level commitments or suffer extended periods of unavailability for our applications, we may be contractually obligated to provide these customers with service credits, refunds for prepaid amounts related to unused subscription services, or we could face contract terminations. Our revenues could be significantly affected if we suffer unscheduled downtime that exceeds the allowed downtimes under our agreements with our customers. Any extended service outages could adversely affect our reputation, revenues and operating results.

Seasonality could cause our operating results and financial metrics to fluctuate from quarter to quarter and make them more difficult to predict.

We typically add fewer customers in the first quarter of the year than other quarters. We also experience a higher volume of sales at the end of each quarter and year, which is often the result of buying decisions by our customers. Seasonality may be reflected to a much lesser extent, and sometimes may not be immediately apparent, in our revenue, due to the fact that we recognize subscription revenue over the term of our agreements. We may also increase expenses in a period in anticipation of future revenues. Changes in the number of customers and users in different periods will cause fluctuations in our financial metrics and, to a lesser extent revenues. Those changes and fluctuations in our expenses will affect our results on a quarterly basis, and will make forecasting our future operating results and financial metrics difficult.

 

34


Table of Contents

Our credit facility contains operating and financial covenants that restrict our business and financing activities and, in some cases, could result in an immediate requirement to repay our outstanding loans.

Borrowings under our credit facility are secured by substantially all of our assets, including our intellectual property. We expect to pay the entire outstanding balance under our credit facility with proceeds from this offering, including a 1% prepayment premium. Our credit facility restricts our ability to, among other things:

 

   

dispose of or sell our assets;

 

   

make material changes in our business or management;

 

   

consolidate or merge with other entities;

 

   

incur additional indebtedness;

 

   

create liens on our assets;

 

   

pay dividends;

 

   

make investments, including capital expenditures;

 

   

enter into transactions with affiliates; and

 

   

pay off or redeem subordinated indebtedness.

These restrictions are subject to exceptions. In addition, our credit facility requires us to maintain a maximum consolidated leverage ratio, among other requirements. The credit facility, which was entered into by our operating subsidiary, BlackLine Systems, Inc. and guaranteed by our intermediary holding company, BlackLine Intermediate, Inc., also places restrictions on BlackLine Systems, Inc.’s ability to make dividend payments, loans or advances to us and our subsidiaries. All of BlackLine Systems, Inc.’s net assets are restricted from making dividend payments, loans or advances to us and our subsidiaries. Restricted net assets as of December 31, 2014 amounted to $184.0 million.

The operating and financial restrictions and covenants in the credit facility, as well as any future financing agreements that we may enter into, could restrict our ability to finance our operations and to engage in, expand or otherwise pursue business activities and strategies that we or our stockholders may consider beneficial. Our ability to comply with these covenants may be affected by events beyond our control, and future breaches of any of these covenants could result in a default under the credit facility. Future defaults, if not waived, could cause all of the outstanding indebtedness under our credit facility to become immediately due and payable and would permit the lenders to terminate all commitments to extend further credit and permit the administrative and collateral agent, on behalf of the lenders, to proceed against the collateral in which we granted the lenders a security interest.

Our credit facility contemplates that we may enter into a revolving loan agreement with lenders and agents, if any, reasonably acceptable to the agent under our credit facility providing for a revolving credit facility of up to $10.0 million. We have not yet entered into such an agreement.

If we do not have or are unable to generate sufficient cash available to repay our debt obligations when they become due and payable, either upon maturity or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all. This could materially and adversely affect our liquidity and financial condition and our ability to operate and continue our business as a going concern.

 

35


Table of Contents

Our international operations subject us to potentially adverse tax consequences.

We report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our intercompany relationships are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with our determinations as to the value of assets sold or acquired or income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position were not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows, and lower overall profitability of our operations. We believe that our financial statements reflect adequate reserves to cover such a contingency, but there can be no assurances in that regard.

The enactment of legislation implementing changes in the U.S. taxation of international business activities or the adoption of other tax reform policies could materially impact our financial position and results of operations.

Recent changes to U.S. tax laws, including limitations on the ability of taxpayers to claim and utilize foreign tax credits, as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of our foreign earnings. Due to expansion of our international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and adversely affect our financial position and results of operations.

Our ability to use our net operating losses to offset future taxable income may be subject to limitations.

As of December 31, 2014, we had federal and State of California net operating loss carryforwards, or NOLs, of $43.0 million and $42.6 million, respectively. In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. Our existing NOLs may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change in connection with or after this offering, our ability to utilize NOLs could be further limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. For these reasons, we may not be able to realize a tax benefit from the use of our NOLs, whether or not we attain profitability.

Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations.

Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction and are subject to change from time to time. Some jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties and interest or future requirements may adversely affect our results of operations.

 

36


Table of Contents

The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.

Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The estimates and forecasts in this prospectus relating to the size and expected growth of the market for a comprehensive platform to automate accounting and finance processes and integrate ERPs may prove to be inaccurate. Even if the market in which we compete meets the size estimates and growth forecasted in this prospectus, our business could fail to grow at similar rates, if at all.

We might require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features or enhance our existing solutions, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired.

Natural disasters and other events beyond our control could harm our business.

Natural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce and the global economy, and thus could have a strong negative effect on us. Our business operations are subject to interruption by natural disasters, fire, power shortages, pandemics and other events beyond our control. Although we maintain crisis management and disaster response plans, such events could make it difficult or impossible for us to deliver our solutions to our customers, and could decrease demand for our solutions. The majority of our research and development activities, corporate headquarters, information technology systems and other critical business operations are located in California, which has experienced major earthquakes in the past. Significant recovery time could be required to resume operations and our financial condition and operating results could be harmed in the event of a major earthquake or catastrophic event.

If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.

We review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. As of September 30, 2015, we had goodwill and intangible assets with a net book value of $223.0 million related to the Acquisition. An adverse change in market conditions, particularly if such change has the effect of changing one of our critical assumptions or estimates, could result in a change to the estimation of fair value that could result in an impairment charge to our goodwill or intangible assets. Any such charges may have a material negative impact on our operating results.

 

37


Table of Contents

Risks Related to Ownership of Our Common Stock and this Offering

There has been no prior market for our common stock and an active market may not develop or be sustained and investors may not be able to resell their shares at or above the initial public offering price.

There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock was determined through negotiations between the underwriters and us and may vary from the market price of our common stock following this offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price, if at all. An active or liquid market in our common stock may not develop following this offering or, if it does develop, it may not be sustainable.

Our stock price may be volatile or may decline regardless of our operating performance resulting in substantial losses for investors purchasing shares in this offering.

The trading price of our common stock is likely to be volatile and could fluctuate widely regardless of our operating performance. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

   

actual or anticipated fluctuations in our operating results;

 

   

the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

   

failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates by any securities analysts who follow our company or our failure to meet these estimates or the expectations of investors;

 

   

ratings changes by any securities analysts who follow our company;

 

   

announcements by us or our competitors of significant technical innovations, acquisitions, strategic relationships, joint ventures, or capital commitments;

 

   

changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;

 

   

price and volume fluctuations in the overall stock market from time to time, including as a result of trends in the economy as a whole;

 

   

changes in accounting standards, policies, guidelines, interpretations or principles;

 

   

actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;

 

   

developments or disputes concerning our intellectual property, or our products or third-party proprietary rights;

 

   

announced or completed acquisitions of businesses or technologies by us or our competitors;

 

   

new laws or regulations, or new interpretations of existing laws or regulations applicable to our business;

 

   

any major change in our board of directors or management;

 

   

sales of shares of our common stock by us or our stockholders;

 

   

lawsuits threatened or filed against us; and

 

   

other events or factors, including those resulting from war, incidents of terrorism, or responses to these events.

 

38


Table of Contents

In addition, the stock markets, and in particular the market on which our common stock will be listed, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from operating our business, and adversely affect our business, results of operations, financial condition and cash flows.

The company will be controlled by our Principal Stockholders, whose interests may differ from those of other stockholders.

Immediately following this offering, our Principal Stockholders will beneficially own, in the aggregate, approximately             % of our outstanding common stock and directors affiliated with our Principal Stockholders will comprise a majority of our board of directors. Further, we will enter into a Stockholder Agreement with the Principal Stockholders which will provide that the Principal Stockholders will be entitled to designate members of our board of directors as described in “Management—Board Composition.” We anticipate that the parties to the Stockholder Agreement will agree to vote for these nominees as well as other directors recommended by our nominating and corporate governance committee.

Under the Stockholder Agreement and subject to our certificate of incorporation and bylaws, as amended and restated in connection with this offering, and applicable law, for so long as the Principal Stockholders collectively beneficially own a number of shares equal to 40% of the total number of shares of our common stock outstanding after completion of this offering, as adjusted for any reorganization, recapitalization, stock dividend, stock split, reverse stock split or similar changes in our capitalization, the following actions will require the approval of our board of directors, including the affirmative vote of at least two directors designated by Silver Lake:

 

   

dissolution, liquidation, reorganization or bankruptcy of the company or its subsidiaries;

 

   

certain dispositions of assets or joint ventures in excess of $50 million by the company or its subsidiaries;

 

   

material changes in the nature of the company’s or its subsidiaries’ business;

 

   

any amendments to the company’s amended and restated certificate of incorporation and amended and restated bylaws;

 

   

incurrence of indebtedness in excess of $150 million;

 

   

appointment or termination of the Chief Executive Officer; and

 

   

change of control transactions.

See “Certain Relationships and Related Party Transactions—Transactions in Connection with the Offering—Stockholder Agreement.”

Immediately following this offering, the Principal Stockholders will be able to determine the outcome of all matters requiring stockholder approval, including mergers and other material transactions, and will be able to cause or prevent a change in the composition of our board of directors or a change in control of our company that could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

 

39


Table of Contents

Further, our amended and restated certificate of incorporation will provide that, to the fullest extent permitted by law, the doctrine of “corporate opportunity” will not apply to Silver Lake, Iconiq, their respective affiliates or the directors they designate, pursuant to their rights under the Stockholder Agreement in a manner that would prohibit them from investing in competing businesses or doing business with our partners or customers. Accordingly, these directors will have the rights to pursue business opportunities that may be of interest to the company and which they would otherwise need to provide to the company. See “Description of Capital Stock— Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws.”

Although we do not expect to rely on the “controlled company” exemption, we will be a “controlled company” within the meaning of the stock exchange rules and we will qualify for exemptions from certain corporate governance requirements.

Because our Principal Stockholders will, collectively, own a majority of our outstanding common stock following the completion of this offering, we will be considered a “controlled company” as that term is set forth in the stock exchange rules. Under these rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a “controlled company” and may elect not to comply with certain stock exchange rules regarding corporate governance, including:

 

   

the requirement that a majority of its board of directors consist of independent directors;

 

   

the requirement that its nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement that its compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

These requirements will not apply to us as long as we remain a “controlled company.” Although we qualify as a “controlled company,” we do not expect to rely on this exemption and intend to fully comply with all corporate governance requirements under the stock exchange rules. However, if we were to utilize some or all of these exemptions, you may not have the same protections afforded to stockholders of companies that are subject to all of the stock exchange rules regarding corporate governance.

Substantial future sales of shares of our common stock could cause the market price of our common stock to decline.

The market price of our common stock could decline as a result of substantial sales of our common stock, particularly sales by our directors, executive officers and significant stockholders, a large number of shares of our common stock becoming available for sale or the perception in the market that holders of a large number of shares intend to sell their shares. After this offering, we will have outstanding              shares of our common stock, based on the number of shares outstanding as of September 30, 2015. This includes the shares included in this offering, which may be resold in the public market immediately. The remaining              shares are currently restricted as a result of market stand-off agreements and lock-up agreements with the underwriters restricting their sale for 180 days after the date of this prospectus. Goldman, Sachs & Co. and Credit Suisse Securities (USA) LLC may, in their sole discretion, permit our officers, directors, employees and current stockholders who are subject to lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

Additionally, the shares of common stock subject to outstanding warrants or outstanding options under our equity incentive plans and the shares reserved for future issuance under our equity incentive

 

40


Table of Contents

plans will become eligible for sale in the public market in the future, subject to legal and contractual limitations. See “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future.

After this offering, the holders of an aggregate of              shares of our common stock as of September 30, 2015 will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our stockholders. We also intend to register shares of common stock that we may issue under our employee equity incentive plans. Once we register these shares, they will be able to be sold freely in the public market upon issuance, subject to market stand-off or lock-up agreements.

As a new investor, you will incur immediate and substantial dilution as a result of this offering.

The initial public offering price will be substantially higher than the pro forma net tangible book value per share of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate dilution of $             per share, based on an assumed initial public offering price of $             per share (the midpoint of the price range set forth on the cover page of the prospectus), and new investors will own approximately             % of our outstanding common stock. This dilution is due in large part to earlier investors having generally paid substantially less than the initial public offering price when they purchased their shares. In addition, the exercise of outstanding options and warrants will, and future equity issuances may, result in further dilution to investors.

Provisions of our corporate governance documents could make an acquisition of the company more difficult and may impede attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.

Our amended and restated certificate of incorporation and amended and restated bylaws and the Delaware General Corporation Law, or DGCL, will contain provisions that could make it more difficult for a third-party to acquire us, even if doing so might be beneficial to our stockholders. Among other things:

 

   

we will have authorized but unissued shares of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include supermajority voting, special approval, dividend, or other rights or preferences superior to the rights of stockholders;

 

   

we will have a classified board of directors with staggered three-year terms;

 

   

stockholder action by written consent will be prohibited from and after the date on which the Principal Stockholders beneficially own, in the aggregate, less than 35% of the total number of shares of our common stock then outstanding;

 

   

for as long as the Principal Stockholders beneficially own, in the aggregate, at least 40% of the total number of shares of our common stock then outstanding, any amendment, alteration, rescission or repeal of our amended and restated bylaws or of certain provisions of our amended and restated certificate of incorporation by our stockholders will require the affirmative vote of 60% of the total number of shares of our common stock then outstanding and at any time when the Principal Stockholders beneficially own, in the aggregate, less than 40% of the total number of shares of our common stock then outstanding, any amendment, alteration, rescission or repeal of our amended and restated bylaws or of certain provisions of our amended and restated certificate of incorporation by our stockholders will require the affirmative vote of the holders of at least 75% of the total number of shares of our common stock then outstanding; and

 

41


Table of Contents
   

stockholders are required to comply with advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; provided, however, that such advance notice procedures will not apply to the Principal Stockholders at any time when such person or entity, beneficially owns at least 10% of the total number of shares of our common stock then outstanding.

Further, as a Delaware corporation, we are also subject to provisions of Delaware law, which may impair a takeover attempt that our stockholders may find beneficial. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of the company, including actions that our stockholders may deem advantageous, or negatively affect the trading price of our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire. See “Description of Capital Stock.”

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the federal securities laws, and we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We will remain an “emerging growth company” until the last day of the fiscal year following the five-year anniversary of the completion of this offering, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the end of the second quarter of a fiscal year prior to the five-year anniversary, we would cease to be an “emerging growth company” as of the following December 31.

The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain executive management and qualified board members.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of the exchanges and other markets upon which our common stock is listed, and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. We will be required to disclose changes made in our internal control and procedures on a quarterly basis and we will be required to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the

 

42


Table of Contents

effective date of this offering. However, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company.” As a result of the complexity involved in complying with the rules and regulations applicable to public companies, our management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. Although we have already hired additional employees to assist us in complying with these requirements, we may need to hire more employees in the future or engage outside consultants, which will increase our operating expenses.

In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time-consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest substantial resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from business operations to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results.

We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return.

Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not increase the value of our business, which could cause our stock price to decline.

We do not intend to pay dividends on our common stock so any returns will be limited to changes in the value of our common stock.

We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain future earnings for the development, operation, and expansion of our

 

43


Table of Contents

business, and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition, our ability to pay cash dividends on our common stock is restricted by our current credit facility and may be prohibited or limited by the terms of our current and future debt financing arrangements. Any return to stockholders will therefore be limited to the increase, if any, of our stock price, which may never occur.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If few securities analysts commence coverage of us, or if industry analysts cease coverage of us, the trading price for our common stock would be negatively affected. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our common stock price and trading volume to decline.

Our amended and restated certificate of incorporation will designate the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Pursuant to our amended and restated certificate of incorporation, as will be in effect upon the completion of this offering, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim against us arising pursuant to any provision of the DGCL, or (4) any action asserting a claim against us that is governed by the internal affairs doctrine shall be a state or federal court located within the State of Delaware, in all cases subject to the court’s having jurisdiction over indispensable parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to this provision. The forum selection clause in our amended and restated certificate of incorporation may have the effect of discouraging lawsuits against us or our directors and officers and may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

 

44


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

   

our ability to attract new customers and expand sales to existing customers;

 

   

the retention of our customers;

 

   

our ability to manage growth effectively;

 

   

our future financial performance and ability to achieve and maintain profitability;

 

   

our ability to provide successful enhancements, new features and modifications to our solutions;

 

   

the success of a limited number of solutions for which we derive substantially all of our revenues;

 

   

our relationships with technology vendors, professional services firms and business process outsourcers;

 

   

breaches or unauthorized access to customer data;

 

   

interruptions or performance problems associated with our solutions, platform and technology;

 

   

our ability to prevent serious errors or defects in our products; and

 

   

our use of the net proceeds of this offering.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

 

45


Table of Contents

INDUSTRY AND MARKET DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, market opportunity and market size, is based on information from various sources, including reports we commissioned with Frost & Sullivan, on assumptions we have made based on such data and other similar sources and on our knowledge of the markets for our solutions. While we are not aware of any misstatements regarding any third-party information presented in this prospectus, estimates of third parties, particularly as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those described in the section titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the third parties and by us.

 

46


Table of Contents

USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of shares of our common stock in this offering will be approximately $            , based upon the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares of our common stock from us is exercised in full, we estimate that the net proceeds to us would be approximately $             million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the net proceeds to us from the sale of shares of our common stock in this offering by $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, the net proceeds to us from the sale of shares of our common stock in this offering by approximately $             million, assuming the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to obtain additional capital and increase our financial flexibility, create a public market for our stock, and increase our visibility in the marketplace. We currently intend to use the net proceeds we receive from this offering to repay the entire outstanding balance under our credit facility and for general corporate purposes, including working capital, research and development activities, sales and marketing activities, general and administrative matters and capital expenditures and to fund our growth plans. As of September 30, 2015, $29.2 million of principal was outstanding under a term loan we entered into under our credit facility, or the Term Loan. Our credit facility requires us to pay a prepayment premium of 1% of the amount prepaid in the event of an early prepayment prior to September 2016. The Term Loan has a term of five years and expires and matures on September 25, 2018. It bears interest at (i) the greater of LIBOR or 1.5% plus (ii) 8%, and can be paid in varying amounts in cash or in kind. At September 30, 2015, the interest rate on the Term Loan was 9.5%. For additional discussion of our credit facility, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” We may also, in our discretion, use a portion of the net proceeds for the acquisition of, or investment in, businesses, products, services, or technologies that complement our business, although we have no current commitments or agreements to enter into any acquisitions or investments. We will have broad discretion over the uses of the net proceeds of this offering.

 

47


Table of Contents

DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings to fund business development and growth, and we do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant. Currently, the provisions of our credit facility place certain limitations on the amount of cash dividends we can pay.

 

48


Table of Contents

CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization at September 30, 2015:

 

   

on an actual basis; and

 

   

on a pro forma basis giving effect to (i) the issuance of              shares of our common stock in this offering, at an assumed initial public offering price of $             per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us, (ii) the retirement of 235,000 shares of treasury stock and (iii) and the use of proceeds from the offering to repay all principal amounts outstanding under our credit facility, including the 1% prepayment premium, each as if such events had occurred on September 30, 2015.

You should read this table together with our consolidated financial statements and related notes, and the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are included elsewhere in this prospectus.

 

     As of September 30, 2015  
     Actual     Pro Forma(1)  
     (in thousands,
except share data)
 

Cash and cash equivalents

   $ 18,015      $                   
  

 

 

   

 

 

 

Term loan, net

     27,681     

Common stock warrant liability

     5,250     

Stockholders’ equity:

    

Common stock, $0.01 par value, 250,000,000 shares authorized, 203,530,765 issued and 203,295,765 outstanding actual, and              issued and outstanding pro forma

     2,035     

Treasury stock, 235,000 shares at cost actual and no shares pro forma

     (254 )  

Additional paid-in capital

     210,814     

Accumulated deficit

     (40,949 )  
  

 

 

   

 

 

 

Total stockholders’ equity

     171,646     
  

 

 

   

 

 

 

Total capitalization

   $   204,577      $            
  

 

 

   

 

 

 

 

(1) Each $1.00 increase or decrease in the assumed initial public offering price of our common stock of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the amount of our pro forma cash and cash equivalents, additional paid-in capital and total stockholders’ equity by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us. An increase or decrease of              shares in the number of shares offered by us would increase or decrease, as applicable, the amount of our pro forma cash and cash equivalents, additional paid-in capital and total stockholders’ equity by approximately $             million, assuming that the initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us.

 

49


Table of Contents

If the underwriters’ option to purchase additional shares of our common stock from us were exercised in full, as of September 30, 2015, pro forma cash and cash equivalents would be $             million, additional paid-in capital would be $             million, total stockholders’ equity would be $             million and shares outstanding would be             .

The pro forma column in the table above is based on 203,295,765 shares of our common stock outstanding as of September 30, 2015, and excludes the following:

 

   

28,988,384 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock outstanding as of September 30, 2015, with a weighted-average exercise price of $1.69 per share;

 

   

2,500,000 shares of our common stock issuable upon the exercise of warrants to purchase shares of our common stock outstanding as of September 30, 2015, with an exercise price of $1.00 per share; and

 

   

             shares of our common stock reserved for future issuance under our stock-based compensation plans, consisting of (i) 312,750 shares of common stock reserved for future awards under the 2014 Equity Incentive Plan, or our 2014 Plan, as of September 30, 2015 (which will terminate as of the completion of this offering and no awards will be granted under our 2014 Plan thereafter), (ii)              shares of common stock reserved for issuance under our 2016 Employee Equity Incentive Plan, or our 2016 Plan, which will become effective on the date of this prospectus and (iii)              shares of common stock reserved for issuance under our 2016 Employee Stock Purchase Plan, or our 2016 ESPP, which will become effective on the date of this prospectus. Stock options to purchase an aggregate of 775,500 shares of our common stock, with an exercise price of $3.00 per share were granted after September 30, 2015 under our 2014 Plan and the number of shares reserved for future issuance under our 2014 Plan was increased to 1,361,125 subsequent to September 30, 2015. Any shares that, as of the effective date of the registration statement of which this prospectus forms a part, have been reserved but not issued pursuant to awards granted under our 2014 Plan and are not subject to any awards granted under our 2014 Plan, plus any shares covering awards granted under our 2014 Plan that, on or after the effective date of the registration statement of which this forms a part, expire or terminate without having been exercised in full or are forfeited to or repurchased by us, will become available for issuance under our 2016 Plan, with the maximum number of shares to be added to our 2016 Plan, from our 2014 Plan equal to              shares. Our 2016 Plan and our 2016 ESPP also provide for automatic annual increases in the number of shares reserved under the plans, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

 

50


Table of Contents

DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock immediately after this offering. Dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after completion of this offering.

Our historical net tangible book deficit as of September 30, 2015 was $51.4 million, or $(0.25) per share. Our historical net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding as of September 30, 2015.

After giving effect to (i) the sale by us of              shares of our common stock in this offering at the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, (ii) the retirement of 235,000 shares of treasury stock and; (iii) the use of proceeds from the offering to repay all principal amounts outstanding under our credit facility including a 1% prepayment premium each as if such events had occurred on September 30, 2015 our pro forma net tangible book value as of September 30, 2015 would have been $             million, or $             per share. This represents an immediate increase in pro forma net tangible book value of $             per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $             per share to investors purchasing shares of our common stock in this offering at the assumed initial public offering price. The following table illustrates this dilution:

 

Assumed initial public offering price per share

     $            

Historical net tangible book deficit per share as of September 30, 2015

   $ (0.25  

Increase in pro forma net tangible book value per share attributable to new investors in this offering

    
  

 

 

   

Pro forma net tangible book value per share immediately after this offering

    
    

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

     $            
    

 

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma net tangible book value per share immediately after this offering by $            , and would increase or decrease, as applicable, dilution per share to new investors in this offering by $            , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us. Similarly, each increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, our pro forma net tangible book value by approximately $             per share and increase or decrease, as applicable, the dilution to new investors by $             per share, assuming the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions payable by us.

If the underwriters’ option to purchase additional shares of our common stock from us is exercised in full, the pro forma net tangible book value per share of our common stock, as adjusted to give effect to this offering, would be $             per share, and the dilution in pro forma net tangible book value per share to new investors in this offering would be $             per share.

 

51


Table of Contents

The following table presents, as of September 30, 2015, the differences between the existing stockholders and the new investors purchasing shares of our common stock in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of shares of our common stock and the average price per share paid or to be paid to us at the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased      Total Consideration      Average
Price
 
     Number      Percent      Amount      Percent      Per Share  

Existing stockholders

     203,295,765                         $ 204,599,000                         $ 1.01   

New investors

                                             $            
  

 

 

    

 

 

    

 

 

    

 

 

    

Totals

        100    $                      100   
  

 

 

    

 

 

    

 

 

    

 

 

    

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid by new investors and total consideration paid by all stockholders by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares of our common stock from us. If the underwriters’ option to purchase additional shares of our common stock were exercised in full, our existing stockholders would own             % and our new investors would own             % of the total number of shares of our common stock outstanding upon the completion of this offering.

The number of shares of our common stock that will be outstanding after this offering is based on 203,295,765 shares of our common stock outstanding as of September 30, 2015, and excludes:

 

   

28,988,384 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock outstanding as of September 30, 2015, with a weighted-average exercise price of $1.69 per share;

 

   

2,500,000 shares of our common stock issuable upon the exercise of warrants to purchase shares of our common stock outstanding as of September 30, 2015, with an exercise price of $1.00 per share; and

 

   

             shares of our common stock reserved for future issuance under our stock-based compensation plans, consisting of (i) 312,750 shares of common stock reserved for future awards under the 2014 Equity Incentive Plan, or our 2014 Plan, as of September 30, 2015 (which will terminate as of the completion of this offering and no awards will be granted under our 2014 Plan thereafter), (ii)              shares of common stock reserved for issuance under our 2016 Equity Incentive Plan, or our 2016 Plan, which will become effective on the date of this prospectus and (iii)              shares of common stock reserved for issuance under our 2016 Employee Stock Purchase Plan, or our 2016 ESPP, which will become effective on the date of this prospectus. Stock options to purchase an aggregate of 775,500 shares of our common stock, with an exercise price of $3.00 per share were granted after September 30, 2015 under our 2014 Plan and the number of shares reserved for future issuance under our 2014 Plan was

 

52


Table of Contents
 

increased to 1,361,125 shares subsequent to September 30, 2015. Any shares that, as of the effective date of the registration statement of which this prospectus forms a part, have been reserved but not issued pursuant to awards granted under our 2014 Plan and are not subject to any awards granted under our 2014 Plan, plus any shares covering awards granted under our 2014 Plan that, on or after the effective date of the registration statement of which this forms a part, expire or terminate without having been exercised in full or are forfeited to or repurchased by us, will become available for issuance under our 2016 Plan, with the maximum number of shares to be added to our 2016 Plan, from our 2014 Plan equal to              shares. Our 2016 Plan and our 2016 ESPP also provide for automatic annual increases in the number of shares reserved under the plans, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

To the extent that any outstanding options to purchase our common stock or the warrants to purchase common stock are exercised, or new awards are granted under our equity compensation plans, there will be further dilution to investors participating in this offering.

 

53


Table of Contents

SELECTED CONSOLIDATED FINANCIAL DATA

The following tables summarize our consolidated financial data. You should read this selected consolidated financial data together with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

On September 3, 2013, we acquired BlackLine Systems, Inc., which we refer to as the Acquisition. Prior to the Acquisition, we had no significant operations. As a result, the consolidated financial statements for the periods from January 1, 2013 to September 2, 2013 are presented as BlackLine Systems, Inc., which we refer to as the Predecessor, and all subsequent periods are presented as BlackLine, Inc., which we refer to as the Successor. The Successor financial statements reflect a new basis of accounting as a result of the Acquisition and therefore are not comparable to the Predecessor financial statements. We refer to the period from January 1, 2013 to September 2, 2013 as the 2013 Predecessor Period and the period from September 3, 2013 to December 31, 2013 as the 2013 Successor Period.

The consolidated statements of operations data for the 2013 Predecessor Period is derived from the audited consolidated financial statements of the Predecessor that are included elsewhere in this prospectus. The consolidated statements of operations data for the 2013 Successor Period and the year ended December 31, 2014 and the consolidated balance sheet data as of December 31, 2013 and 2014 are derived from the audited consolidated financial statements of the Successor included elsewhere in this prospectus. The consolidated statements of operations data for the nine months ended September 30, 2014 and 2015 and the consolidated balance sheet data as of September 30, 2015 are derived from the unaudited interim condensed consolidated financial statements of the Successor included elsewhere in this prospectus. Our unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which consist only of normal recurring adjustments, necessary for the fair statement of those unaudited condensed consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future.

 

54


Table of Contents

Consolidated Statements of Operations Data:

 

                    Year Ended     Nine Months Ended  
    2013         2013     December 31,     September 30,  
    Predecessor Period         Successor Period     2014     2014     2015  
   

(In thousands except share and per share data)

 
           

Revenues

           

Subscription and support

  $ 21,977        $ 7,723      $ 49,029      $ 33,513      $ 56,666   

Professional services

    1,407          860        2,648        2,090        2,467   
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    23,384          8,583        51,677        35,603        59,133   
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues

           

Subscription and support

    4,442          4,346        14,380        10,511        14,220   

Professional services

    1,145          499        2,218        1,684        2,162   
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues(1)

    5,587          4,845        16,598        12,195        16,382   
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    17,797          3,738        35,079        23,408        42,751   
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

           

Sales and marketing(1)

    10,453          6,895        31,837        20,840        39,694   

Research and development(1)

    4,738          2,225        9,705        6,730        12,938   

General and administrative(1)

    6,978          2,827        11,716        8,405        14,968   

Acquisition related costs

    5,586          1,634                        
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    27,755          13,581        53,258        35,975        67,600   
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (9,958       (9,843     (18,179     (12,567     (24,849
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Other expense:

           

Interest expense, net

    (22       (781     (3,047     (2,262     (2,466

Change in fair value of the common stock warrant liability

                    (3,700     (1,970     (170
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Other expense, net

    (22       (781     (6,747     (4,232     (2,636
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (9,980       (10,624     (24,926     (16,799     (27,485

Provision for (benefit from) income taxes

    21          (3,954     (8,174     (5,827     (9,958
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (10,001     $ (6,670   $ (16,752   $ (10,972   $ (17,527
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted

  $ (0.12     $ (0.03   $ (0.08   $ (0.05   $ (0.09
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding, basic and diluted

    82,250,000          200,094,118        200,445,411        200,261,813        202,753,714   
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share, basic and diluted (unaudited)(2)

        $                 $            
       

 

 

     

 

 

 

Pro forma weighted average common shares, basic and diluted (unaudited)

           
       

 

 

     

 

 

 

 

(1) The following table presents the stock-based compensation expense included in each respective expense category:

 

                       Year Ended      Nine Months Ended  
     2013          2013      December 31,      September 30,  
     Predecessor Period          Successor Period          2014              2014              2015      
     (in thousands)  

Cost of revenues

   $ 86         $       $ 249       $ 170       $ 351   

Sales and marketing

     124                   1,059         717         1,747   

Research and development

     330                   229         182         420   

General and administrative

     360                   480         332         1,352   
  

 

 

      

 

 

    

 

 

    

 

 

    

 

 

 
   $                     900         $                     —       $     2,017       $     1,401       $     3,870   
  

 

 

      

 

 

    

 

 

    

 

 

    

 

 

 

 

55


Table of Contents

 

(2) Pro forma basic and diluted net loss per share has been computed to give effect to the number of additional shares that would have been required to be issued to repay the outstanding credit facility balance, including the 1% prepayment premium, assuming the issuance of such shares at the assumed initial public offering price of $             per share which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Also, the numerator in the pro forma basic and diluted net loss per share calculation has been adjusted to reverse the interest expense, net of tax on the credit facility. The pro forma net loss per share does not include the proceeds to be received from the assumed initial public offering, or shares expected to be sold in the initial public offering, except for those shares necessary to be issued to repay the credit facility.

Consolidated Balance Sheet Data:

 

     As of December 31,      As of September 30, 2015  
     2013      2014      Actual      Pro Forma(1)  
     (in thousands)  

Cash and cash equivalents

   $ 14,855       $ 25,707       $ 18,015       $                        

Total assets

     276,492         286,184         287,128      

Deferred revenue

     17,328         34,574         47,041      

Long-term debt

     23,132         25,673         27,681      

Total stockholders’ equity

     193,852         183,947         171,646      

 

(1) The pro forma balance sheet gives effect to (i) the issuance of              shares of our common stock in this offering, at an assumed initial public offering price of $             per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us (ii) the retirement of 235,000 shares of treasury stock and (iii) the use of proceeds from the offering to repay all principal amounts outstanding under our credit facility, including a 1% early prepayment premium each as if such events had occurred on September 30, 2015.

Key Metrics

We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.

 

     December 31,     September 30,  
     2013     2014     2014     2015  

Dollar-based net revenue retention rate

     120     118     118     120

Number of customers (as of end of period)

     738        987        905        1,219   

Number of users (as of end of period)

     67,387        93,665        86,154        119,912   

Dollar-based net revenue retention rate.    We believe that dollar-based net revenue retention rate is an important metric to measure the long-term value of customer agreements and our ability to retain and grow our relationships with existing customers over time. We calculate dollar-based net revenue retention rate as the implied monthly subscription revenue at the end of a period for the base set of customers from which we generated subscription revenue in the year prior to the calculation, divided by the implied monthly subscription revenue one year prior to the date of calculation for that same customer base. This calculation does not reflect implied monthly subscription revenue for new customers added during the one year period but does include the effect of customers who terminated

 

56


Table of Contents

during the period. We define implied monthly subscription revenue as the total amount of minimum subscription and support revenue contractually committed to, under each of our customer agreements over the entire term of the agreement, divided by the number of months in the term of the agreement.

Number of customers.    We believe that our ability to expand our customer base is an indicator of our market penetration and the growth of our business. We define a customer as an entity with an active subscription agreement as of the measurement date. In situations where an organization has multiple subsidiaries or divisions, each entity that is invoiced as a separate entity is treated as a separate customer. For the 2013 Predecessor Period, the 2013 Successor Period, the year ended December 31, 2014 and the nine months ended September 30, 2015, no single customer accounted for more than 10% of our total revenues.

Number of users.    Since our customers generally pay fees based on the number of users of our platform within their organization, we believe the total number of users is an indicator of the growth of our business.

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the non-GAAP measures below are useful in evaluating our business. These non-GAAP financial measures provide consistency and comparability with our past performance, facilitate period-to-period comparisons of operations, and facilitate comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.

 

       Year Ended December 31,       Nine Months Ended
September 30,
 
             2013                     2014             2014     2015  
     (in thousands, except percentages)  

Non-GAAP Revenues

   $ 38,012      $ 56,629      $ 40,555      $ 59,133   

Non-GAAP Gross Profit

   $ 29,714      $ 46,419      $ 33,134      $ 47,706   

Non-GAAP Gross Margin

     78.2     82.0     81.7     80.7

Non-GAAP Cash Provided by (Used in) Operations

   $ 1,886      $ 8,943      $ 7,141      $ (150

Non-GAAP Revenues.    We define non-GAAP revenues as our GAAP revenues adjusted for the impact of purchase accounting resulting from the Acquisition. Upon the Acquisition, deferred revenue at the Acquisition date was recorded at fair value, resulting in a reduction from its then carrying value. This reduction resulted in reduced revenue in the 2013 Successor Period and for the year ended December 31, 2014. Our non-GAAP revenues for the year ended December 31, 2013 combines the GAAP revenues for the 2013 Predecessor Period and the 2013 Successor Period adjusted for by the purchase accounting adjustment. We believe that presenting non-GAAP revenues is useful to investors as it more fully reflects our core revenue growth rate during 2013 and 2014 and allows a direct comparison of revenues between periods. The purchase accounting adjustments related to the Acquisition will not affect our revenues for the year ended December 31, 2015 or future periods.

Non-GAAP Gross Profit and Non-GAAP Gross Margin.    We define non-GAAP gross profit as our non-GAAP revenues less our GAAP cost of revenue adjusted for the amortization of acquired developed technology resulting from the Acquisition and stock-based compensation. We define non-GAAP gross margin as our non-GAAP gross profit divided by our non-GAAP revenues. We believe that presenting non-GAAP gross margin is useful to investors as it eliminates the impact of items that we do not consider indicative of our core operating performance and that have been impacted by purchase accounting, and allows a direct comparison of gross margin between periods.

 

57


Table of Contents

Non-GAAP Cash Provided by (Used in) Operations.    We define non-GAAP cash provided by (used in) operations as our GAAP net cash provided by (used in) operating activities adjusted for the acquisition related costs resulting from the Acquisition. Our non-GAAP cash provided by operations for the year ended December 31, 2013 combines the GAAP net cash provided by (used in) operations for the 2013 Predecessor Period and 2013 Successor Period reduced by acquisition related costs. We believe that presenting non-GAAP cash provided by (used in) operations is useful to investors as it eliminates the impact of non-recurring costs associated with the Acquisition and allows a direct comparison of operating cash flow between periods. The acquisition related costs resulting from the Acquisition did not affect our cash provided by operations for the year ended December 31, 2014 and will not affect our cash provided by (used in) operations in future periods.

Reconciliation of Non-GAAP Financial Measures

Our non-GAAP financial measures have limitations as analytical tools and you should not consider them in isolation or as a substitute for an analysis of our results under GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their nearest GAAP equivalents. First, non-GAAP revenues, non-GAAP gross profit, non-GAAP gross margin and non-GAAP cash provided by (used in) operations are not substitutes for revenue, gross profit, gross margin and net cash provided by (used in) operating activities, respectively. Second, these non-GAAP financial measures may not provide information directly comparable to measures provided by other companies in our industry, as those other companies may calculate their non-GAAP financial measures differently, particularly related to adjustments for acquisition accounting and non-recurring expenses. Third, these non-GAAP measures exclude certain recurring expenses that have been and will continue to be significant expenses of our business.

The following table presents a reconciliation of revenues, gross profit, gross margin and net cash provided by (used in) operating activities, the most comparable GAAP measures, to non-GAAP revenues, non-GAAP gross profit, non-GAAP gross margin and non-GAAP cash provided by (used in) operations:

 

     2013
Predecessor
Period
    2013
Successor
Period
    Year Ended
December 31,
    Nine Months Ended
September 30,
 
         2013
Combined
    2014     2014      2015  
     (in thousands, except percentages)  

Non-GAAP Revenues:

             

Revenues

   $ 23,384      $ 8,583      $ 31,967      $ 51,677      $ 35,603       $ 59,133   

Purchase accounting adjustment to revenue

            6,045        6,045        4,952        4,952           
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Non-GAAP Revenues

   $ 23,384      $ 14,628      $ 38,012      $ 56,629      $ 40,555       $ 59,133   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Non-GAAP Gross Profit:

             

Gross Profit

   $ 17,797      $ 3,738      $ 21,535      $ 35,079      $ 23,408       $ 42,751   

Purchase accounting adjustment to revenue

            6,045        6,045        4,952        4,952           

Amortization of developed technology

            2,048        2,048        6,139        4,604         4,604   

Stock-based compensation expense

     86               86        249        170         351   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Non-GAAP Gross Profit

   $ 17,883      $ 11,831      $ 29,714      $ 46,419      $ 33,134       $ 47,706   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Gross Margin

     76.1     43.6     67.4     67.9     65.7      72.3

Non-GAAP Gross Margin

     76.5     80.9     78.2     82.0     81.7      80.7

Non-GAAP Cash Provided by (Used in) Operating Activities:

             

Net cash provided by (used in) operating activities

   $ 1,240      $ (6,574   $ (5,334   $ 8,943      $ 7,141       $ (150

Acquisition related costs

            7,220        7,220                         
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Non-GAAP Cash Provided by (Used in) Operating Activities

   $ 1,240      $ 646      $ 1,886      $ 8,943      $ 7,141       $ (150
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

58


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with our consolidated financial statements and accompanying notes included elsewhere within this prospectus. This discussion includes both historical information and forward-looking information that involves risk, uncertainties and assumptions. Our actual results may differ materially from management’s expectations as a result of various factors, including, but not limited to, those discussed in the section entitled “Risk Factors.”

Overview

We have created a comprehensive cloud-based software platform designed to transform and modernize accounting and finance operations for organizations of all types and sizes. Our secure, scalable platform supports critical accounting processes such as the financial close, account reconciliations, intercompany accounting and controls assurance. By introducing software to automate these processes and to enable them to function continuously, we empower our customers to improve the integrity of their financial reporting, increase efficiency in their accounting and finance processes and enhance real-time visibility into their operations.

We began operations in 2002 and, in 2004, we were engaged by one of our customers to build custom software to manage their account reconciliations. Because we observed that many accounting processes were managed and tracked with spreadsheets that required manual reconciliation on a periodic basis, which were expensive, labor-intensive, inefficient and subject to error, we believed that other companies could benefit from automated accounting and finance tools and we began licensing our account reconciliation software to other customers. In 2005, we began offering a Software as a Service, or SaaS, platform to provide greater and easier scalability for our customers, and have exclusively sold SaaS solutions since 2009.

As of September 30, 2015, we had more than 1,200 customers with over 119,000 users in approximately 100 countries. Additionally, we continue to build strategic relationships with technology vendors, professional services firms, business process outsourcers and resellers.

We are a holding company and conduct our operations through our wholly-owned subsidiary, BlackLine Systems, Inc. BlackLine Systems, Inc. funded its business with investments from our founder and cash flows from operations until September 3, 2013, when we acquired BlackLine Systems, Inc. and Silver Lake and Iconiq acquired a controlling interest in us, which we refer to as the “Acquisition.” We refer to Silver Lake and Iconiq collectively as our “Investors.” The Acquisition was accounted for as a business combination under GAAP and resulted in a change in accounting basis as of the date of the Acquisition. As a result, our consolidated financial statements for periods after September 3, 2013 are presented on a different basis than that for the periods before September 3, 2013, due to the application of purchase accounting as of September 3, 2013, and therefore are not comparable. We refer to the period from January 1, 2013 to September 2, 2013 as the 2013 Predecessor Period and the period from September 3, 2013 to December 31, 2013 as the 2013 Successor Period.

Our platform consists of seven core cloud-based products, including Account Reconciliation, Task Management, Transaction Matching, Journal Entry, Variance Analysis, Consolidation Integrity Manager and Daily Reconciliation. Customers typically purchase these products in packages that we refer to as solutions, but they have the option to purchase these products individually. Current solutions include

 

59


Table of Contents

Reconciliation Management and Financial Close Management. Our platform also includes two new solutions, Intercompany Hub and Insights, which were introduced in November 2015.

We derived 94% of our revenue from subscriptions to our cloud-based software platform, 4% from professional services and 2% from on-premises legacy software for the nine-month period ended September 30, 2015. The majority of subscriptions are sold through one-year non-cancellable contracts, with a growing percentage of subscriptions sold through three-year non-cancellable contracts. We price our subscriptions based on a number of factors, primarily the number of users having access to the products and the number of products purchased by the customer. Subscription revenue is recognized ratably over the term of the customer agreement. The first year of subscription fees are typically payable within 30 days after execution of a contract, and thereafter upon renewal.

Professional services consist of implementation and consulting services. Although our platform is ready to use immediately after a new customer has access to it, we typically help customers implement our solutions for a fixed fee which is initially recorded as deferred revenue and recognized on a proportional performance basis as the services are performed. We also provide consulting services to help customers optimize the use of our products. We charge customers for our consulting services on a time-and-materials basis and we recognize that revenue as services are performed.

We typically invoice customers annually in advance for annual and multi-year subscriptions and invoice in advance or on a time-and-materials basis for professional services. We record amounts invoiced for portions of annual subscription periods that have not occurred or services that have not been performed as deferred revenue on our balance sheet.

We sell our platform primarily through our direct sales force, which leverages our relationships with technology vendors, professional services firms and business process outsourcers. In particular, we have a strategic relationship with SAP and we offer our customers an integrated SAP-endorsed business solution. Under our agreement with SAP, which we entered into in 2013, we pay SAP a fee based on a percentage of revenues for new customers that use an SAP ERP system. We continue to pay SAP a fee for these customers over the term of their subscription agreements. For the nine months ended September 30, 2015, revenues from customers under this agreement accounted for $6.1 million, or approximately 10%, of our total revenues. Additionally, we are expanding our channel of resellers, particularly in markets outside of the United States.

We target our sales and marketing efforts at both enterprise and mid-market businesses. We define the enterprise market as companies with greater than $500 million in annual revenue, and we define mid-market as companies with between $50 and $500 million in annual revenue. For the nine months ended September 30, 2015, sales to enterprise and mid-market customers represented 86% and 14% of our revenues, respectively. Additionally, we target our efforts at both new customers and existing customers. Existing customers may renew their subscriptions and broaden the deployment of our platform across their organizations by increasing the number of users accessing our platform or by adding additional products. We have historically signed a higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in the fourth quarter of each year and usually during the last month of the quarter. This can be attributed to buying patterns typical in the software industry. As the terms of most of our customer agreements are measured in full year increments, agreements initially entered into the fourth quarter or last month of any quarter will generally come up for renewal at that same time in subsequent years. This seasonality is reflected in our revenues, though the impact to overall annual or quarterly revenues is minimal due to the fact that we recognize subscription revenue ratably over the term of the customer contract.

We believe the addressable market for our platform is large and growing. According to a study we commissioned with Frost & Sullivan, in 2015 there were more than 165,000 corporate organizations worldwide that are in our addressable market with revenues greater than $50 million. As a result,

 

60


Table of Contents

we expect to continue to grow our direct sales team and to expand our relationships with technology vendors, professional services firms, business process outsourcers and resellers. We also intend to continue to invest in research and development to extend the functionality of our platform and develop new solutions and features.

We have experienced significant revenue growth and adoption of our platform. Prior to the Acquisition, we funded our business with cash flows from operations. More recently, we have accelerated investment in our business in 2014 and 2015, including expansion of our software and development teams and our sales force as well as our international presence. As a result of the Acquisition and the related purchase accounting, our historical financial statements are presented on a predecessor and successor basis.

We had revenues of $23.4 million for the period from January 1, 2013 to September 2, 2013, $8.6 million for the period from September 3, 2013 to December 31, 2013 and $51.7 million for the year ended December 31, 2014. For the nine months ended September 30, 2014 and 2015, we had revenues of $35.6 million and $59.1 million, respectively. We incurred net losses of $10.0 million for the period from January 1, 2013 to September 2, 2013, $6.7 million for the period from September 3, 2013 to December 31, 2013, $16.8 million for the year ended December 31, 2014, $11.0 million for the nine months ended September 30, 2014 and $17.5 million for the nine months ended September 30, 2015.

Factors Affecting Performance

We believe that our future performance will depend on many factors, including those described below. While these areas present significant opportunity, they also present risks that we must manage to achieve successful results. See the section titled “Risk Factors.” If we are unable to address these challenges, our business and operating results could be adversely affected.

Expansion and Further Penetration of Our Customer Base.    We employ a land-and-expand sales strategy that focuses on acquiring new customers and growing our relationships with existing customers over time. We believe significant opportunity exists for us to acquire new customers in both the enterprise and mid-market segments across all geographies, as well as expand the use of our platform by selling additional products and increasing the number of users within our current customers’ organizations.

Investment in Growth.    We plan to continue to invest in our business so that we can capitalize on our market opportunity. We intend to continue to grow our global sales and marketing team to acquire new customers and to increase sales to existing customers. We intend to continue to grow our research and development team to extend the functionality and range of our applications to bring new and improved solutions to accounting and finance. However, we expect our sales and marketing expenses and research and development expenses as a percentage of revenues to decrease over time as we grow our revenues and gain economies of scale by increasing our customer base and increase sales to our existing customer base. We believe that these investments will contribute to our long-term growth, although they may adversely affect our profitability in the near term.

Leveraging Strategic Relationships.    We plan to continue to strengthen and expand our relationships with technology vendors, such as SAP, professional services firms, business process outsourcers and resellers. These relationships enable us to increase the speed of deployment and offer a wider range of integrated services to our customers. We intend to support these existing relationships, seek additional relationships and further expand our channel of resellers to help us increase our presence in existing markets and to expand into new markets. Our business and results of operations will be significantly affected by our success in leveraging and expanding these relationships.

 

61


Table of Contents

Market Adoption of Our Platform.    A key focus of our sales and marketing efforts is creating market awareness about the benefits of our cloud-based SaaS platform. The market for SaaS solutions for accounting and finance is less mature than the market for on-premise accounting and finance software applications, and potential customers may be slow or unwilling to migrate from their legacy solutions such as spreadsheets, manual processes or home grown solutions. It is difficult to predict customer adoption rates and demand, the future growth rate and size of the SaaS platform for accounting and finance market or the entry of competitive solutions. Our business and operating results will be significantly affected by the degree to and speed with which organizations adopt our solutions.

Metrics

We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.

 

     December 31,     September 30,  
     2013     2014     2014     2015  

Dollar-based net revenue retention rate

     120     118     118     120

Number of customers (as of end of period)

     738        987        905        1,219   

Number of users (as of end of period)

     67,387        93,665        86,154        119,912   

Dollar-based net revenue retention rate.    We believe that dollar-based net revenue retention rate is an important metric to measure the long-term value of customer agreements and our ability to retain and grow our relationships with existing customers over time. We calculate dollar-based net revenue retention rate as the implied monthly subscription revenue at the end of a period for the base set of customers from which we generated subscription revenue in the year prior to the calculation, divided by the implied monthly subscription revenue one year prior to the date of calculation for that same customer base. This calculation does not reflect implied monthly subscription revenue for new customers added during the one year period but does include the effect of customers who terminated during the period. We define implied monthly subscription revenue as the total amount of minimum subscription and support revenue contractually committed to, under each of our customer agreements over the entire term of the agreement, divided by the number of months in the term of the agreement.

Number of customers.     We believe that our ability to expand our customer base is an indicator of our market penetration and the growth of our business. We define a customer as an entity with an active subscription agreement as of the measurement date. In situations where an organization has multiple subsidiaries or divisions, each entity that is invoiced as a separate entity is treated as a separate customer. For the 2013 Predecessor Period, the 2013 Successor Period, the year ended December 31, 2014 and the nine months ended, September 30, 2015, no single customer accounted for more than 10% of our total revenues.

Number of users.     Since our customers generally pay fees based on the number of users of our platform within their organization, we believe the total number of users is an indicator of the growth of our business.

Key Components of our Results of Operations

Revenues

Subscription and support.     The majority of subscriptions are sold through one-year non-cancellable contracts and a growing percentage of subscriptions are sold through three-year non-

 

62


Table of Contents

cancellable contracts. Fees are based on a number of factors, including the number of users having access to the products and the number of products purchased by the customer. The first year of subscription fees are typically payable within 30 days after execution of a contract, and thereafter upon renewal. We initially record the subscription fees as deferred revenue and recognize revenue on a straight-line basis over the term of the agreement. At any time during the subscription period, customers may increase their number of users and add products. Additional fees are payable for the remainder of the initial or renewed contract term. Customers may only reduce their number of users or subscription to products upon renewal of their arrangement. Revenues from subscriptions to our cloud-based software platform comprised approximately 94% of our revenues for the nine months ended September 30, 2015.

Subscription and support revenues also include revenues associated with sales of on-premise software licenses, which we sold prior to our migration to SaaS, and related support. We no longer develop any new applications or functionality for on-premise software licensed to customers, but we continue to provide post-contract support to approximately 20 customers that had not migrated to our SaaS solution as of September 30, 2015. Revenues related to annual renewals of post-contract support are recognized on a straight-line basis over the support period and comprised approximately 2% of total revenues for the nine months ended September 30, 2015.

Professional services.     We offer our customers implementation and consulting services. Although our platform is ready to use immediately after a new customer has access to it, we typically help customers implement our solutions for a fixed fee and we recognize revenue over the period such services are performed. We also provide consulting and training services to help customers optimize the use of our products. We charge customers for our consulting and training services on a time-and-materials basis and we recognize revenue as services are performed. Professional services revenues comprised approximately 4% of our revenues for the nine months ended September 30, 2015.

For a description of our revenue accounting policies, see “Critical Accounting Policies and Estimates.”

Cost of Revenues

Subscription and support cost of revenues.     Subscription and support cost of revenues primarily consists of amortization of developed technology costs resulting from the Acquisition, salaries, benefits and stock-based compensation associated with our hosting operations and support personnel, data center costs related to hosting our cloud-based software and amortization of capitalized internal-use software costs. We also allocate a portion of overhead to subscription and support cost of revenues.

Professional services costs of revenues.     Costs associated with providing professional services primarily consist of salaries, benefits and stock based compensation associated with our implementation personnel. These costs are expensed as incurred when the services are performed. We also allocate a portion of overhead to professional services cost of revenues.

Operating Expenses

Sales and marketing.     Sales and marketing expenses consist primarily of personnel costs of our sales and marketing employees, including salaries, sales commissions and incentives, benefits and stock-based compensation expense, travel and related costs, commissions paid in connection with our strategic relationships, outside consulting fees, marketing programs, including lead generation, costs of our annual conference, advertising and trade shows, other event expenses and allocated overhead costs. We defer sales and partner commissions and amortize them ratably over the term of the corresponding subscription agreement. Sales and marketing expenses also include amortization of

 

63


Table of Contents

customer relationship intangible assets. We expect sales and marketing expenses will increase as we expand our direct sales teams and increase sales through our strategic relationships and resellers.

Research and development.     Research and development expenses consist primarily of salaries, benefits and stock-based compensation associated with our engineering, product and quality assurance personnel and allocated overhead costs. Research and development expenses also include the cost of third-party contractors. Other than internal-use software development costs that qualify for capitalization, research and development costs are expensed as incurred. We expect research and development costs to increase as we develop new solutions and make improvements to our existing platform.

General and administrative.     General and administrative expenses consist primarily of salaries, benefits and stock-based compensation associated with our executive, finance, legal, human resources, compliance and other administrative personnel, accounting, auditing and legal professional services fees, recruitment costs, other corporate-related expenses and allocated overhead costs. General and administrative expenses also include amortization of covenant not to compete and tradename intangible assets. We expect that general and administrative expenses will increase as we incur the costs of compliance associated with being a publicly-traded company, including legal, audit and consulting fees.

Interest Income (Expense)

Interest income (expense), net consists primarily of interest expense from borrowings under our credit facility and amortization of debt discounts and issuance costs.

Change in Fair Value of Common Stock Warrant Liabilities

We have issued warrants to purchase common stock in connection with our credit facility. The warrants are measured at fair value each period, with changes in fair value recorded in our consolidated statement of operations. The warrants will continue to be measured at fair value each period until the earlier of their exercise or termination. Increases in the fair value of our common stock will result in an increase in the fair value of our common stock warrant liability and a corresponding increase in our net loss.

Provision for (Benefit from) Income Taxes

For periods subsequent to the Acquisition, which occurred on September 3, 2013, we are subject to federal and state income taxes in the United States and taxes in foreign jurisdictions. We have been in a net deferred tax liability position primarily as a result of intangible assets acquired in the acquisition. These deferred tax liabilities have been an available source of income to realize our losses and accordingly, we have recorded an income tax benefit in our statement of operations. We will be required to record a valuation allowance against our deferred tax assets to the extent that realization of the deferred tax assets, including consideration of our deferred tax liabilities, is not more likely than not. During 2015, for state income taxes our estimated deferred assets exceeded our deferred tax liabilities, and given our cumulative losses, we believe that it is not more likely than not these deferred tax assets will be realized. Accordingly, we recorded a valuation allowance on our net state deferred tax assets. We anticipate that in 2016 our deferred tax assets, arising principally from our cumulative losses, will exceed our deferred tax liabilities, and given uncertainty as to their realization, we will be required to record a valuation allowance against all our deferred tax assets.

Our effective tax rate for the periods presented differs from the U.S. federal tax rate of 34% due to state taxes, expenses not deductible for income tax purposes including the change in fair value of common stock warrants, acquisition related costs and other tax credits. Our effective tax rate in the future will change to the extent we are required to record a valuation allowance.

 

64


Table of Contents

For periods prior to September 3, 2013, we operated as an S-Corporation and, as such, the results of our operations passed through directly to the shareholders and any taxes were affected at the individual shareholder level, other than foreign taxes which were not material.

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the non-GAAP measures below are useful in evaluating our business. These non-GAAP financial measures provide consistency and comparability with our past performance, facilitate period-to-period comparisons of operations, and facilitate comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.

 

     Year Ended December 31,      Nine Months Ended
September 30,
 
         2013              2014              2014              2015      
     (in thousands, except percentages)  

Non-GAAP Revenues

   $ 38,012       $ 56,629       $   40,555       $   59,133   

Non-GAAP Gross Profit

   $ 29,714       $ 46,419       $ 33,134       $ 47,706   

Non-GAAP Gross Margin

     78.2      82.0      81.7      80.7

Non-GAAP Cash Provided by (Used in) Operations

   $ 1,886       $ 8,943       $ 7,141       $ (150

For additional information and our reconciliation of Non-GAAP financial measures to GAAP, refer to our “Selected Consolidated Financial Data.”

Results of Operations

We accounted for the Acquisition as a business combination, which resulted in a new basis of accounting. Refer to Note 3 of the notes to our consolidated financial statements for additional information. As a result of the Acquisition, our consolidated financial statements for the periods after September 3, 2013 are presented on a different basis than that for the periods before September 3, 2013 due to the application of purchase accounting as of September 3, 2013 and, therefore, are not comparable. To illustrate the effective date of the new basis of accounting, the results below are separated by a black line.

The Acquisition resulted in the following principal impacts for periods subsequent to the Acquisition date:

 

   

A reduction in revenues in the 2013 Successor Period and for the year ended December 31, 2014 as a result of the deferred revenue at the Acquisition date being recorded at fair value at an amount less than its then carrying value;

 

   

Increased amortization costs resulting from recording of intangible assets at fair value. We record amortization of acquired developed technology in cost of revenues, amortization of customer relationships in sales and marketing expenses, and amortization of covenants not to compete and tradename intangible assets in general and administrative expenses;

 

   

Contingent consideration issued as part of the Acquisition is recorded at fair value each period with changes in fair value recorded in general and administrative costs;

 

   

Transaction costs were expensed as incurred as a separate line item in our statement of operations;

 

   

Prior to the Acquisition, BlackLine Systems, Inc. was an S-Corporation, where its earnings flowed through to its shareholders. Post-Acquisition, we are a C-Corporation and are subject to federal and state income taxes in the United States, which resulted in a significant change in our tax provision or tax benefit and our deferred tax assets and liabilities, including

 

65


Table of Contents
 

$43.0 million in federal and $42.6 million in the State of California net operating loss carryforwards, as of December 31, 2014; and

 

   

Shortly after the Acquisition we issued debt, which increased our interest expense for periods post-Acquisition.

The following table sets forth our statements of operations for each of the periods indicated in dollars.

 

    

2013

       

2013

    Year Ended
December 31,
    Nine Months Ended
September 30,
 
     Predecessor Period         Successor Period     2014     2014     2015  

Revenues

     (in thousands, except share and per share amounts)   

Subscription and support

   $ 21,977          $ 7,723      $ 49,029      $ 33,513      $ 56,666   

Professional services

     1,407            860        2,648        2,090        2,467   
  

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     23,384            8,583        51,677        35,603        59,133   
  

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues

              

Subscription and support

     4,442            4,346        14,380        10,511        14,220   

Professional services

     1,145            499        2,218        1,684        2,162   
  

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     5,587            4,845        16,598        12,195        16,382   
  

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     17,797            3,738        35,079        23,408        42,751   
  

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

              

Sales and marketing

     10,453            6,895        31,837        20,840        39,694   

Research and development

     4,738            2,225        9,705        6,730        12,938   

General and administrative

     6,978            2,827        11,716        8,405        14,968   

Acquisition related costs

     5,586            1,634                        
  

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     27,755            13,581        53,258        35,975        67,600   
  

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (9,958         (9,843     (18,179     (12,567     (24,849
  

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Other expense:

              

Interest expense, net

     (22         (781     (3,047     (2,262     (2,466

Change in fair value of the common stock warrant liability

                       (3,700     (1,970     (170
  

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Other expense, net

     (22         (781     (6,747     (4,232     (2,636
  

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (9,980         (10,624     (24,926     (16,799     (27,485

Provision for (benefit from) income taxes

     21            (3,954     (8,174     (5,827     (9,958
  

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (10,001       $ (6,670   $ (16,752   $ (10,972   $ (17,527
  

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted

   $ (0.12       $ (0.03   $ (0.08   $ (0.05   $ (0.09
  

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding, basic and diluted

     82,250,000            200,094,118        200,445,411        200,261,813        202,753,714   
  

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

 

66


Table of Contents

Comparison of Nine Months Ended September 30, 2014 and 2015

Total revenues

 

     Nine Months Ended
September 30,
     Change  
     2014      2015      Amount      %  
     (in thousands)  

Subscription and support

   $ 33,513       $ 56,666       $ 23,153         69.1

Professional services

     2,090         2,467         377         18.0
  

 

 

    

 

 

    

 

 

    

Total revenues

   $ 35,603       $ 59,133       $ 23,530         66.1
  

 

 

    

 

 

    

 

 

    

Total revenues increased for the nine months ended September 30, 2015 as compared to the same period in 2014 primarily due to an increase in the number of customers, an increase in the number of users added by existing customers and an increase in the number of products purchased by existing customers. The increase in total revenues was also impacted by purchase accounting. Upon the Acquisition, deferred revenue was recorded at fair value, resulting in a reduction from its then carrying value. This reduction resulted in reduced revenue in the 2014 period by $5.0 million. There was no corresponding reduction in the 2015 period. Excluding the impact of this purchase accounting adjustment, our total revenue increased by 45.8% for the nine months ended September 30, 2015 as compared to the same period in 2014.

Total cost of revenues

 

     Nine Months Ended
September 30,
     Change  
     2014      2015      Amount      %  
     (in thousands, except percentages)  

Subscription and support

   $ 10,511       $ 14,220       $ 3,709         35.3%   

Professional services

     1,684         2,162         478         28.4%   
  

 

 

    

 

 

    

 

 

    

Total cost of revenues

   $ 12,195       $ 16,382       $ 4,187         34.3%   
  

 

 

    

 

 

    

 

 

    

Gross margin

     65.7%         72.3%         

Total cost of revenues increased primarily due to a $2.8 million increase in salaries, benefits and stock-based compensation, a $0.7 million increase in data center costs and a $0.4 million increase in amortization of capitalized software costs. Salaries, benefits and stock-based compensation increased due to growth in headcount. Costs associated with our datacenter increased due to costs of additional bandwidth associated with the growth in our customer base. Amortization of our capitalized software development costs increased due to larger total capitalized costs as we expanded the functionality of our solutions.

Our gross margin was 65.7% and 72.3% for the nine months ended September 30, 2014 and 2015, respectively. The improvement in gross margin was primarily the result of the impact of purchasing accounting adjustments, which reduced revenue in the 2014 period with no corresponding adjustment in the 2015 period. In addition, amortization of developed technology included in our cost of revenues is a fixed cost each period. Accordingly, improvements in revenues over the period resulted in an improvement in our gross margin.

 

67


Table of Contents

Sales and marketing

 

     Nine Months Ended
September 30,
     Change  
     2014      2015      Amount      %  
     (in thousands, except percentages)  

Sales and marketing

   $ 20,840       $ 39,694       $ 18,854         90.5%   

Percentage of total revenues

     58.5%         67.1%         

Sales and marketing expense increased primarily due to a $13.2 million increase in salaries, sales commissions and incentives and stock-based compensation, a $1.6 million increase in commissions payable to third parties that refer customers to us, a $1.3 million increase in travel and related costs, a $0.6 million increase in outside consulting fees and a $0.5 million increase in advertising and trade shows. The increase in salaries, sales commissions and incentives and stock-based compensation was driven by an increase in headcount and revenue growth. The increase in commissions payable to third parties was primarily driven by the expansion of our relationships with technology vendors, including SAP. The increase in outside consulting fees was primarily due to an increase in digital marketing services. The increase in advertising and trade shows was primarily due to an increase in our marketing efforts.

Research and development

 

     Nine Months Ended
September 30,
     Change  
     2014      2015      Amount      %  
     (in thousands, except percentages)  

Research and development

   $ 6,730       $ 12,938       $ 6,208         92.2%   

Percentage of total revenues

     18.9%         21.9%         

Research and development increased primarily due to a $3.9 million increase in salaries, benefits and stock-based compensation due to an increase in headcount and a $2.3 million increase in services provided by third-party contractors. These increases were partially offset by an increase in capitalized costs related to software development of $0.4 million. The additional headcount and number of third-party contractors were used to further maintain, enhance and develop our platform.

General and administrative

 

     Nine Months Ended
September 30,
     Change  
     2014      2015      Amount      %  
     (in thousands, except percentages)  

General and administrative

   $ 8,405       $ 14,968       $ 6,563         78.1%   

Percentage of total revenues

     23.6%         25.3%         

General and administrative increased primarily due to a $2.4 million increase in salaries, benefits and stock-based compensation due to an increase in headcount and stock option grants to new executive officers and other employees, a $2.2 million increase in professional services costs due to legal, accounting and auditing fees as we prepare for our initial public offering, additional recruitment costs and a $0.5 million increase in facility related expenses related to the expansion of our global headquarters. In addition, our general and administrative costs in the 2014 period were reduced by $0.6 million relating to the change in fair value of contingent consideration. There was no significant change in contingent consideration during the 2015 period.

 

68


Table of Contents

Interest expense, net

 

     Nine Months Ended
September 30,
     Change  
     2014      2015      Amount      %  
     (in thousands, except percentages)  

Interest expense, net

   $ (2,262)       $ (2,466)       $ (204)         9.0%   

Interest expense, net increased due to an increase in interest expense on a larger long-term debt principal balance. During the 2014 and 2015 periods, we paid 20% of our interest costs in cash and the remainder increased the principal balance.

Change in fair value of common stock warrant liability

 

     Nine Months ended
September  30,
     Change  
         2014              2015          Amount      %  
     (in thousands, except percentages)  

Change in fair value of common stock warrant liability

   $ (1,970)       $ (170)       $ 1,800         (91.4%)   

We value our common stock warrants using a binomial lattice model. The primary input in the binomial lattice model driving the change in the fair value our common stock warrants is the value of our common stock. The increase in the liabilities associated with our common stock warrants in both periods was driven by the increase in the value of our common stock. Refer to “—Critical Accounting Policies and Estimates—Significant Factors, Assumptions, and Methodologies Used in Determining Fair Value of Common Stock”.

Income tax benefit

 

     Nine Months Ended
September 30,
     Change  
     2014      2015      Amount      %  
     (in thousands, except percentages)  

Benefit from income taxes

   $ (5,827)       $ (9,958)       $ (4,131)         70.9%   

Our effective tax rate was 34.7% and 36.2% for the nine months ended September 30, 2014 and 2015, respectively. The effective tax rate differs from the U.S. federal statutory rate of 34% primarily because of state taxes, net of federal benefit, the change in the value of common stock warrants and contingent consideration which are not deductible for income tax purposes, and valuation allowance for state income taxes. We record a valuation allowance against our deferred tax assets to the extent that realization of the deferred tax assets, including consideration of our deferred tax liabilities, is not more likely than not. For 2015, for state income taxes, our deferred assets are estimated to exceed our deferred tax liabilities and given our cumulative losses, we believe that it is not more likely than not that these deferred tax assets will be realized. Accordingly, we recorded a valuation allowance on our net state deferred tax assets. Taxes for international operations are not material for the nine months ended September 30, 2014 and 2015.

 

69


Table of Contents

Comparison of 2013 Predecessor Period, 2013 Successor Period, and year ended December 31, 2014

Total revenues

 

     Predecessor
Period
         Successor
Period
     Year Ended
December 31,
 
     2013          2013      2014  
     (in thousands, except percentages)  

Subscription and support

   $ 21,977           $ 7,723       $ 49,029   

Professional services

     1,407             860         2,648   
  

 

 

        

 

 

    

 

 

 

Total revenues

   $ 23,384           $ 8,583       $ 51,677   
  

 

 

        

 

 

    

 

 

 

Our total revenues have increased on a year-over-year basis. This increase was driven by an increase in the number of customers, an increase in the number of users added by existing customers and an increase in the number of products purchased by existing customers. Our revenues have been impacted by purchase accounting as a result of the Acquisition which reduced our core revenues by $6.0 million and $5.0 million for the 2013 Successor Period and year ended December 31, 2014, respectively. Excluding the impact of purchase accounting and combining the results of the 2013 Predecessor Period and 2013 Successor Period our total revenues for the year ended December 31, 2013 would have been $38.0 million compared to $56.6 million for the year ended December 31, 2014 on a comparable basis, representing a 49% increase.

Total cost of revenues

 

     Predecessor
Period
         Successor
Period
    Year Ended
December 31,
 
     2013          2013     2014  
     (in thousands, except percentages)  

Subscription and support

   $ 4,442           $ 4,346      $ 14,380   

Professional services

     1,145             499        2,218   
  

 

 

        

 

 

   

 

 

 

Cost of revenues

   $ 5,587           $ 4,845      $ 16,598   
  

 

 

        

 

 

   

 

 

 

Gross margin

     76.1          43.6     67.9

Our cost of revenues has increased as our revenues have increased. The increase in cost of revenues was driven by increases in salaries, benefits and stock-based compensation, due to increased headcount, and increased data center costs to support our revenue activities. Salaries, benefits, and stock-based compensation for the 2013 Predecessor Period, 2013 Successor Period and the year ended December 31, 2014 were $3.3 million, $1.6 million, and $6.7 million, respectively. Datacenter costs for the 2013 Predecessor Period, the 2013 Successor Period and the year ended December 31, 2014 were $1.6 million, $0.9 million, and $2.2 million, respectively.

Our cost of revenues and our gross margin has been impacted by purchase accounting as a result of the Acquisition which increased amortization costs relating to intangible assets acquired in the acquisition and reduced our revenues as described above. Amortization of intangibles included in costs of revenues was $2.0 million and $6.1 million, in the 2013 Successor Period and the year ended December 31, 2014, respectively. Excluding the impact of these purchase accounting adjustments our gross margin was 76.1%, 80.9%, and 82.0% for the 2013 Predecessor Period, the 2013 Successor Period, and the year ended December 31, 2014, respectively.

 

70


Table of Contents

Sales and marketing

 

     Predecessor
Period
         Successor
Period
    Year Ended
December 31,
 
     2013          2013     2014  
     (in thousands, except percentages)  

Sales and marketing

   $ 10,453           $ 6,895      $ 31,837   

Percent of revenue

     44.7          80.3     61.6

Our sales and marketing costs have increased due to our investments in our sales and marketing organization to drive revenue growth. Our sales and marketing personnel costs have increased primarily due to an increase in salaries, sales commissions and incentives, benefits and stock-based compensation expense due to an increase in headcount and revenue growth. Our salaries, sales commissions and incentives, benefits and stock-based compensation expense for the 2013 Predecessor Period, the 2013 Successor Period and the year ended December 31, 2014 were $7.6 million, $3.9 million, and $20.1 million, respectively. Travel and related costs for our sales personnel have increased due to expansion of our sales organization. For the 2013 Predecessor Period, the 2013 Successor Period, and the year ended December 31, 2014, travel and related costs were $0.7 million, $0.3 million, and $1.7 million, respectively. In addition, we accelerated our investment in advertising and trade shows during the year ended December 31, 2014 to drive additional revenues. Advertising and trade shows for the 2013 Predecessor Period, the 2013 Successor Period, and the year ended December 31, 2014 were $0.1 million, $0.3 million, and $1.5 million, respectively.

Our sales and marketing costs have also been impacted by purchase accounting associated with the amortization of customer relationship intangibles. Our sales and marketing costs include amortization of customer relationship intangibles of $1.2 million and $3.5 million for the 2013 Successor Period and the year ended December 31, 2014, respectively. As a percentage of revenues, our sales and marketing costs were also impacted by purchasing accounting which reduced revenues in the 2013 Successor Period and the year ended December 31, 2014, as described above.

Research and development

 

     Predecessor
Period
         Successor
Period
    Year Ended
December 31,
 
     2013          2013     2014  
     (in thousands, except percentages)  

Research and development

   $ 4,738           $ 2,225      $ 9,705   

Percent of revenue

     20.3          25.9     18.8

Research and development costs have increased due to investments made to expand the functionality of our existing solutions and to develop new solutions. The growth in our research and development cost is primarily due to increased salaries, benefits and stock-based compensation costs driven by growth in our headcount and our expanded use of third-party contractors. Salaries, benefits and stock-based compensation for the 2013 Predecessor Period, the 2013 Successor Period and the year ended December 31, 2014 were $4.7 million, $2.0 million, and $8.9 million, respectively, and third-party contractor costs for the 2013 Predecessor Period, the 2013 Successor Period and the year ended December 31, 2014 were $0.6 million, $0.4 million, and $1.3 million, respectively. These amounts were partially offset by capitalized costs related to software development of $0.6 million, $0.3 million, and $1.5 million during the respective periods.

 

71


Table of Contents

General and administrative

 

     Predecessor
Period
         Successor
Period
    Year Ended
December 31,
 
     2013          2013     2014  
     (in thousands, except percentages)  

General and administrative

   $ 6,978           $ 2,827      $ 11,716   

Percent of revenue

     29.8          32.9     22.7

Our general and administrative expenses have increased primarily due to an increase in salaries, benefits, and stock-based compensation driven by growth in headcount and increased professional service costs to support our growth initiatives. Salaries, benefits, and stock-based compensation for the 2013 Predecessor Period, the 2013 Successor Period and the year ended December 31, 2014 were $5.0 million, $1.2 million, and $5.3 million, respectively. Included in salaries, benefits, and stock-based compensation in the 2013 Predecessor Period is a one-time bonus paid to our employees of $2.2 million concurrent with the Acquisition. Professional service costs for the 2013 Predecessor Period, the 2013 Successor Period and the year ended December 31, 2014 were $0.5 million, $0.4 million, and $2.3 million, respectively.

Our general and administrative expenses have been impacted by purchase accounting associated with the amortization of certain acquired intangibles. Our general and administrative costs include amortization of intangible assets of $0.8 million and $2.5 million for the 2013 Successor Period and the year ended December 31, 2014, respectively.

Interest expense, net

 

     Predecessor
Period
         Successor
Period
    Year Ended
December 31,
 
     2013          2013     2014  
     (in thousands)  

Interest income (expense), net

   $ (22        $ (781   $ (3,047

In September 2013, we entered into a $25 million Term Loan which bore interest at 9.5% per annum during 2013 and 2014. Since September 2013 we have paid 20% of the interest costs in cash and the remainder has increased the principal balance which then bears interest.

Change in fair value of common stock warrant liability

 

     Predecessor
Period
         Successor
Period
     Year Ended
December 31,
 
     2013          2013      2014  
     (in thousands)  

Change in fair value

   $           $       $ (3,700

We issued the common stock warrants in September 2013. We value our common stock warrants using a binomial lattice model. The increase in the value of the common stock warrant liability for the year ended December 31, 2014 was driven by the increase in the value of our common stock. Refer to “—Critical Accounting Policies and Estimates — Significant Factors, Assumptions, and Methodologies Used in Determining Fair Value of Common Stock”.

 

72


Table of Contents

Provision (benefit from) for income taxes

 

     Predecessor
Period
         Successor
Period
    Year Ended
December 31,
 
     2013          2013     2014  
     (in thousands)  

Provision for (benefit from) income taxes

   $ 21           $ (3,954   $ (8,174

Our effective tax rate was 37.2% and 32.8% for the 2013 Successor Period and the year ended December 31, 2014, respectively. Our effective tax rate differed from the U.S. federal income tax rate of 34% due to research and experimentation credits, acquisition costs related to the Acquisition, and the change in fair value of common stock warrants. For the 2013 Predecessor Period we operated as an S-Corporation and as such the results of our operations passed through directly to the shareholders and any taxes were affected at the individual shareholder level.

Quarterly Results of Operations

The following tables set forth selected key metrics and unaudited quarterly consolidated statements of operations for 2014 and the first three quarters of 2015. The consolidated financial statements for each of these quarterly periods have been prepared on a basis consistent with our audited financial statements and include, in the opinion of management, all normal recurring adjustments necessary for the fair statement of the financial information contained in these statements. The historical financial results are not necessarily indicative of future results and should be read in conjunction with our annual financial statements and the related notes included elsewhere in this prospectus.

The following table sets forth selected metrics data for each of the periods indicated:

 

    Mar 31,
2014
    Jun 30,
2014
    Sep 30,
2014
    Dec 31,
2014
    Mar 31,
2015
    Jun 30,
2015
    Sep 30,
2015
 

Dollar-based net revenue retention rate

    116     119     118     118     120     120     120

Number of customers (as of end of period)

    781        842        905        987        1,067        1,145        1,219   

Number of users (as of end of period)

    72,786        79,121        86,154        93,665        102,903        111,383        119,912   

 

73


Table of Contents

The following table sets forth selected consolidated statements of operations data for each of the periods indicated:

 

     Three Months Ended  
     Mar 31,
    2014     
    Jun 30,
    2014     
    Sep 30,
    2014     
    Dec 31,
    2014     
    Mar 31,
    2015     
    Jun 30,
    2015     
    Sep 30,
    2015     
 
     (in thousands)  

Revenues

              

Subscription and support

   $ 8,384      $ 11,509      $ 13,620      $ 15,516      $ 17,282      $ 18,598      $ 20,786   

Professional services

     754        660        676        558        765        827        875   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     9,138        12,169        14,296        16,074        18,047        19,425        21,661   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues

              

Subscription and support

     3,420        3,333        3,758        3,869        4,287        4,814        5,119   

Professional services

     513        562        609        534        666        672        824   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     3,933        3,895        4,367        4,403        4,953        5,486        5,943   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     5,205        8,274        9,929        11,671        13,094        13,939        15,718   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

              

Sales and marketing

     5,612        6,778        8,450        10,997        11,657        13,297        14,740   

Research and development

     1,923        2,226        2,581        2,975        3,569        4,465        4,904   

General and administrative

     2,754        2,762        2,889        3,311        3,805        5,247        5,916   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     10,289        11,766        13,920        17,283        19,031        23,009        25,560   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (5,084     (3,492     (3,991     (5,612     (5,937     (9,070     (9,842
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

              

Interest expense, net

     (735     (755     (772     (785     (782     (862     (822

Change in fair value of the common stock warrant liability

     —          (920     (1,050     (1,730     30        (280     80   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expense, net

     (735     (1,675     (1,822     (2,515     (752     (1,142     (742
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (5,819     (5,167     (5,813     (8,127     (6,689     (10,212     (10,584

Provision for (benefit from) income taxes

     (2,170     (1,790     (1,867     (2,347     (2,435     (3,674     (3,849
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (3,649   $ (3,377   $ (3,946   $ (5,780   $ (4,254   $ (6,538   $ (6,735
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The increase in total revenues in each of the periods presented was primarily due to an increase in the number of customers, an increase in the number of users added by existing customers and an increase in the number of products purchased by existing customers. From December 31, 2013 to September 30, 2015, our customer count increased from 738 to 1,219. In addition, the number of BlackLine users increased from 67,387 to 119,912 at the corresponding dates.

Cost of revenues in each of the periods presented increased on an incremental basis to support the demand for our platform. The improvement in gross margin was primarily the result of the impact of purchase accounting adjustments as a result of the Acquisition, which reduced revenue in the 2014 period with no corresponding adjustment in the 2015 period. In addition, amortization of developed technology included in our cost of revenues is a fixed cost each period. Accordingly, increased revenues resulted in an improvement in our gross margin.

Sales and marketing expenses have consistently increased for each of the periods presented due to the expansion in headcount of our mid-market and enterprise direct sales teams.

Research and development expenses have increased steadily during the quarterly periods due to growth in headcount and use of third-party contractors to support our development efforts.

General and administrative expenses have increased steadily since the first quarter of 2014. During the second and third quarters of 2015, our general administrative costs increased due to legal,

 

74


Table of Contents

accounting and other costs incurred to support our expanding operations and in preparation for our initial public offering.

More generally, our quarterly operating results have fluctuated in the past and may continue to fluctuate in the future based on a number of factors, many of which are beyond our control. Such factors include, in addition to those described in the “Risk Factors” section of this prospectus:

 

   

our ability to attract new customers;

 

   

the timing and rate at which we enter into agreements for our solutions with new customers;

 

   

the extent to which our existing customers renew their subscriptions for our solutions and the timing of those renewals;

 

   

the extent to which our existing customers purchase additional products or add incremental users;