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BLACKLINE, INC. - Quarter Report: 2019 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from     to     

Commission File Number: 001-37924

 

BlackLine, Inc.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

46-3354276

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

21300 Victory Boulevard, 12th Floor

Woodland Hills, CA 91367

(Address of principal executive offices, including zip code)

 

(818) 223-9008

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

BL

NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares of the registrant’s common stock outstanding at October 31, 2019 was 55,639,281.

 

 

 

 


BlackLine, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended September 30, 2019

TABLE OF CONTENTS

Part I. Financial Information

 

Item 1.

Unaudited Condensed Consolidated Financial Statements

4

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets at September 30, 2019 and December 31, 2018

4

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the Quarters and Nine Months Ended September 30, 2019 and 2018

5

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the Quarters and Nine Months Ended September 30, 2019 and 2018

6

 

 

 

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Quarters and Nine Months Ended September 30, 2019 and 2018

7

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018

9

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

12

 

 

 

Item 2.

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

24

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

Item 4.

Controls and Procedures

35

 

 

Part II. Other Information

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

 

 

 

Item 6.

Exhibits

59

 

 

2


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risk and uncertainties. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential,” “would,” “continue,” “ongoing” or the negative of these terms or other comparable terminology. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding future financial and operational performance; statements concerning growth strategies including extension of distribution channels and strategic relationships, product innovation, international expansion, customer growth and expansion, customer service initiatives, expectations regarding contract size and increased focus on strategic products, expectations for hiring new talent and expanding our sales organization; our ability to accurately forecast revenue and appropriately plan expenses and investments; the demand for and benefits from the use of our current and future solutions; market acceptance of our solutions; and changes in the competitive environment in our industry and the markets in which we operate. These statements are based upon our historical performance and our current plans, estimates and expectations and are not a representation that such plans, estimates, or expectations will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith beliefs and assumptions as of that time with respect to future events, and are subject to risks and uncertainty. If any of these risks or uncertainties materialize or if any assumptions prove incorrect, actual performance or results may differ materially from those expressed in or suggested by the forward looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainty, and assumptions that are difficult to predict, including those identified below, under “Part II-Other Information, Item 1A. Risk Factors” and elsewhere herein. Forward-looking statements should not be read as a guarantee of future performance or results, and you should not place undue reliance on such statements. Furthermore, we undertake no obligation to revise or update any forward-looking statements for any reason, except as required by applicable law.

Unless the context otherwise requires, the terms “BlackLine, Inc.,” “the Company,” “we,” “us” and “our” in this Quarterly Report on Form 10-Q refer to the consolidated operations of BlackLine, Inc. and its consolidated subsidiaries as a whole, 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. We refer to, Iconiq, Therese Tucker, and Mario Spanicciati collectively as our Principal Stockholders.

 

3


Part 1 – Financial Information

Item 1.

Financial Statements

BLACKLINE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands)

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

528,197

 

 

$

46,181

 

Marketable securities

 

 

68,324

 

 

 

86,396

 

Accounts receivable, net

 

 

81,865

 

 

 

74,902

 

Prepaid expenses and other current assets

 

 

10,874

 

 

 

14,042

 

Total current assets

 

 

689,260

 

 

 

221,521

 

Capitalized software development costs, net

 

 

9,424

 

 

 

9,023

 

Property and equipment, net

 

 

12,891

 

 

 

13,536

 

Intangible assets, net

 

 

19,063

 

 

 

27,785

 

Goodwill

 

 

185,138

 

 

 

185,138

 

Operating lease right-of-use assets

 

 

13,381

 

 

 

 

Other assets

 

 

46,482

 

 

 

36,865

 

Total assets

 

$

975,639

 

 

$

493,868

 

LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST, AND STOCKHOLDERS' EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,614

 

 

$

3,442

 

Accrued expenses and other current liabilities

 

 

25,704

 

 

 

24,705

 

Deferred revenue

 

 

144,100

 

 

 

129,074

 

Short-term portion of operating lease liabilities

 

 

4,779

 

 

 

 

Short-term portion of contingent consideration

 

 

2,008

 

 

 

2,008

 

Total current liabilities

 

 

178,205

 

 

 

159,229

 

Operating lease liabilities, noncurrent

 

 

11,710

 

 

 

 

Convertible senior notes, net

 

 

378,856

 

 

 

 

Contingent consideration

 

 

4,621

 

 

 

4,308

 

Deferred tax liabilities, net

 

 

1,151

 

 

 

1,116

 

Deferred revenue, noncurrent

 

 

222

 

 

 

277

 

Other long-term liabilities

 

 

 

 

 

2,982

 

Total liabilities

 

 

574,765

 

 

 

167,912

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Redeemable non-controlling interest (Note 4)

 

 

4,453

 

 

 

4,387

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock

 

 

556

 

 

 

547

 

Additional paid-in capital

 

 

548,201

 

 

 

451,571

 

Accumulated other comprehensive income

 

 

415

 

 

 

45

 

Accumulated deficit

 

 

(152,751

)

 

 

(130,594

)

Total stockholders' equity

 

 

396,421

 

 

 

321,569

 

Total liabilities, redeemable non-controlling interest, and stockholders' equity

 

$

975,639

 

 

$

493,868

 

 

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

4


BLACKLINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and support

 

$

70,311

 

 

$

56,170

 

 

$

197,651

 

 

$

157,842

 

Professional services

 

 

4,614

 

 

 

2,564

 

 

 

11,067

 

 

 

7,630

 

Total revenues

 

 

74,925

 

 

 

58,734

 

 

 

208,718

 

 

 

165,472

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and support

 

 

11,689

 

 

 

11,174

 

 

 

34,109

 

 

 

30,048

 

Professional services

 

 

3,603

 

 

 

2,343

 

 

 

9,745

 

 

 

6,941

 

Total cost of revenues

 

 

15,292

 

 

 

13,517

 

 

 

43,854

 

 

 

36,989

 

Gross profit

 

 

59,633

 

 

 

45,217

 

 

 

164,864

 

 

 

128,483

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

41,848

 

 

 

31,709

 

 

 

114,888

 

 

 

93,086

 

Research and development

 

 

11,558

 

 

 

7,261

 

 

 

32,694

 

 

 

22,001

 

General and administrative

 

 

14,088

 

 

 

11,268

 

 

 

40,444

 

 

 

34,808

 

Total operating expenses

 

 

67,494

 

 

 

50,238

 

 

 

188,026

 

 

 

149,895

 

Loss from operations

 

 

(7,861

)

 

 

(5,021

)

 

 

(23,162

)

 

 

(21,412

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

2,161

 

 

 

578

 

 

 

3,590

 

 

 

1,474

 

Interest expense

 

 

(3,006

)

 

 

 

 

 

(3,006

)

 

 

(4

)

Other income (expense), net

 

 

(845

)

 

 

578

 

 

 

584

 

 

 

1,470

 

Loss before income taxes

 

 

(8,706

)

 

 

(4,443

)

 

 

(22,578

)

 

 

(19,942

)

Provision for income taxes

 

 

206

 

 

 

17

 

 

 

557

 

 

 

130

 

Net loss

 

 

(8,912

)

 

 

(4,460

)

 

 

(23,135

)

 

 

(20,072

)

Net loss and adjustment attributable to non-controlling interest (Note 4)

 

 

330

 

 

 

 

 

 

(85

)

 

 

 

Net loss attributable to BlackLine, Inc.

 

$

(9,242

)

 

$

(4,460

)

 

$

(23,050

)

 

$

(20,072

)

Basic net loss per share attributable to BlackLine, Inc.

 

$

(0.17

)

 

$

(0.08

)

 

$

(0.42

)

 

$

(0.37

)

Shares used to calculate basic net loss per share

 

 

55,480

 

 

 

54,263

 

 

 

55,164

 

 

 

53,660

 

Diluted net loss per share attributable to BlackLine, Inc.

 

$

(0.17

)

 

$

(0.08

)

 

$

(0.42

)

 

$

(0.37

)

Shares used to calculate diluted net loss per share

 

 

55,480

 

 

 

54,263

 

 

 

55,164

 

 

 

53,660

 

 

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


5


BLACKLINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

(in thousands)

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net loss

$

(8,912

)

 

$

(4,460

)

 

$

(23,135

)

 

$

(20,072

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gains (losses) on marketable securities, net of tax of $0 for the quarters and nine months ended September 30, 2019 and 2018

 

(23

)

 

 

25

 

 

 

213

 

 

 

(29

)

Foreign currency translation

 

10

 

 

 

 

 

 

308

 

 

 

 

Other comprehensive income (loss)

 

(13

)

 

 

25

 

 

 

521

 

 

 

(29

)

Comprehensive loss

 

(8,925

)

 

 

(4,435

)

 

 

(22,614

)

 

 

(20,101

)

Less: Other comprehensive loss attributable to

    redeemable non-controlling interest (excluding

    adjustment to redeemable non-controlling interest)

 

(504

)

 

 

 

 

 

(827

)

 

 

 

Comprehensive loss attributable to BlackLine, Inc.

$

(8,421

)

 

$

(4,435

)

 

$

(21,787

)

 

$

(20,101

)

 

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

6


BLACKLINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands)

 

 

 

Quarter Ended September 30, 2019

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Total

 

Balance at June 30, 2019

 

 

55,307

 

 

$

553

 

 

$

470,681

 

 

$

299

 

 

$

(144,348

)

 

$

327,185

 

Stock option exercises

 

 

247

 

 

 

2

 

 

 

3,803

 

 

 

 

 

 

 

 

 

3,805

 

Vesting of restricted stock units

 

 

77

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Issuance of common stock through employee stock purchase plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition of common stock for tax

    withholding obligations

 

 

 

 

 

 

 

 

(784

)

 

 

 

 

 

 

 

 

(784

)

Stock-based compensation

 

 

 

 

 

 

 

 

10,260

 

 

 

 

 

 

 

 

 

10,260

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

116

 

 

 

 

 

 

116

 

Equity component of convertible senior notes,

    net of issuance costs

 

 

 

 

 

 

 

 

111,230

 

 

 

 

 

 

 

 

 

111,230

 

Purchase of capped calls

 

 

 

 

 

 

 

 

(46,150

)

 

 

 

 

 

 

 

 

(46,150

)

Net loss attributable to BlackLine, Inc.,

    including adjustment to redeemable

    non-controlling interest

 

 

 

 

 

 

 

 

(839

)

 

 

 

 

 

(8,403

)

 

 

(9,242

)

Balance at September 30, 2019

 

 

55,631

 

 

$

556

 

 

$

548,201

 

 

$

415

 

 

$

(152,751

)

 

$

396,421

 

 

 

 

Nine Months Ended September 30, 2019

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Total

 

Balance at December 31, 2018

 

 

54,683

 

 

$

547

 

 

$

451,571

 

 

$

45

 

 

$

(130,594

)

 

$

321,569

 

Stock option exercises

 

 

535

 

 

 

4

 

 

 

8,363

 

 

 

 

 

 

 

 

 

8,367

 

Vesting of restricted stock units

 

 

339

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

4

 

Issuance of common stock through employee stock purchase plan

 

 

74

 

 

 

1

 

 

 

2,551

 

 

 

 

 

 

 

 

 

2,552

 

Acquisition of common stock for tax

    withholding obligations

 

 

 

 

 

 

 

 

(3,372

)

 

 

 

 

 

 

 

 

(3,372

)

Stock-based compensation

 

 

 

 

 

 

 

 

24,901

 

 

 

 

 

 

 

 

 

24,901

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

370

 

 

 

 

 

 

370

 

Equity component of convertible senior notes,

    net of issuance costs

 

 

 

 

 

 

 

 

111,230

 

 

 

 

 

 

 

 

 

111,230

 

Purchase of capped calls

 

 

 

 

 

 

 

 

(46,150

)

 

 

 

 

 

 

 

 

(46,150

)

Net loss attributable to BlackLine, Inc.,

    including adjustment to redeemable

    non-controlling interest

 

 

 

 

 

 

 

 

(893

)

 

 

 

 

 

(22,157

)

 

 

(23,050

)

Balance at September 30, 2019

 

 

55,631

 

 

$

556

 

 

$

548,201

 

 

$

415

 

 

$

(152,751

)

 

$

396,421

 

 

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

7


BLACKLINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (cont.) (UNAUDITED)

(in thousands)

 

 

 

Quarter Ended September 30, 2018

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Total

 

Balance at June 30, 2018

 

 

53,837

 

 

$

539

 

 

$

432,068

 

 

$

(117

)

 

$

(118,402

)

 

$

314,088

 

Stock option exercises

 

 

806

 

 

 

8

 

 

 

7,408

 

 

 

 

 

 

 

 

 

7,416

 

Vesting of restricted stock units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition of common stock for tax

    withholding obligations

 

 

 

 

 

 

 

 

(112

)

 

 

 

 

 

 

 

 

(112

)

Stock-based compensation

 

 

 

 

 

 

 

 

5,476

 

 

 

 

 

 

 

 

 

5,476

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

25

 

Net loss attributable to BlackLine, Inc.,

    including adjustment to redeemable

    non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,460

)

 

 

(4,460

)

Balance at September 30, 2018

 

 

54,643

 

 

$

547

 

 

$

444,840

 

 

$

(92

)

 

$

(122,862

)

 

$

322,433

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Total

 

Balance at December 31, 2017

 

 

52,983

 

 

$

530

 

 

$

419,628

 

 

$

(63

)

 

$

(102,790

)

 

$

317,305

 

Stock option exercises

 

 

1,658

 

 

 

17

 

 

 

13,503

 

 

 

 

 

 

 

 

 

13,520

 

Vesting of restricted stock units

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition of common stock for tax

    withholding obligations

 

 

 

 

 

 

 

 

(3,325

)

 

 

 

 

 

 

 

 

(3,325

)

Stock-based compensation

 

 

 

 

 

 

 

 

15,034

 

 

 

 

 

 

 

 

 

15,034

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(29

)

 

 

 

 

 

(29

)

Net loss attributable to BlackLine, Inc.,

    including adjustment to redeemable

    non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,072

)

 

 

(20,072

)

Balance at September 30, 2018

 

 

54,643

 

 

$

547

 

 

$

444,840

 

 

$

(92

)

 

$

(122,862

)

 

$

322,433

 

 

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

8


BLACKLINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss attributable to BlackLine, Inc.

 

$

(23,050

)

 

$

(20,072

)

Net loss and adjustment attributable to redeemable non-controlling interest (Note 4)

 

 

(85

)

 

 

 

Net loss

 

 

(23,135

)

 

 

(20,072

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

16,803

 

 

 

16,767

 

Change in fair value of contingent consideration

 

 

313

 

 

 

287

 

Amortization of debt discount and issuance costs

 

 

2,923

 

 

 

 

Stock-based compensation

 

 

24,605

 

 

 

14,707

 

Noncash lease expense

 

 

3,677

 

 

 

 

Accretion of purchase discounts on marketable securities, net

 

 

(873

)

 

 

(602

)

Net foreign currency losses

 

 

138

 

 

 

334

 

Deferred income taxes

 

 

35

 

 

 

(443

)

Provision for (benefit from) doubtful accounts receivable

 

 

157

 

 

 

(19

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(7,455

)

 

 

(1,735

)

Prepaid expenses and other current assets

 

 

3,129

 

 

 

(2,392

)

Other assets

 

 

(9,647

)

 

 

(5,017

)

Accounts payable

 

 

(1,591

)

 

 

(4,401

)

Accrued expenses and other current liabilities

 

 

1,447

 

 

 

(58

)

Deferred revenue

 

 

14,971

 

 

 

13,925

 

Operating lease liabilities

 

 

(3,997

)

 

 

 

Other long-term liabilities

 

 

 

 

 

36

 

Net cash provided by operating activities

 

 

21,500

 

 

 

11,317

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(93,259

)

 

 

(103,624

)

Proceeds from maturities of marketable securities

 

 

95,138

 

 

 

91,840

 

Proceeds from sales of marketable securities

 

 

17,279

 

 

 

7,118

 

Capitalized software development costs

 

 

(3,751

)

 

 

(4,640

)

Purchases of property and equipment

 

 

(3,461

)

 

 

(4,588

)

Net cash provided by (used in) investing activities

 

 

11,946

 

 

 

(13,894

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible senior notes, net of issuance costs

 

 

487,163

 

 

 

 

Purchase of capped calls related to convertible senior notes

 

 

(46,150

)

 

 

 

Proceeds from exercises of stock options

 

 

8,371

 

 

 

13,520

 

Proceeds from employee stock purchase plan

 

 

2,552

 

 

 

 

Acquisition of common stock for tax withholding obligations

 

 

(3,372

)

 

 

(3,325

)

Principal payments on capital lease obligations

 

 

 

 

 

(443

)

Financed purchases of property and equipment

 

 

(314

)

 

 

 

Net cash provided by financing activities

 

 

448,250

 

 

 

9,752

 

Effect of foreign currency exchange rate changes on cash, cash equivalents, and restricted cash

 

 

308

 

 

 

 

Net increase in cash, cash equivalents, and restricted cash

 

 

482,004

 

 

 

7,175

 

Cash, cash equivalents, and restricted cash, beginning of period

 

 

46,455

 

 

 

31,504

 

Cash, cash equivalents, and restricted cash, end of period

 

$

528,459

 

 

$

38,679

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

528,197

 

 

$

38,401

 

Restricted cash included within prepaid expenses and other current assets at end of period

 

 

19

 

 

 

 

9


Restricted cash included within other assets at end of period

 

 

243

 

 

 

278

 

Total cash, cash equivalents, and restricted cash at end of period shown in the consolidated statements of cash flows

 

$

528,459

 

 

$

38,679

 

 

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

10


BLACKLINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

SUPPLEMENTAL CASH FLOWS DISCLOSURE

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Non-cash financing and investing activities

 

 

 

 

 

 

 

 

Stock-based compensation capitalized for software development

 

$

296

 

 

$

327

 

Capitalized software development costs included in accounts

   payable and accrued expenses and other current liabilities at end

   of period

 

$

182

 

 

$

328

 

Purchases of property and equipment included in accounts

   payable and accrued expenses and other current liabilities at end

   of period

 

$

360

 

 

$

55

 

Leased assets obtained in exchange for new operating lease liabilities

 

$

2,195

 

 

$

 

 

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

 

 

11


BLACKLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Company Overview

BlackLine, Inc. and its subsidiaries (the “Company” or “BlackLine”) provide financial accounting close solutions delivered primarily as Software as a Service (“SaaS”). The Company’s solutions enable its customers to address various aspects of their financial close process including account reconciliations, variance analysis of account balances, journal entry capabilities, and certain types of data matching capabilities.

The Company is headquartered in Woodland Hills, California and has offices in Australia, Canada, France, Germany, Hong Kong, Netherlands, Poland, Romania, Singapore, and the United Kingdom.

 

Note 2 – Basis of Presentation, Significant Accounting Policies and Recently-Issued Accounting Pronouncements

The accompanying condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2019. The condensed consolidated financial statements are unaudited and have been prepared on a basis consistent with that used to prepare the audited annual consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair statement of the condensed consolidated financial statements. The condensed consolidated balance sheet at December 31, 2018 was derived from audited financial statements, but does not include all disclosures required by GAAP. The operating results for the quarter and nine months ended September 30, 2019 are not necessarily indicative of the results expected for the full year ending December 31, 2019.

Use of estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.

Significant accounting policies

The Company’s significant accounting policies are detailed in “Note 2: Summary of Significant Accounting Policies" of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Except as noted below, there have been no material changes to the Company’s significant accounting policies.

Leases

On January 1, 2019, the Company adopted Accounting Standards Codification No. 842, Leases, on a modified retrospective basis.

Financial information related to periods prior to adoption are as originally reported under ASC 840, Leases. At January 1, 2019, the Company recorded operating lease right-of-use (“ROU”) assets of $14.9 million and operating lease liabilities of $18.3 million. The difference between the leased assets and lease liabilities represents the existing deferred rent liabilities balance at adoption, resulting from historical straight-line recognition of operating leases, which was reclassified upon adoption to reduce the measurement of the leased assets. The adoption of the standard did not have an impact on the Company’s stockholders’ equity, results of operations, or cash flows.

The new standard provides several optional practical expedients in transition. The Company elected the package of three practical expedients permitted under the transition guidance, which eliminates the requirement to reassess whether a contract contains a lease and lease classification.

12


The Company has also made accounting policy elections, including a short-term lease exception policy, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e. leases with expected terms of 12 months or less), and an accounting policy to account for lease and certain non-lease components as a single component for certain classes of assets. The portfolio approach, which allows a lessee to account for its leases at a portfolio level, was elected for certain equipment leases in which the difference in accounting for each asset separately would not have been materially different from accounting for the assets as a combined unit.  

The Company has leases for office space, equipment, and data centers. The Company’s leases have remaining initial lease terms of less than one year to approximately six years, some of which include options to extend the leases for up to ten years, and some of which include options to terminate the leases within one year.

The Company determines whether an arrangement is a lease, or contains a lease, at inception if the Company is both able to identify an asset and can conclude it has the right to control the identified asset for a period of time. Leases are included in operating lease ROU assets and operating lease liabilities on the Company’s condensed consolidated balance sheets. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheet.

ROU assets represent the Company’s right to control an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the discount rate used to present value lease payments. The Company used the incremental borrowing rate on January 1, 2019 for operating leases that commenced on or prior to that date. The Company uses the incremental borrowing rate at the commencement date, or remeasurement date, for operating leases. The incremental borrowing rate used is estimated based on what the Company would be required to pay for a collateralized loan over a similar term. Additionally, the Company used the portfolio approach when applying the discount rate selected based on the dollar amount and term of the obligation. The Company’s leases typically do not include any residual value guarantees, bargain purchase options, or asset retirement obligations.

The Company’s lease terms are only for periods in which it has enforceable rights. A lease is no longer enforceable when both the lessee and the lessor each have the right to terminate the lease without permission from the other party with no more than an insignificant penalty. The Company’s lease terms are impacted by options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company generally uses the base, non-cancelable lease term when determining the lease assets and liabilities.

The Company’s agreements may contain variable lease payments. The Company includes variable lease payments that depend on an index or a rate and excludes those which depend on facts or circumstances occurring after the commencement date, other than the passage of time. Additionally, for certain equipment leases, the Company applies a portfolio approach to effectively account for the operating lease ROU assets and operating lease liabilities.

Judgment is required when determining whether any of the Company’s data center contracts contain a lease. The Company concluded a lease exists when the asset is specifically identifiable, substantially all the economic benefit of the asset is obtained, and the right to direct the use of the asset exists during the term of the lease.

Recently issued accounting pronouncements not yet adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued guidance which requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. This guidance amends the accounting for credit losses for available-for-sale securities and purchased financial assets with credit deterioration. This guidance is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for any interim or annual period after December 15, 2018. The Company has not determined the impact of this guidance on its consolidated financial statements.

In August 2018, the FASB issued guidance which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. The guidance will be effective for the Company for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

13


Recently adopted accounting pronouncements

In August 2018, the FASB issued guidance which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset. The guidance will be effective for the Company for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. The Company adopted this guidance on a prospective basis effective April 1, 2019, and the adoption of this standard resulted in the Company capitalizing $0.3 million and $0.7 million, respectively, of implementation and consulting costs relating to its various hosting arrangements in the quarter and nine months ended September 30, 2019.

In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted this guidance effective January 1, 2019.

In February 2018, the FASB issued an Accounting Standard Update (“ASU”) that provides companies with an option to reclassify stranded tax effects resulting from enactment of the Tax Cuts and Jobs Act (the “Tax Act”) from accumulated other comprehensive income to retained earnings. The Company adopted this guidance effective January 1, 2019, and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In June 2018, the FASB issued guidance which expands the scope of Accounting Standards Codification Topic 718, Compensation—Stock Compensation, to include share-based payments granted to non-employees in exchange for goods or services. The fair value of awards granted to non-employees will be determined as of the grant date, which will be recognized over the service period. Previous guidance required the awards to be remeasured at fair value periodically when determining the related expense. The Company adopted this guidance effective January 1, 2019, and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Note 3 – Leases

The following table sets forth the Company’s lease expense (in thousands):

 

 

Quarter Ended

September 30, 2019

 

 

Nine Months Ended

September 30, 2019

 

Operating lease cost

$

1,402

 

 

$

4,390

 

Short-term lease cost

 

239

 

 

 

660

 

Variable cost

 

216

 

 

 

454

 

    Total lease cost

$

1,857

 

 

$

5,504

 

 

Supplemental information related to the Company’s leases was as follows (in thousands, except percentages):

 

 

Quarter Ended

September 30, 2019

 

 

Nine Months Ended

September 30, 2019

 

Cash paid for amounts included in the measurement of lease liabilities - operating leases

$

1,655

 

 

$

4,785

 

 

 

September 30, 2019

 

Weighted-average remaining lease term - operating leases (in years)

 

4.3

 

Weighted-average discount rate - operating leases

 

6

%

 

14


Maturities of lease liabilities at September 30, 2019 was (in thousands):

 

2019 (remaining 3 months)

$

1,545

 

2020

 

5,352

 

2021

 

4,112

 

2022

 

3,062

 

2023

 

2,901

 

Thereafter

 

1,632

 

    Total lease payments

 

18,604

 

Less imputed interest

 

(2,115

)

    Total

$

16,489

 

At September 30, 2019, leases entered into that have not yet commenced were $0.2 million and are not reflected in the table above.

Future minimum lease payments under non-cancelable operating leases at December 31, 2018 was (in thousands):

 

2019

$

7,059

 

2020

 

5,307

 

2021

 

3,786

 

2022

 

2,586

 

2023

 

2,638

 

Thereafter

 

237

 

    Total

$

21,613

 

 

Note 4 – Redeemable Non-Controlling Interest

In September 2018, the Company entered into an agreement with Japanese Cloud Computing and M30 LLC (the “Investors”) to engage in the investment, organization, management, and operation of a Japanese subsidiary (“BlackLine K.K.”) of the Company that is focused on the sale of the Company's products in Japan. In October 2018, the Company initially contributed approximately $4.5 million in cash in exchange for 51% of the outstanding common stock of BlackLine K.K. As the Company controls a majority stake in BlackLine K.K., the entity has been consolidated.

All of the common stock held by the Investors is callable by the Company or puttable by the Investors upon certain contingent events. Should the call or put option be exercised, the redemption value will be determined based upon a prescribed formula derived from the discrete revenues of BlackLine K.K. and the Company and may be settled, at the Company’s discretion, with Company stock or cash. As a result of the put right available to the Investors in the future, the redeemable non-controlling interests in BlackLine K.K. are classified outside of permanent equity in the Company’s condensed consolidated balance sheet, and the balance is reported at the greater of the initial carrying amount adjusted for the redeemable non-controlling interests’ share of earnings, or its estimated redemption value. The resulting changes in the estimated redemption amount are recorded within retained earnings or, in the absence of retained earnings, additional paid-in-capital. The estimated redemption value of the call/put option embedded in the redeemable non-controlling interests was $0.9 million at September 30, 2019.

The following table summarizes the activity in the redeemable non-controlling interests for the periods indicated below:

 

 

 

Quarter Ended

September 30, 2019

 

 

Nine Months Ended

September 30, 2019

 

Balance at beginning of period

 

$

4,118

 

 

$

4,387

 

Net loss attributable to redeemable non-controlling interest (excluding adjustment to non-controlling interest)

 

 

(509

)

 

 

(978

)

Foreign currency translation

 

 

5

 

 

 

151

 

Adjustment to redeemable non-controlling interest

 

 

839

 

 

 

893

 

Balance at end of period

 

$

4,453

 

 

$

4,453

 

 

15


Note 5 – Balance Sheet Components

Investments in Marketable Securities

Investments in marketable securities presented within current assets on the condensed consolidated balance sheet consisted of the following:

 

 

 

September 30, 2019

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

 

(in thousands)

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

$

33,202

 

 

$

52

 

 

$

 

 

$

33,254

 

Corporate bonds

 

 

20,276

 

 

 

72

 

 

 

 

 

 

20,348

 

Commercial paper

 

 

14,722

 

 

 

 

 

 

 

 

 

14,722

 

 

 

$

68,200

 

 

$

124

 

 

$

 

 

$

68,324

 

 

 

 

December 31, 2018

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

 

(in thousands)

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

$

25,856

 

 

$

 

 

$

(29

)

 

$

25,827

 

Corporate bonds

 

 

32,030

 

 

 

 

 

 

(60

)

 

 

31,970

 

Commercial paper

 

 

28,599

 

 

 

 

 

 

 

 

 

28,599

 

 

 

$

86,485

 

 

$

 

 

$

(89

)

 

$

86,396

 

 

During the quarters and nine months ended September 30, 2019 and 2018 there were no material realized gains or losses related to sales of marketable securities recognized in the Company’s unaudited condensed consolidated statements of operations. Net gains and losses related to maturities of marketable securities that were reclassified from accumulated other comprehensive loss to earnings in the unaudited condensed consolidated statements of operations were $0.1 million and $0.7 million for the quarter and nine months ended September 30, 2019, respectively. Net gains and losses related to maturities of marketable securities that were reclassified from accumulated other comprehensive loss to earnings in the unaudited condensed consolidated statements of operations were $0.3 million and $0.6 million for the quarter and nine months ended September 30, 2018. Net gains and losses are determined using the specific identification method.

The Company’s marketable securities have a contractual maturity of less than two years. The amortized cost and fair values of marketable securities, by remaining contractual maturity, were as follows:

 

 

 

September 30, 2019

 

 

 

Amortized

Cost

 

 

Fair Value

 

 

 

(in thousands)

 

Maturing within 1 year

 

$

62,648

 

 

$

62,772

 

Maturing between 1 and 2 years

 

 

5,552

 

 

 

5,552

 

 

 

$

68,200

 

 

$

68,324

 

 

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Partner referral fees

 

$

61

 

 

$

5,219

 

Other prepaid expenses and other current assets

 

 

10,813

 

 

 

8,823

 

 

 

$

10,874

 

 

$

14,042

 

16


Other Assets

Other assets consisted of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Deferred customer contract acquisition costs

 

$

43,549

 

 

$

34,172

 

Restricted cash

 

 

243

 

 

 

274

 

Other assets

 

 

2,690

 

 

 

2,419

 

 

 

$

46,482

 

 

$

36,865

 

 

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities were comprised of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Accrued salaries and employee benefits

 

$

17,812

 

 

$

17,054

 

Accrued income and other taxes payable

 

 

4,084

 

 

 

4,547

 

Short-term tenant improvement allowance

 

 

 

 

 

475

 

Other accrued expenses and current liabilities

 

 

3,808

 

 

 

2,629

 

 

 

$

25,704

 

 

$

24,705

 

 

Note 6 – Fair Value Measurements

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis by level, within the fair value hierarchy. Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement (in thousands):

 

 

 

September 30, 2019

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

25,104

 

 

$

 

 

$

 

 

$

25,104

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

 

33,254

 

 

 

 

 

 

 

 

 

33,254

 

Corporate bonds

 

 

 

 

 

20,348

 

 

 

 

 

 

20,348

 

Commercial paper

 

 

 

 

 

14,722

 

 

 

 

 

 

14,722

 

Total assets

 

$

58,358

 

 

$

35,070

 

 

$

 

 

$

93,428

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

6,629

 

 

$

6,629

 

Total liabilities

 

$

 

 

$

 

 

$

6,629

 

 

$

6,629

 

 

 

 

December 31, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

32,021

 

 

$

 

 

$

 

 

$

32,021

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

 

25,827

 

 

 

 

 

 

 

 

 

25,827

 

Corporate bonds

 

 

 

 

 

31,970

 

 

 

 

 

 

31,970

 

Commercial paper

 

 

 

 

 

28,599

 

 

 

 

 

 

28,599

 

Total assets

 

$

57,848

 

 

$

60,569

 

 

$

 

 

$

118,417

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

6,316

 

 

$

6,316

 

Total liabilities

 

$

 

 

$

 

 

$

6,316

 

 

$

6,316

 

 

17


The following table summarizes the changes in the contingent consideration liability (in thousands):

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Beginning fair value

 

$

6,500

 

 

$

6,056

 

 

$

6,316

 

 

$

5,866

 

Change in fair value

 

 

129

 

 

 

97

 

 

 

313

 

 

 

287

 

Ending fair value

 

$

6,629

 

 

$

6,153

 

 

$

6,629

 

 

$

6,153

 

The fair value of contingent consideration is determined by discounting estimated future taxable income. The significant inputs used in the fair value measurement of contingent consideration are the timing and amount of taxable income in any given period and the discount rate, which considers the risk associated with the forecasted taxable income. Significant changes in the estimated future taxable income and the periods in which they are generated would significantly impact the fair value of the contingent consideration liability.

Note 7 – Convertible Senior Notes

On August 13, 2019, the Company sold $500.0 million, which includes the initial purchasers option of $65.0 million, aggregate principal amount of 0.125% Convertible Senior Notes due 2024 (the “Notes”) to the initial purchasers in a private placement in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). The initial resale of the Notes by the initial purchasers to qualified institutional buyers was exempt from registration pursuant to Rule 144A under the Securities Act. The Notes were issued pursuant to an Indenture (the “Indenture”) between the Company and U.S. Bank National Association, as trustee (the “Trustee”).

Interest on the Notes is payable semi-annually in cash at a rate of 0.125% per annum on February 1 and August 1 of each year, beginning on February 1, 2020. The Notes mature on August 1, 2024 unless redeemed, repurchased or converted prior to such date in accordance with their terms.

Prior to the close of business on the business day immediately preceding May 1, 2024, the Notes will be convertible only under the following circumstances:

(1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2019, and only during such calendar quarter, if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the Notes on each applicable trading day;

(2) during the five business-day period after any five consecutive trading-day period in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate on each such trading day;

(3) if the Company calls any or all of the Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or

(4) upon the occurrence of specified corporate events set forth in the Indenture.

On or after May 1, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date of the Notes, holders of the Notes, at their option, may convert all or any portion of their Notes regardless of the foregoing conditions.

The Notes have an initial conversion rate of 13.6244 shares of common stock per $1,000 principal amount of Notes, equivalent to an initial conversion price of approximately $73.40 per share of common stock. The conversion rate is subject to adjustment for certain events. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at its election. It is the Company’s current intent to settle conversions of the Notes through “combination settlement”, which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount in shares of its common stock.

If the Company undergoes a fundamental change, as described in the Indenture, prior to the maturity date of the Notes, holders of the Notes may require the Company to repurchase all or a portion of the Notes for cash at a price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

18


The Notes are the Company’s senior unsecured obligations and will rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of the Company’s unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of current or future subsidiaries of the Company.

The Indenture contains customary events of default with respect to the Notes and provides that upon certain events of default occurring and continuing, the Trustee may, and the Trustee at the request of holders of at least 25% in principal amount of the Notes shall, declare all principal and accrued and unpaid interest, if any, of the Notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization, involving the Company, all of the principal of, and accrued and unpaid interest on the Notes will automatically become due and payable.

In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The equity component representing the conversion option was determined by deducting the fair value of the liability component from the principal amount of the Notes. The difference between the principal amount of the Notes and the liability component of $114.2 million was recorded as a debt discount. In addition, the Company incurred $12.8 million of transaction costs related to the Notes of which $9.9 million and $2.9 million, respectively, was allocated to the liability and equity components of the Notes. Transaction costs allocated to the liability component was recorded as additional debt discount.  The equity component of the Notes will not be remeasured as long as it continues to meet the conditions for equity classification.  The debt discount is amortized to interest expense over the term of the Notes using the effective interest method.

To estimate the fair value of a similar liability that does not have an associated conversion feature, the Company discounted the contractual cash flows of the Notes at an estimated interest rate for a comparable nonconvertible note. The Company applied judgment to determine the interest rate which was estimated based on the credit spread implied by the Notes issuance. Significant inputs used in the model to determine the applicable interest rate include expected volatility over the term of the Notes and selection of comparable companies.

The Notes consisted of the following (in thousands):

 

 

September 30, 2019

 

Liability:

 

 

 

Principal

$

500,000

 

Unamortized debt discount and issuance costs

 

(121,144

)

Net carrying amount

$

378,856

 

Carrying amount of the equity component

$

111,230

 

 

The effective interest rate of the liability component of the Notes, excluding the conversion option, is 6.06%.

The Company carries the Notes at face value less unamortized discount and issuance costs on its condensed consolidated balance sheet and presents the fair value for disclosure purposes only. The estimated fair value of the Notes, based on a market approach as of September 30, 2019 was approximately $479.6 million, which represents a Level 2 valuation. The estimated fair value was determined based on the actual bids and offers of the Notes in an over-the-counter market on the last trading day of the period.

During the quarter and nine months ended September 30, 2019, the Company recognized $2.9 million of interest expense related to the amortization of debt discount and issuance costs and $0.1 million of coupon interest expense.

As of September 30, 2019, the remaining life of the Notes is approximately 58 months.

The Notes were not convertible as of September 30, 2019.

19


Capped Calls

In conjunction with the issuance of the Notes, the Company entered into capped call transactions (the “Capped Calls”) with a certain counterparty affiliated with the Initial Purchasers and others at a cost of approximately $46.2 million, which was recorded as a reduction of the Company’s additional paid-in capital in the accompanying condensed consolidated financial statements.

Under the Capped Calls, the Company purchased capped call options that in the aggregate relate to the total number of shares of the Company’s common stock, with an exercise price equal to the initial conversion price of each of the Notes, and a cap price of $106.76 per share of common stock, subject to certain adjustments under the terms of the Capped Calls.

By entering into the Capped Calls, the Company expects to reduce the potential dilution to its common stock (or, in the event a conversion of the Notes is settled in cash, to reduce its cash payment obligation) in the event that at the time of conversion of the Notes its common stock price exceeds the conversion price of the Notes.

The cost of the Capped Calls is not expected to be tax deductible as the Company did not elect to integrate the Capped Calls into the Notes for tax purposes.

Note 8 – Commitments and Contingencies

Contingent consideration—On September 3, 2013, BlackLine Systems, Inc. was acquired by BlackLine, Inc. (the “2013 Acquisition”).  In conjunction with the 2013 Acquisition, option holders of BlackLine Systems, Inc. were allowed to cancel their stock option rights and receive a cash payment equal to the amount of calculated gain (less applicable expense and other items) had they exercised their stock options and then sold their common shares as part of the 2013 Acquisition.  As a condition of the 2013 Acquisition, the Company is required to pay additional cash consideration to certain equity holders if the Company realizes a tax benefit from the use of net operating losses generated from the stock option exercises concurrent with the 2013 Acquisition.  The maximum contingent cash consideration to be distributed is $8.0 million. The fair value of the contingent consideration was $6.6 million and $6.3 million at September 30, 2019 and December 31, 2018, respectively.

Litigation—From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company is not currently a party to any legal proceedings, nor is it aware of any pending or threatened litigation, that would have a material adverse effect on the Company’s business, operating results, cash flows, or financial condition should such litigation be resolved unfavorably.

Indemnification—In the ordinary course of business, the Company may provide indemnification of varying scope and terms to customers, vendors, investors, directors, and officers with respect to certain matters, including, but not limited to, losses arising out of its breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third parties. These indemnification provisions may survive termination of the underlying agreement and the maximum potential amount of future payments the Company could be required to make under these indemnification provisions may not be subject to maximum loss clauses. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is indeterminable. The Company has never paid a material claim, nor has it been sued in connection with these indemnification arrangements. At September 30, 2019 and December 31, 2018, the Company has not accrued a liability for these indemnification arrangements because the likelihood of incurring a payment obligation, if any, in connection with these indemnification arrangements is not probable or reasonably estimable.

Note 9 – Equity Awards

Stock-based compensation expense

Stock-based compensation expense recorded in the Company’s unaudited condensed consolidated statements of operations was as follows (in thousands):

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Cost of revenues

 

$

1,431

 

 

$

869

 

 

$

3,478

 

 

$

2,389

 

Sales and marketing

 

 

4,522

 

 

 

2,182

 

 

 

11,074

 

 

 

5,927

 

Research and development

 

 

1,452

 

 

 

651

 

 

 

3,631

 

 

 

1,755

 

General and administrative

 

 

2,736

 

 

 

1,638

 

 

 

6,422

 

 

 

4,636

 

 

 

$

10,141

 

 

$

5,340

 

 

$

24,605

 

 

$

14,707

 

 

20


For each of the quarters ended September 30, 2019 and 2018, stock-based compensation capitalized as an asset was $0.1 million. For each of the nine months ended September 30, 2019 and 2018, stock-based compensation capitalized as an asset was $0.3 million.

Stock options

The following table summarizes activity for awards that contain service-only vesting conditions (in thousands):

 

Outstanding at December 31, 2018

 

 

3,820

 

Granted

 

 

480

 

Exercised

 

 

(552

)

Forfeited/canceled

 

 

(52

)

Outstanding at September 30, 2019

 

 

3,696

 

 

Restricted stock units

The following table summarizes activity for restricted stock units (in thousands):

 

Nonvested at December 31, 2018

 

 

1,300

 

Granted

 

 

875

 

Vested

 

 

(397

)

Forfeited/canceled

 

 

(86

)

Nonvested at September 30, 2019

 

 

1,692

 

 

Stock options with performance conditions

In October 2016, the Company granted options to purchase 682,800 shares of common stock at an exercise price of $14.00 per share to two executive officers that vest upon meeting certain performance conditions and continued service. The performance conditions include meeting yearly cash flow targets and cumulative annual recurring revenue targets through 2019. If each yearly cash flow target is met through 2019, but the full cumulative annual recurring target through 2019 is not met, the executive officers are still able to vest in the award if an additional cash flow target for 2020 and a cumulative annual recurring revenue target through 2020 are achieved. The cash flow performance targets for each year are determined concurrently with the annual budget process and, at December 31, 2018, because each yearly target had not yet been set, no grant date for the options was established. The cash flow performance targets for the final year were set during the quarter ended March 31, 2019, resulting in a grant date being established. The total fair value of the awards at grant date was approximately $24.0 million. At September 30, 2019, the Company has determined that the achievement of the performance targets is not probable and, accordingly, no stock-based compensation expense has been recorded for these awards.

Note 10 – Unearned Revenue and Performance Obligations

Revenue totaling $117.8 million and $96.6 million was recognized during the nine months ended September 30, 2019 and 2018, respectively, that was previously included in the deferred revenue balance at December 31, 2018 and 2017, respectively.

Contracted not recognized revenue was $312.0 million at September 30, 2019, of which the Company expects to recognize approximately 64% over the next 12 months and the remainder thereafter.

Note 11 – Income Taxes

In determining quarterly provisions for income taxes, the Company uses the annual estimated effective tax rate applied to the actual year-to-date loss, adjusted for discrete items arising in that quarter. The Company’s annual estimated effective tax rate differs from the U.S. federal statutory rate of 21% primarily as a result of state taxes, foreign taxes, and changes in the Company’s valuation allowance for domestic income taxes. For the quarters ended September 30, 2019 and 2018, the Company recorded $0.2 million and $17,000, respectively, in income tax expense. For the quarters ended September 30, 2019 and 2018, the Company maintained a full valuation allowance on its U.S. federal and state net deferred tax assets as it was more likely than not that those deferred tax assets will not be realized.

21


For the nine months ended September 30, 2019 and 2018, the Company recorded $0.6 million and $0.1 million, respectively, in income tax expense. The increase in the income tax expense for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, was related to a reduction in net operating losses in the Company’s foreign jurisdictions for the current period. For the nine months ended September 30, 2019 and 2018, the Company maintained a full valuation allowance on its U.S. federal and state net deferred tax assets as it was more likely than not that those deferred tax assets will not be realized.

Note 12 – Net Loss per Share

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

 

 

2018

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to BlackLine, Inc.

 

$

(9,242

)

 

$

(4,460

)

 

$

(23,050

)

 

 

 

$

(20,072

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares

 

 

55,480

 

 

 

54,263

 

 

 

55,164

 

 

 

 

 

53,660

 

  Add: Dilutive effect of securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used to calculate diluted net loss per share

 

 

55,480

 

 

 

54,263

 

 

 

55,164

 

 

 

 

 

53,660

 

Basic net loss per share attributable to BlackLine, Inc.

 

$

(0.17

)

 

$

(0.08

)

 

$

(0.42

)

 

 

 

$

(0.37

)

Diluted net loss per share attributable to BlackLine, Inc.

 

$

(0.17

)

 

$

(0.08

)

 

$

(0.42

)

 

 

 

$

(0.37

)

 

The following potentially dilutive shares were excluded from the calculation of diluted net loss per share attributable to common stockholders because they were anti-dilutive (in thousands):

 

 

 

September 30,

 

 

 

2019

 

 

2018

 

Stock options with service-only vesting conditions

 

 

3,696

 

 

 

3,772

 

Stock options with performance conditions

 

 

683

 

 

 

683

 

Restricted stock units

 

 

1,692

 

 

 

1,202

 

Total shares excluded from net loss per share

 

 

6,071

 

 

 

5,657

 

Additionally, approximately 6.8 million shares underlying the conversion option in the Notes are not considered in the calculation of diluted net loss per share as the effect would be anti-dilutive. The shares are subject to adjustment, up to approximately 9.4 million shares for the Notes, if certain corporate events occur prior to the maturity date or if the Company issues a notice of redemption. The Company uses the treasury stock method for calculating any potential dilutive effect of the conversion option on diluted net income per share, if applicable. During the quarter ended September 30, 2019, the average market price of the Company’s common stock did not exceed the conversion price of the Notes of $73.40 per share.

Note 13 – Geographic Information

The Company disaggregates its revenue from contracts with customers by geographic location, as it believes it best depicts how the nature, amount, timing, and uncertainty of its revenues and cash flows are affected by economic factors.

The following table sets forth the Company’s revenues by geographic region (in thousands):

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

United States

$

58,588

 

 

$

46,782

 

 

$

162,487

 

 

$

131,456

 

International

 

16,337

 

 

 

11,952

 

 

 

46,231

 

 

 

34,016

 

 

$

74,925

 

 

$

58,734

 

 

$

208,718

 

 

$

165,472

 

 

Note 14 – Subsequent Events

On November 5, 2019, the Company’s Compensation Committee approved restricted stock unit grants to employees totaling approximately 67,000 shares. Each restricted stock unit entitles the recipient to receive one share of

22


common stock upon vesting of the award. The restricted stock units will vest as to one-fourth of the total number of units awarded on the first anniversary of November 20, 2019 and quarterly thereafter for 12 consecutive quarters.

On November 5, 2019, the Company’s Stock Award Committee approved restricted stock unit grants to employees totaling 18,000 shares. Each restricted stock unit entitles the recipient to receive one share of common stock upon vesting of the award. The restricted stock units will vest as to one-fourth of the total number of units awarded on each of the first four anniversaries of November 20, 2019.

23


Item 2.

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

You should read the following discussion and analysis of our financial condition and results of operations together with the financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 28, 2019 (“Annual Report on Form 10-K”). This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those discussed in the section entitled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.

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.

At September 30, 2019, we had approximately 245,000 individual users across approximately 2,900 customers exclusive of on-premise software. 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”). BlackLine Systems funded its business with investments from our founder and cash flows from operations until September 3, 2013. On September 3, 2013, we acquired BlackLine Systems, and Silver Lake Sumeru and Iconiq acquired a controlling interest in us, which we refer to as the “2013 Acquisition.” The 2013 Acquisition was accounted for as a business combination under GAAP and resulted in a change in accounting basis as of the date of the 2013 Acquisition.

Our platform consists of nine core cloud-based products, including Transaction Matching, Account Reconciliations, Consolidation Integrity Manager, Daily Reconciliations, Journal Entry, Variance Analysis, Task Management, Compliance, and Insights. 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 Balance Sheet Integrity, Close Process Management, Accounting Process Automation, Finance Transformation, Intercompany Hub and Smart Close.

We sell our solutions primarily through our direct sales force, which leverages our relationships with technology vendors, professional services firms and business process outsourcers. In particular, our solution is an SAP endorsed business solution that integrates with SAP’s ERP solutions. In the fourth quarter of 2018, SAP became part of the reseller channel that we use in the ordinary course of business. SAP has the ability to resell our accounting solutions, for which we receive a percentage of the revenues. Since October 1, 2018, we are no longer obligated to pay SAP a fee based on a percentage of revenues from our new customers that use an SAP ERP solution.

The length of our sales cycle depends on the size of the potential customer and contract, as well as the type of solution or product being purchased. The sales cycle for our global enterprise customers is generally longer than that of our mid-market customers. In addition, the length of the sales cycle tends to increase for larger contracts and for more complex, strategic products like Intercompany Hub. As we continue to focus on increasing our average contract size and selling more strategic products, we expect our sales cycle to lengthen and become less predictable, which could cause variability in our results for any particular period.

We have historically signed a high 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.

24


For the quarters ended September 30, 2019 and 2018, we had revenues totaling $74.9 million and $58.7 million, respectively, and we incurred net losses attributable to BlackLine, Inc. of $9.2 million and $4.5 million, respectively. For the nine months ended September 30, 2019 and 2018, we had revenues totaling $208.7 million and $165.5 million, respectively, and we incurred net losses attributable to BlackLine, Inc. of $23.1 million and $20.1 million, respectively.

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. Each of the metrics below exclude the impact of on-premise software.

 

 

Sep 30, 2018

 

 

Dec 31, 2018

 

 

Mar 31, 2019

 

 

Jun 30, 2019

 

 

Sep 30, 2019

 

Dollar-based net revenue retention rate

 

109

%

 

 

108

%

 

 

108

%

 

 

108

%

 

 

109

%

Number of customers

 

2,494

 

 

 

2,631

 

 

 

2,707

 

 

 

2,813

 

 

 

2,871

 

Number of users

 

214,747

 

 

 

222,619

 

 

 

226,979

 

 

 

236,802

 

 

 

244,515

 

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 and support 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 and support revenue one year prior to the date of calculation for that same customer base. This calculation does not reflect implied monthly subscription and support 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 and support 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. Our ability to maximize the lifetime value of our customer relationships will depend, in part, on the willingness of the customer to purchase additional user licenses and products from us. Over the past few years, our dollar-based net revenue retention rate has been decreasing. This is caused by increasing churn or attrition, higher initial deal sizes, customer mix, a slower adoption rate of new products by existing customers, lower price increases than in prior periods, or a slower pace of user expansion as our customer base matures. We rely on our sales and customer success teams to support and grow our existing customers by maintaining high customer satisfaction and educating the customer on the value all our products provide.

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. However, where an existing customer requests its invoice be divided for the sole purpose of restructuring its internal billing arrangement without any incremental increase in revenue, such customer continues to be treated as a single customer. For the quarters and nine months ended September 30, 2019 and 2018, 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. We are also beginning to sell an increasing number of non-user based strategic products, such as Transaction Matching and Intercompany Hub.

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the non-GAAP measures below are useful to us and our investors in evaluating our business. These non-GAAP financial measures are useful because they 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.

 

 

 

Quarter Ended  September 30,

 

 

Nine Months Ended  September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(in thousands, except percentages)

 

GAAP gross profit

 

$

59,633

 

 

$

45,217

 

 

$

164,864

 

 

$

128,483

 

GAAP gross margin

 

 

79.6

%

 

 

77.0

%

 

 

79.0

%

 

 

77.6

%

GAAP net loss attributable to BlackLine, Inc.

 

$

(9,242

)

 

$

(4,460

)

 

$

(23,050

)

 

$

(20,072

)

25


 

 

 

Quarter Ended  September 30,

 

 

Nine Months Ended  September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(in thousands, except percentages)

 

Non-GAAP gross profit

 

$

62,263

 

 

$

47,807

 

 

$

172,964

 

 

$

136,016

 

Non-GAAP gross margin

 

 

83.1

%

 

 

81.4

%

 

 

82.9

%

 

 

82.2

%

Non-GAAP net income attributable to BlackLine, Inc.

 

$

7,029

 

 

$

4,145

 

 

$

14,273

 

 

$

4,936

 

Non-GAAP Gross Profit and Non-GAAP Gross Margin. Non-GAAP gross profit is defined as GAAP revenues less GAAP cost of revenue adjusted for the amortization of acquired developed technology and stock-based compensation expense. Non-GAAP gross margin is defined as non-GAAP gross profit divided by GAAP revenues. We believe that presenting non-GAAP gross margin is useful to investors as it eliminates the effect of certain non-cash expenses and allows a direct comparison of gross margin between periods.

Non-GAAP Net Income. Non-GAAP net income is defined as GAAP net loss adjusted for the impact of the provision for (benefit from) income taxes that we were able to recognize as a result of the deferred tax liabilities associated with the intangible assets established upon the 2013 Acquisition and the Runbook Acquisition, amortization of acquired intangible assets resulting from the 2013 Acquisition and the Runbook Acquisition, stock-based compensation expense, the amortization of debt discount and issuance costs from our convertible notes, legal settlement gains, the change in the fair value of contingent consideration, costs incurred relating to our registration statement and related shelf offering for certain of our stockholders, and the adjustment to the value of the redeemable non-controlling interest to the redemption amount. We believe that presenting non-GAAP net income is useful to investors as it eliminates the impact of items that have been affected by the 2013 Acquisition and the Runbook Acquisition, certain non-cash expenses, and other costs related to non-recurring non-operating events in order to allow a direct comparison of net loss between current and future periods.

Reconciliation of Non-GAAP Financial Measures

The following table presents a reconciliation of gross profit, gross margin and net loss, the most comparable GAAP measures, to non-GAAP gross profit, non-GAAP gross margin and non-GAAP net income:

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(in thousands, except percentages)

 

Non-GAAP Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

$

59,633

 

 

$

45,217

 

 

$

164,864

 

 

$

128,483

 

Amortization of developed technology

 

 

1,199

 

 

 

1,721

 

 

 

4,622

 

 

 

5,144

 

Stock-based compensation expense

 

 

1,431

 

 

 

869

 

 

 

3,478

 

 

 

2,389

 

Total non-GAAP gross profit

 

$

62,263

 

 

$

47,807

 

 

$

172,964

 

 

$

136,016

 

Gross margin

 

 

79.6

%

 

 

77.0

%

 

 

79.0

%

 

 

77.6

%

Non-GAAP gross margin

 

 

83.1

%

 

 

81.4

%

 

 

82.9

%

 

 

82.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP Net Income Attributable to BlackLine, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to BlackLine, Inc.

 

$

(9,242

)

 

$

(4,460

)

 

$

(23,050

)

 

$

(20,072

)

Provision for (benefit from) income taxes

 

 

53

 

 

 

(137

)

 

 

35

 

 

 

(327

)

Amortization of intangibles

 

 

2,566

 

 

 

3,305

 

 

 

8,722

 

 

 

9,940

 

Stock-based compensation expense

 

 

10,141

 

 

 

5,340

 

 

 

24,605

 

 

 

14,707

 

Amortization of debt discount and issuance costs

 

 

2,923

 

 

 

 

 

 

2,923

 

 

 

 

Change in fair value of contingent consideration

 

 

129

 

 

 

97

 

 

 

313

 

 

 

287

 

Legal settlement gains

 

 

(380

)

 

 

 

 

 

(380

)

 

 

 

Shelf offering costs

 

 

 

 

 

 

 

 

212

 

 

 

401

 

Adjustment to redeemable non-controlling interest

 

 

839

 

 

 

 

 

 

893

 

 

 

 

Total non-GAAP net income attributable to BlackLine, Inc.

 

$

7,029

 

 

$

4,145

 

 

$

14,273

 

 

$

4,936

 

26


Results of Operations

The following table sets forth our statements of operations for each of the periods indicated:

 

 

 

Quarter Ended  September 30,

 

 

Nine Months Ended  September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and support

 

$

70,311

 

 

$

56,170

 

 

$

197,651

 

 

$

157,842

 

Professional services

 

 

4,614

 

 

 

2,564

 

 

 

11,067

 

 

 

7,630

 

Total revenues

 

 

74,925

 

 

 

58,734

 

 

 

208,718

 

 

 

165,472

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and support

 

 

11,689

 

 

 

11,174

 

 

 

34,109

 

 

 

30,048

 

Professional services

 

 

3,603

 

 

 

2,343

 

 

 

9,745

 

 

 

6,941

 

Total cost of revenues

 

 

15,292

 

 

 

13,517

 

 

 

43,854

 

 

 

36,989

 

Gross profit

 

 

59,633

 

 

 

45,217

 

 

 

164,864

 

 

 

128,483

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

41,848

 

 

 

31,709

 

 

 

114,888

 

 

 

93,086

 

Research and development

 

 

11,558

 

 

 

7,261

 

 

 

32,694

 

 

 

22,001

 

General and administrative

 

 

14,088

 

 

 

11,268

 

 

 

40,444

 

 

 

34,808

 

Total operating expenses

 

 

67,494

 

 

 

50,238

 

 

 

188,026

 

 

 

149,895

 

Loss from operations

 

 

(7,861

)

 

 

(5,021

)

 

 

(23,162

)

 

 

(21,412

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

2,161

 

 

 

578

 

 

 

3,590

 

 

 

1,474

 

Interest expense

 

 

(3,006

)

 

 

 

 

 

(3,006

)

 

 

(4

)

Other income (expense), net

 

 

(845

)

 

 

578

 

 

 

584

 

 

 

1,470

 

Loss before income taxes

 

 

(8,706

)

 

 

(4,443

)

 

 

(22,578

)

 

 

(19,942

)

Provision for income taxes

 

 

206

 

 

 

17

 

 

 

557

 

 

 

130

 

Net loss

 

$

(8,912

)

 

$

(4,460

)

 

$

(23,135

)

 

$

(20,072

)

Net loss and adjustment attributable to non-controlling interest

 

 

330

 

 

 

 

 

 

(85

)

 

 

 

Net loss attributable to BlackLine, Inc.

 

$

(9,242

)

 

$

(4,460

)

 

$

(23,050

)

 

$

(20,072

)

Quarters and Nine Months Ended September 30, 2019 and 2018

Revenues

 

 

 

Quarter Ended

September 30,

 

 

Change

 

 

Nine Months Ended

September 30,

 

 

Change

 

 

 

2019

 

 

2018

 

 

$

 

 

%

 

 

2019

 

 

2018

 

 

$

 

 

%

 

 

 

(in thousands, except percentages)

 

Subscription and support

 

$

70,311

 

 

$

56,170

 

 

$

14,141

 

 

 

25

%

 

$

197,651

 

 

$

157,842

 

 

$

39,809

 

 

 

25

%

Professional services

 

 

4,614

 

 

 

2,564

 

 

 

2,050

 

 

 

80

%

 

 

11,067

 

 

 

7,630

 

 

 

3,437

 

 

 

45

%

Total revenues

 

$

74,925

 

 

$

58,734

 

 

$

16,191

 

 

 

28

%

 

$

208,718

 

 

$

165,472

 

 

$

43,246

 

 

 

26

%

 

 

September 30,

 

 

2019

 

 

2018

 

Dollar-based net revenue retention rate*

 

109

%

 

 

109

%

Number of customers*

 

2,871

 

 

 

2,494

 

Number of users*

 

244,515

 

 

 

214,747

 

*Exclusive of on-premise software

 

 

 

 

 

 

 

The increase in revenues for the quarter and nine months ended September 30, 2019, compared to the quarter and nine months ended September 30, 2018, was primarily due to an increase in the number of customers, an increase in the number of users added by existing customers, an increase in the number of products purchased by existing customers in the period, and an increase in non-user based strategic product sales. The total number of customers and users at September 30, 2019 increased by 15% and 14%, respectively, as compared to September 30, 2018.

27


Cost of revenues

 

 

 

Quarter Ended

September 30,

 

 

Change

 

 

Nine Months Ended

September 30,

 

 

Change

 

 

 

2019

 

 

2018

 

 

$

 

 

%

 

 

2019

 

 

2018

 

 

$

 

 

%

 

 

 

(in thousands, except percentages)

 

Subscription and support

 

$

11,689

 

 

$

11,174

 

 

$

515

 

 

 

5

%

 

$

34,109

 

 

$

30,048

 

 

$

4,061

 

 

 

14

%

Professional services

 

 

3,603

 

 

 

2,343

 

 

 

1,260

 

 

 

54

%

 

 

9,745

 

 

 

6,941

 

 

 

2,804

 

 

 

40

%

Total cost of revenues

 

$

15,292

 

 

$

13,517

 

 

$

1,775

 

 

 

13

%

 

$

43,854

 

 

$

36,989

 

 

$

6,865

 

 

 

19

%

Gross margin

 

 

79.6

%

 

 

77.0

%

 

 

 

 

 

 

 

 

 

 

79.0

%

 

 

77.6

%

 

 

 

 

 

 

 

 

The increase in cost of revenues for the quarter ended September 30, 2019, compared to the quarter ended September 30, 2018, was primarily due to a $1.6 million increase in salaries, benefits, and stock-based compensation and a $0.6 million increase in computer software expenses, partially offset by a $0.3 million decrease in depreciation and amortization. The increase in salaries, benefits, and stock-based compensation was primarily driven by an increase in average headcount, which increased 10% from the quarter ended September 30, 2018 to the quarter ended September 30, 2019. The increase in computer software expenses was primarily driven by purchases of additional server licenses driven by growth in our customer and user base.

The increase in cost of revenues for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, was primarily due to a $2.9 million increase in salaries, benefits, and stock-based compensation; a $1.9 million increase in computer software expenses; a $0.6 million increase in amortization of developed technology; and a $0.5 million increase in travel-related costs. The increase in salaries, benefits, and stock-based compensation was primarily driven by an increase in average headcount, which increased 27% from the nine months ended September 30, 2018 to the nine months ended September 30, 2019. The increase in computer software expenses was primarily driven by purchases of additional server licenses driven by growth in our customer base. Amortization of our capitalized software development costs increased due to larger total capitalized costs as we continue to expand the functionality of our solutions.

Sales and marketing

 

 

 

Quarter Ended

September 30,

 

 

Change

 

 

Nine Months Ended

September 30,

 

 

Change

 

 

 

2019

 

 

2018

 

 

$

 

 

%

 

 

2019

 

 

2018

 

 

$

 

 

%

 

 

 

(in thousands, except percentages)

 

Sales and marketing

 

$

41,848

 

 

$

31,709

 

 

$

10,139

 

 

 

32

%

 

$

114,888

 

 

$

93,086

 

 

$

21,802

 

 

 

23

%

Percentage of total revenues

 

 

55.9

%

 

 

54.0

%

 

 

 

 

 

 

 

 

 

 

55.0

%

 

 

56.3

%

 

 

 

 

 

 

 

 

The increase in sales and marketing expenses for the quarter ended September 30, 2019, compared to the quarter ended September 30, 2018, was primarily due to an $8.7 million increase in salaries, sales commissions, incentives, and stock-based compensation; a $3.8 million increase in advertising and trade show expenses; a $0.7 million increase in travel-related costs; and a $0.3 million increase in computer software expenses, partially offset by a $3.2 million decrease in partner referral fees. The increase in salaries, sales commissions, incentives, and stock-based compensation was primarily driven by an increase in headcount and revenue growth. Our sales and marketing average headcount increased 27% from the quarter ended September 30, 2018 to the quarter ended September 30, 2019. The increase in advertising and trade shows was primarily due to moving our annual InTheBlack conference to the third quarter in 2019 compared to the fourth quarter in 2018, as well as increased marketing efforts. Travel-related costs increased due to the expansion of our sales organization. The increase in computer software expenses was primarily driven by the expansion of our sales organization. The decrease in partner referral fees was primarily driven by the amendment of the previous SAP agreement in the fourth quarter of 2018 and the addition of SAP to our channel of resellers.

28


The increase in sales and marketing expenses for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, was primarily due to a $21.0 million increase in salaries, sales commissions, incentives, and stock-based compensation; a $3.9 million increase in advertising and trade show expenses; a $1.8 million increase in travel-related costs; and a $1.1 million increase in computer software expenses, partially offset by a $5.9 million decrease in partner referral fees. The increase in salaries, sales commissions, incentives, and stock-based compensation was primarily driven by an increase in headcount and revenue growth. Our sales and marketing average headcount increased 16% from the nine months ended September 30, 2018 to the nine months ended September 30, 2019. The increase in advertising and trade shows was primarily due to moving our annual InTheBlack conference to the third quarter in 2019 compared to the fourth quarter in 2018, as well as increased marketing efforts. Travel-related costs increased due to the expansion of our sales organization. Computer software expenses increased due to the additional software licenses driven by an increase in average sales and marketing headcount. The decrease in partner referral fees was primarily driven by the amendment of the previous SAP agreement in the fourth quarter of 2018 and the addition of SAP to our channel of resellers.

Research and development  

 

 

 

Quarter Ended

September 30,

 

 

Change

 

 

Nine Months Ended

September 30,

 

 

Change

 

 

 

2019

 

 

2018

 

 

$

 

 

%

 

 

2019

 

 

2018

 

 

$

 

 

%

 

 

 

(in thousands, except percentages)

 

Research and development, gross

 

$

12,779

 

 

$

8,858

 

 

$

3,921

 

 

 

44

%

 

$

36,270

 

 

$

26,673

 

 

$

9,597

 

 

 

36

%

Capitalized internally developed software costs

 

 

(1,221

)

 

 

(1,597

)

 

 

376

 

 

 

(24

%)

 

 

(3,576

)

 

 

(4,672

)

 

 

1,096

 

 

 

(23

%)

Research and development, net

 

$

11,558

 

 

$

7,261

 

 

$

4,297

 

 

 

59

%

 

$

32,694

 

 

$

22,001

 

 

$

10,693

 

 

 

49

%

Percentage of total revenues

 

 

15.4

%

 

 

12.4

%

 

 

 

 

 

 

 

 

 

 

15.7

%

 

 

13.3

%

 

 

 

 

 

 

 

 

The increase in research and development expenses for the quarter ended September 30, 2019, compared to the quarter ended September 30, 2018, was primarily due to a $2.9 million increase in salaries, benefits, and stock-based compensation; a $0.6 million increase in professional services expense; and a $0.4 million decrease in capitalized software costs, which resulted in an increase in net expenses. The increase in salaries, benefits, and stock-based compensation was primarily driven by an increase in average headcount, which increased 17% from the quarter ended September 30, 2018 to the quarter ended September 30, 2019. The increase in professional services expense was primarily driven by the investment in products, features, and functionality buildouts by external consultants.

The increase in research and development expenses for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, was primarily due to a $7.6 million increase in salaries, benefits, and stock-based compensation; a $1.4 million increase in professional services expense; and a $1.1 million decrease in capitalized software costs, which resulted in an increase in net expenses. The increase in salaries, benefits, and stock-based compensation was primarily driven by an increase in average headcount, which increased 14% from the nine months ended September 30, 2018 to the nine months ended September 30, 2019. The increase in professional services expense was primarily driven by the investment in products, features, and functionality buildouts by external consultants.

General and administrative

 

 

 

Quarter Ended

September 30,

 

 

Change

 

 

Nine Months Ended

September 30,

 

 

Change

 

 

 

2019

 

 

2018

 

 

$

 

 

%

 

 

2019

 

 

2018

 

 

$

 

 

%

 

 

 

(in thousands, except percentages)

 

General and administrative

 

$

14,088

 

 

$

11,268

 

 

$

2,820

 

 

 

25

%

 

$

40,444

 

 

$

34,808

 

 

$

5,636

 

 

 

16

%

Percentage of total revenues

 

 

18.8

%

 

 

19.2

%

 

 

 

 

 

 

 

 

 

 

19.4

%

 

 

21.0

%

 

 

 

 

 

 

 

 

The increase in general and administrative expenses for the quarter ended September 30, 2019, compared to the quarter ended September 30, 2018, was primarily due to a $2.3 million increase in salaries, benefits, and stock-based compensation; a $0.9 million increase in foreign currency losses; and a $0.4 million increase in professional services expense, partially offset by a $0.4 million legal settlement gain, which settled in the third quarter of 2019. The increase in salaries, benefits, and stock-based compensation was primarily driven by an increase in average headcount, which increased 20% from the quarter ended September 30, 2018 to the quarter ended September 30, 2019. The increase in foreign currency losses was primarily due to the impact of foreign currency rates related to the Euro and British Pound during the quarter ended September 30, 2019, compared to the quarter ended September 30, 2018, on net asset balances denominated in foreign currencies.

29


The increase in general and administrative expenses for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, was primarily due to a $4.9 million increase in salaries, benefits, and stock-based compensation; a $1.0 million increase in professional services expense; and a $0.5 million increase in foreign currency losses. These increases were partially offset by a $0.7 million decrease in depreciation and amortization and a $0.4 million legal settlement gain, which settled in the third quarter of 2019. The increase in salaries, benefits, and stock-based compensation was primarily driven by an increase in average headcount, which increased 20% from the nine months ended September 30, 2018 to the nine months ended September 30, 2019. The increase in foreign currency losses was primarily due to the impact of foreign currency rates related to the Euro and British Pound during the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, on net asset balances denominated in foreign currencies.

Interest income

 

 

 

Quarter Ended

September 30,

 

 

Change

 

 

Nine Months Ended

September 30,

 

 

Change

 

 

 

2019

 

 

2018

 

 

$

 

 

%

 

 

2019

 

 

2018

 

 

$

 

 

%

 

 

 

(in thousands, except percentages)

 

Interest income

 

$

2,161

 

 

$

578

 

 

$

1,583

 

 

 

274

%

 

$

3,590

 

 

$

1,474

 

 

$

2,116

 

 

 

144

%

The increase in interest income during the quarter and nine months ended September 30, 2019, compared to the quarter and nine months ended September 30, 2018, was primarily due to interest earned on higher cash balances relating to the proceeds of the Convertible Senior Notes (the “Notes”) issuance, as well as an increase in average interest rates in the quarter and nine months ended September 30, 2019, compared to the quarter and nine months ended September 30, 2018.

Interest expense

 

 

 

Quarter Ended

September 30,

 

 

Change

 

Nine Months Ended

September 30,

 

 

Change

 

 

2019

 

 

2018

 

 

$

 

 

%

 

2019

 

 

2018

 

 

$

 

 

%

 

 

(in thousands, except percentages)

Interest expense

 

$

3,006

 

 

$

 

 

$

3,006

 

 

N/A

 

$

3,006

 

 

$

4

 

 

$

3,002

 

 

*

* Not meaningful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The increase in interest expense during the quarter and nine months ended September 30, 2019, compared to the quarter and nine months ended September 30, 2018, was due to amortization of the debt discount on the Notes issued during the quarter and, to a lesser extent, interest accrued during the period on the outstanding balance on the Notes.

Provision for income taxes

 

 

 

Quarter Ended

September 30,

 

 

Change

 

Nine Months Ended

September 30,

 

 

Change

 

 

 

2019

 

 

2018

 

 

$

 

 

%

 

2019

 

 

2018

 

 

$

 

 

%

 

 

 

(in thousands, except percentages)

 

Provision for income taxes

 

$

206

 

 

$

17

 

 

$

189

 

 

*

 

$

557

 

 

$

130

 

 

$

427

 

 

 

328

%

* Not meaningful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We are subject to federal and state income taxes in the United States and taxes in foreign jurisdictions. For the quarter ended September 30, 2019, our annual estimated effective tax rate differed from the U.S. federal statutory rate of 21% primarily as a result of state taxes, foreign taxes, and changes in our valuation allowance for domestic income taxes. For the quarters ended September 30, 2019 and 2018, we recorded $0.2 million and $17,000 of income tax expense, respectively. For the quarters ended September 30, 2019 and 2018, we maintained a full valuation allowance on our U.S. federal and state net deferred tax assets as it was more likely than not that those deferred tax assets will not be realized. The provision for income taxes for the quarter ended September 30, 2019 was primarily related to our international operations.

For the nine months ended September 30, 2019 and 2018, we recorded $0.6 million and $0.1 million, respectively, in income tax expense. The increase in income tax expense for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, was related to a reduction in net operating losses in our foreign jurisdictions for the current period. For the nine months ended September 30, 2019 and 2018, we maintained a full valuation allowance on our U.S. federal and state net deferred tax assets as it was more likely than not that those deferred tax assets will not be realized.

30


Liquidity and Capital Resources

At September 30, 2019, our principal sources of liquidity was an aggregate of $596.5 million of cash and cash equivalents and marketable securities, which primarily consist of short-term, investment-grade commercial paper, corporate bonds, and U.S. treasury securities. We had $500.0 million aggregate principal amount of Notes outstanding at September 30, 2019. We have the ability to settle the Notes in cash, shares of our common stock, or a combination of cash and shares of our common stock at our own election. The Notes were not convertible at September 30, 2019.

In connection with the offering of the Notes, we entered into the Capped Calls with the counterparties covering, subject to anti-dilution adjustments, approximately 6.8 million shares of our common stock. If the Capped Calls are exercised and the market value per share of our common stock is greater than the strike price of $73.40 of the Capped Calls but not greater than the cap price of $106.76 for the Capped Calls, we expect to receive from the counterparties a number of shares of our common stock or, at our election (subject to certain conditions), cash, with an aggregate market value (or, in the case of cash settlement, in an amount) approximately equal to the product of such excess times the number of shares of our common stock relating to the Capped Calls being exercised. As a result, the Capped Calls are expected to offset the potential dilution as a result of conversion of the Notes unless we elect, at our option and subject to certain conditions specified under the Capped Calls, for the options to be settled in cash rather than shares of our common stock. If, however, the market value per share of our common stock, as measured under the terms of the Capped Calls at the time of exercise, exceeds the cap price of the Capped Calls, the number of shares of our common stock or the amount of cash we expect to receive upon the exercise of the Capped Calls will be capped at a number of shares of our common stock with an aggregate market value approximately equal to (1) the excess of the cap price of the Capped Calls over the strike price of the Capped Calls times (2) the number of shares of our common stock relating to the Capped Calls (or the portions thereof) being exercised, and the dilution mitigation under the Capped Calls will be limited to such capped number of shares of our common stock we expect to receive. It is our current intent to settle conversions of the Notes through combination settlement, which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount in shares of our common stock.

We believe our existing cash and cash equivalents, investments in marketable securities and cash from operations will be sufficient to meet our working capital needs, capital expenditures and financing obligations for at least the next 12 months.

Our future capital requirements will depend on many factors, including our growth rate, the expansion of our direct sales force, strategic relationships and international operations, the timing and extent of spending to support research and development efforts and the continuing market acceptance of our solutions. We may require or opportunistically raise additional equity or debt financing. Sales of additional equity or equity-linked securities could result in dilution to our stockholders. If we raise funds by borrowing from third parties, the terms of those financing arrangements would require us to incur interest expense and may include negative covenants or other restrictions on our business that could impair our operating flexibility. We can provide no assurance that financing will be available at all or, if available, that we would be able to obtain financing on terms favorable to us. If we are unable to raise additional capital when needed, we would be required to curtail our operating activities and capital expenditures, and our business operating results and financial condition would be adversely affected.

Historical Cash Flows

The following table sets forth a summary of our cash flows for the periods indicated:

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Net cash provided by operating activities

 

$

21,500

 

 

$

11,317

 

Net cash provided by (used in) investing activities

 

$

11,946

 

 

$

(13,894

)

Net cash provided by financing activities

 

$

448,250

 

 

$

9,752

 

Net Cash Provided By Operating Activities

Our net loss and cash flows from operating activities are significantly influenced by our investments in headcount and infrastructure to support anticipated growth. In recent periods, our net loss has generally been significantly greater than our use of cash for operating activities due to our subscription-based revenue model in which billings occur in advance of revenue recognition, as well as the substantial amount of non-cash charges which we incur. Non-cash charges primarily include depreciation and amortization, stock-based compensation, non-cash lease expense, amortization of debt discount and issuance costs, and deferred taxes.

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For the nine months ended September 30, 2019, cash provided by operations was $21.5 million, resulting from net non-cash expenses of $47.8 million, partially offset by our net loss of $23.1 million and net cash flow used as a result of changes in operating assets and liabilities of $3.1 million. The $3.1 million of net cash flows used as a result of changes in our operating assets and liabilities reflected a $9.6 million increase in other assets; a $7.5 million increase in accounts receivable; a $4.0 million decrease in operating lease liabilities; and a $1.6 million decrease in accounts payable. These changes in our operating assets and liabilities were largely offset by a $15.0 million increase in deferred revenue as a result of the growth in our customer and user base; a $3.1 million decrease in prepaid expenses and other current assets; and a $1.4 million increase in accrued expenses and other current liabilities.

For the nine months ended September 30, 2018, cash provided by operations was $11.3 million, resulting from net non-cash expenses of $31.0 million and net cash flow provided as a result of changes in operating assets and liabilities of $0.4 million, largely offset by our net loss of $20.1 million. The $11.3 million of net cash flows provided as a result of changes in our operating assets and liabilities reflected a $13.9 million increase in deferred revenue as a result of the growth of our customer and user base. This change in our operating assets and liabilities was largely offset by a $5.0 million increase in other assets; a $4.4 million decrease in accounts payable; a $2.4 million increase in prepaid expenses and other current assets; and a $1.7 million increase in accounts receivable.

Net Cash Provided by (Used In) Investing Activities

Our investing activities consist primarily of investments in and maturities of marketable securities, capital expenditures for property and equipment and capitalized software development costs.

For the nine months ended September 30, 2019, cash provided by investing activities was $11.9 million as a result of $19.2 million of proceeds from maturities and sales of marketable securities, net of purchases, partially offset by $3.8 million in capitalized software development costs and $3.5 million in purchases of property and equipment.

For the nine months ended September 30, 2018, cash used in investing activities was $13.9 million as a result of $4.7 million of purchases of marketable securities, net of proceeds from maturities and sales, $4.6 million in capitalized software development costs, and $4.6 million in purchases of property and equipment.

Net Cash Provided By Financing Activities

For the nine months ended September 30, 2019, cash provided by financing activities was $448.3 million primarily as a result of net proceeds of $441.0 million from the issuance of the Notes and the purchase of the associated Capped Calls; $8.4 million of proceeds from exercises of stock options; and $2.6 million of proceeds from the employee stock purchase plan, partially offset by $3.4 million of acquisitions of common stock for tax withholding obligations.

For the nine months ended September 30, 2018, cash provided by financing activities was $9.8 million primarily as a result of $13.5 million of proceeds from the exercises of stock options, partially offset by $3.3 million of acquisitions of common stock for tax withholding obligations.

Contractual Obligations and Commitments

Contractual obligations at September 30, 2019 were as follows (in thousands):

 

 

 

 

 

 

 

Payments Due by Period

 

 

 

Total

 

 

Less than 1 Year

 

 

1-3 Years

 

 

3-5 Years

 

 

More than 5 Years

 

Purchase obligations

 

$

13,920

 

 

$

4,882

 

 

$

9,038

 

 

$

 

 

$

 

We are required to pay up to a maximum of $8.0 million of contingent consideration relating to our 2013 Acquisition if we realize a tax benefit from the use of net operating losses generated from the stock option exercises concurrent with the 2013 Acquisition. We have not included this obligation in the table above because there is a high degree of uncertainty regarding the amount and timing of future cash flows to extinguish this liability. The settlement of this liability depends on our ability to generate taxable income in the future to realize this tax benefit.

At September 30, 2019, liabilities for unrecognized tax benefits of $1.6 million were not included in the table above because, due to their nature, there was a high degree of uncertainty regarding the timing of future cash outflows and other events that extinguish these liabilities.

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Commitments under letters of credit at September 30, 2019 were scheduled to expire as follows (in thousands):

 

 

 

Total

 

 

Less than 1 Year

 

 

1-3 Years

 

 

3-5 Years

 

 

Thereafter

 

Letters of credit

 

$

277

 

 

$

 

 

$

 

 

$

 

 

$

277

 

Letters of credit are maintained pursuant to certain of our lease arrangements. The letters of credit remain in effect at varying levels through the terms of the related agreements.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not have any relationships with other entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are therefore not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships.

In the ordinary course of business, we may provide indemnification of varying scope and terms to customers, vendors, investors, directors and officers with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. These indemnification provisions may survive termination of the underlying agreement and the maximum potential amount of future payments we could be required to make under these indemnification provisions may not be subject to maximum loss clauses. The maximum potential amount of future payments we could be required to make under these indemnification provisions is indeterminable. We have never paid a material claim, nor have we been sued in connection with these indemnification arrangements. At September 30, 2019, we had not accrued a liability for these indemnification arrangements because the likelihood of incurring a payment obligation, if any, in connection with these indemnification arrangements is not probable or reasonably estimable.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP, which require us to make estimates and assumptions about future events that affect the amounts reported in our unaudited consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. Our critical accounting policies and estimates are detailed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018. On January 1, 2019, we adopted Accounting Standards Codification No. 842, Leases, on a prospective basis.

Leases

Financial information related to periods prior to adoption will be as originally reported under ASC 840, Leases. At January 1, 2019, we recorded operating lease right-of-use (“ROU”) assets of $14.9 million and operating lease liabilities of $18.3 million. The difference between the leased assets and lease liabilities represents the existing deferred rent liabilities balance at adoption, resulting from historical straight-line recognition of operating leases, which was reclassified upon adoption to reduce the measurement of the leased assets. The adoption of the standard did not have an impact on our stockholders’ equity, results of operations, or cash flows.

The new standard provides several optional practical expedients in transition. We elected the package of three practical expedients permitted under the transition guidance, which eliminates the requirement to reassess whether a contract contains a lease and lease classification.

We have also made accounting policy elections, including a short-term lease exception policy, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e. leases with expected terms of 12 months or less), and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. The portfolio approach, which allows a lessee to account for its leases at a portfolio level, was elected for certain equipment leases in which the difference in accounting for each asset separately would not have been materially different from accounting for the assets as a combined unit.  

We have leases for office space, equipment, and datacenters. Our leases have remaining initial lease terms of less than one year to approximately six years, some of which include options to extend the leases for up to ten years, and some of which include options to terminate the leases within one year.

We determine whether an arrangement is a lease, or contains a lease, at inception if we are both able to identify an asset and can conclude we have the right to control the identified asset for a period of time. Leases are included in

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operating lease ROU assets and operating lease liabilities on our condensed consolidated balance sheets. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

ROU assets represent our right to control an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit rate, we used its incremental borrowing rate based on the information available at commencement date in determining the discount rate used to present value lease payments. We used the incremental borrowing rate on January 1, 2019 for operating leases that commenced on or prior to that date. We used the incremental borrowing rate at the commencement date, or remeasurement date, for operating leases. The incremental borrowing rate used is estimated based on what we would be required to pay for a collateralized loan over a similar term. Additionally, we used the portfolio approach when applying the discount rate selected based on the dollar amount and term of the obligation. Our leases typically do not include any residual value guarantees, bargain purchase options, or asset retirement obligations.

Our lease terms are only for periods in which we have enforceable rights. A lease is no longer enforceable when both the lessee and the lessor each have the right to terminate the lease without permission from the other party with no more than an insignificant penalty. Our lease terms are impacted by options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We generally use the base, non-cancelable lease term when determining the lease assets and liabilities.

Our agreements may contain variable lease payments. We include variable lease payments that depend on an index or a rate and excludes those which depend on facts or circumstances occurring after the commencement date, other than the passage of time. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and operating lease liabilities.

 

Judgment is required when determining whether any of our data center contracts contain a lease. We concluded a lease exists when the asset is specifically identifiable, substantially all the economic benefit of the asset is obtained, and the right to direct the use of the asset exists during the term of the lease.

Recent Accounting Pronouncements

See Note 2 - “Basis of Presentation, Significant Accounting Policies and Recently-Issued Accounting Pronouncements” contained in the “Notes to Unaudited Condensed Consolidated Financial Statements” in Item 1 of Part I of this Quarterly Report on Form 10-Q for a full description of the recent accounting pronouncements and our expectation of their impact, if any, on our results of operations and financial condition.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange and inflation risks, as well as risks relating to changes in the general economic conditions in the countries where we conduct business. To reduce these risks, we monitor the financial condition of our clients and limit credit exposure by collecting in advance and setting credit limits as we deem appropriate. In addition, our investment strategy has historically been to invest in financial instruments that are highly liquid and readily convertible into cash and that mature within three months from the date of purchase. To date, we have not used derivative instruments to mitigate the impact of our market risk exposures. We have also not used, nor do we intend to use, derivatives for trading or speculative purposes.

Interest Rate Risk

We are exposed to market risk related to changes in interest rates.

In August 2019, we issued $500.0 million aggregate principal amount of 0.125% convertible senior notes due 2024. The Notes have a fixed annual interest rate of 0.125%; therefore, we do not have economic interest rate exposure on the Notes. However, the fair value of the Notes is exposed to interest rate risk. Generally, the fair market value of the Notes will increase as interest rates fall and decrease as interest rates rise. In addition, the fair values of the Notes are affected by our common stock price. The fair value of the Notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines. Additionally, we carry the Notes at face value less unamortized discount and issuance costs on our balance sheet, and we present the fair value for required disclosure purposes only.

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We had cash and cash equivalents and marketable securities of $596.5 million at September 30, 2019. Our cash equivalents and marketable securities consist of highly liquid, investment-grade commercial paper, corporate bonds, and U.S. treasury bonds.  The carrying amount of our cash equivalents and marketable securities reasonably approximates fair value due to the highly liquid nature of these instruments. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to fluctuations in interest rates, which may affect our interest income and the fair market value of our investments. Due to the short-term nature of our investment portfolio, however, we do not believe an immediate 10% increase or decrease in interest rates would have a material effect on the fair market value of our portfolio. We therefore do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.

We do not believe our cash equivalents and marketable securities have significant risk of default or illiquidity. While we believe our cash equivalents and marketable securities do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. We cannot be assured that we will not experience losses on these deposits.

Foreign Currency Risk

While we primarily transact with customers in the U.S. Dollar, we also transact in foreign currencies, including the Euro, British Pound, Canadian Dollar, Australian Dollar, Singapore Dollar, Philippine Peso, South African Rand, Malaysian Ringgit, Romanian Leu, Hong Kong Dollar, Japanese Yen, and Polish Zloty, due to foreign operations and customer sales. We expect to continue to grow our foreign operations and customer sales. Our international subsidiaries maintain certain asset and liability balances that are denominated in currencies other than the functional currencies of these subsidiaries, which is the U.S. Dollar for all international subsidiaries, with the exception of BlackLine K.K., for which the Japanese Yen is the functional currency. Changes in the value of foreign currencies relative to the U.S. Dollar can result in fluctuations in our total assets, liabilities, revenue, operating expenses, and cash flows. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our cash and marketable securities at September 30, 2019.

As our international operations grow, our risks associated with fluctuation in currency rates will become greater, and we will continue to reassess our approach to managing this risk. In addition, currency fluctuations or a weakening U.S. Dollar can increase the costs of our international expansion. To date, we have not entered into any foreign currency hedging contracts, since exchange rate fluctuations have not had a material impact on our operating results and cash flows. Based on our current international structure, we do not plan on engaging in hedging activities in the near future.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

Item 4.

Controls and Procedures  

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, as amended, or “the Exchange Act” means controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms; and that such information is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures at September 30, 2019, the last day of the period covered by this Quarterly Report. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, at September 30, 2019, our disclosure controls and procedures were effective at the reasonable assurance level.

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Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) under the Exchange Act that occurred during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Disclosure Controls and Procedures

In designing and evaluating our disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and our management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. The design of any disclosure controls and procedures and internal control over financial reporting also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

PART II. OTHER INFORMATION

Item 1.

From time to time, we may be subject to legal proceedings arising in the ordinary course of business. In addition, from time to time, third parties may assert intellectual property infringement claims against us in the form of letters and other forms of communication. As of the date of this Quarterly Report on Form 10-Q, we are not a party to any litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our results of operations, prospects, cash flows, financial position or brand.

Item 1A.

Risk Factors

Investing in our common stock involves a high degree of risk.  You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our unaudited condensed consolidated financial statements and related notes, before making a decision to invest in our common stock. The risks and uncertainties described below are not the only ones we face.  Additional risk and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If any of the events or circumstances described in the following risk factors actually occurs, our business, operating results, financial condition, cash flows, and prospects could be materially and adversely affected.  In that event, the market price of our common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business and Industry

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. Although our customers, users, and revenue have grown rapidly in the past, in recent periods our slower growth rates have reflected the size and scale of our business, as well as our focus on our strategic products. We cannot be assured that we will achieve similar growth rates in future periods as our customers, users, and revenue could decline or grow more slowly than we expect. Our business also depends on retaining existing customers. If we do not retain customers, including due to the acquisition of our customers by other companies, 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 will result in increased sales to existing customers or additional revenues.

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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 to three years. 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. Renewal rates may decline or fluctuate as a result of a variety of factors, including 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.

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

We have incurred net losses attributable to BlackLine, Inc. in recent periods, including $23.1 million and $20.1 million for the nine months ended September 30, 2019 and 2018, respectively. We had an accumulated deficit of $152.8 million at September 30, 2019. 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 or any growth in revenue and may not be sufficient to offset the expense and may harm our profitability. If we fail to continue to grow our revenue, we may not achieve or sustain profitability.

We continue to experience rapid growth and organizational change 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 at December 31, 2013 to 1,006 at September 30, 2019 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.

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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;

 

the rate of expansion and productivity of our sales force;

 

long sales cycles and the timing of large contracts;

 

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;

 

the impact and timing of taxes or changes in tax law;

 

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

 

seasonality of our business; and

 

changes in customer buying patterns.

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 (“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.

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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 Close Process Management solution. As such, the continued growth in market demand for this solution is critical to our continued success. In 2016, we introduced two new software solutions, Intercompany Hub and Smart Close, and one new software product, Insights, but cannot be certain that they will generate significant revenues. Accordingly, our business and financial results have been and 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 to market our solutions to users of their ERP solutions, and professional services firms such as Deloitte, Ernst & Young, and KPMG, and business process outsourcers such as Cognizant, Genpact and IBM to supplement delivery and implementation of our applications. We believe these relationships enable us to effectively market our solutions by offering a complementary suite of services. In particular, our solution is an SAP-endorsed business solution that integrates with SAP’s ERP solutions. In the fourth quarter of 2018, SAP became part of the reseller channel that we use in the ordinary course of business. SAP has the ability to resell our accounting solutions, for which we receive a percentage of the revenues. Since October 1, 2018, we are no longer obligated to pay SAP a fee based on a percentage of revenues from our customers that use an SAP ERP solution. If we are unsuccessful in maintaining our relationship with SAP, if our reseller arrangement with SAP is less successful than we anticipate, if our customers that use an SAP ERP solution do not renew their subscriptions directly with us and instead purchase our solution through the SAP reseller channel 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 by either party upon six months’ notice and there is no assurance that our relationship with SAP will continue. If our solution is no longer an SAP-endorsed business solution, our business could be adversely affected. 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, or if the counterparties to our relationships offer competing solutions, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating results could 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, or inadvertent access to customer, employee or other confidential data is otherwise obtained, our software solutions may be perceived as insecure, we may lose existing customers or fail to attract new customers, our business may be harmed 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 or inadvertent 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. We may also suffer breaches of our internal systems. Security breaches of our platform or our internal systems 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.

Additionally, many jurisdictions have enacted or may enact laws and regulations requiring companies to notify individuals of data security breaches involving certain types of personal data. These mandatory disclosures regarding a security breach could result in negative publicity to us, which may cause our customers to lose confidence in the effectiveness of our data security measures which could impact our operating results.

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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 Software as a Service (“SaaS”) provider or other technology companies, 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 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.  From time to time, we experience cyber security events including directed “phishing” attacks against our employees, web attacks and other information technology incidents that are typical for a SaaS company of our size. These threats continue to evolve in sophistication and volume and are difficult to detect and predict due to advances in computer capabilities, new discoveries in the field of cryptography and new and sophisticated methods used by criminals including phishing, social engineering or other illicit acts. There can be no assurances that our defensive measures will prevent cyber-attacks and any incidents could damage our brand and reputation and negatively impact our business.

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 liabilities.

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.

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.

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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, many of whom are new. 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. There recently have been, and from time to time in the future, 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 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. 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, including some of our partners, resellers, and other parties with which we have relationships, 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

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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 increasingly 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 size of the potential contract and the type of solution or product being purchased. The sales cycle for our global enterprise customers is generally longer than that of our mid-market customers. In addition, the length of the sales cycle tends to increase for larger contracts and for more complex, strategic products like Intercompany Hub. As we continue to focus on increasing our average contract size and selling more strategic products, we expect our sales cycle to lengthen and become less predictable.  This could cause variability in our operating results for any particular period.

A number of other 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.

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.

Failure to effectively organize or 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 organize and expand our sales and marketing operations and activities. At December 31, 2018, our sales and marketing teams included 395 employees. As we’ve grown and scaled our operations, we have aligned our sales team to help streamline the customer experience. We rely on our direct sales force, which includes an account management team, to obtain new customers and to maximize the lifetime value of our customer relationships through retention and upsell efforts. Our success will depend, in part, on our ability to support new and existing customer growth and maintain customer satisfaction. If we cannot provide the tools and training to our teams to efficiently do their jobs and satisfy customer demands, we may not be able to achieve anticipated revenue growth as quickly as expected.

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In addition, 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.

We recognize subscription 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 from our platform 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 may identify material weaknesses in the future or otherwise fail to maintain an effective system of internal control over financial reporting in the future and 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 are 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 (the “Sarbanes-Oxley Act”), requires that we evaluate and determine the effectiveness of our internal control over financial reporting and provide a management report on internal control over financial reporting.

The process of designing and implementing internal control over financial reporting required to comply with Section 404 of the Sarbanes-Oxley Act has been and will continue to be time consuming, costly and complicated. If, during the evaluation and testing process, we identify one or more material weaknesses in our internal control over financial reporting, 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 stockholder lawsuits, 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, and cause investor perceptions to be adversely affected and potentially resulting in restatement of our financial statements for prior periods and a decline in the market price of our stock.

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 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, 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.

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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 to 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 have and expect to in the future move or transfer our data and our customers’ data. 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.

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 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.

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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 Australia, Canada, France, Germany, Hong Kong, Ireland, Netherlands, Poland, Romania, Singapore, and the United Kingdom, and we intend to build out our international operations. As part of our ongoing international expansion strategy, in August 2016, we acquired Runbook, a Netherlands-based provider of financial close automation software solutions to SAP customers. Additionally, in September 2018, we entered into an agreement with Japanese Cloud Computing and M30 LLC to engage in a joint venture that is focused on the sale of our products in Japan (the “Japanese Joint Venture”). We derived approximately 22% and 21% of our revenues from sales outside the United States in the nine months ended September 30, 2019 and 2018, respectively. Any international expansion efforts that we may undertake, including our Runbook Acquisition and our Japanese Joint Venture, 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;

 

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, including the significant volatility in the global financial markets; 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 may be unable to integrate acquired businesses and technologies successfully, or achieve the expected benefits of these transactions and other strategic transactions.

We regularly evaluate and consider potential strategic transactions, including acquisitions of, or investments in, businesses, technologies, services, products, and other assets. For example, in 2016, we completed the Runbook Acquisition and in 2018, we entered into our Japanese Joint Venture. 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 future 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. In addition, Runbook offers an on-premise solution to its customers. If we are unable to migrate those customers to our cloud solution or if we are unable to integrate Runbook’s on-premise software with our platform, our business may be adversely affected. 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.

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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, and amortization, or deferred compensation charges.

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 has been awarded a Notice of Allowance from the United States Patent and Trademark Office, but has not yet resulted 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 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.

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Lawsuits or other claims 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.

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 (the “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 EU-U.S. Privacy Shield and Swiss-U.S. Privacy Shield certifications in place that we believe allow for the lawful transfer of personal data from the EU and Switzerland to the United States, however, the EU-U.S. Privacy Shield, Swiss-U.S. Privacy Shield, and any other mechanisms that we use or may use in the future in an effort to legitimize cross-border data transfers may be challenged or evolve to include new legal requirements that could have an impact on data transfers. It is unclear at this time whether the EU-U.S. Privacy Shield or Swiss-U.S. Privacy Shield will continue to serve as an appropriate means for us to transfer personal data from the EU to the United States.  Our means for transferring personal data from the EU and Switzerland 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. We and our customers face a risk of enforcement actions taken by EU and Swiss data protection authorities regarding data transfers from the EU and Switzerland to the United States.

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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. For example, the European Commission adopted a General Data Protection Regulation (“GDPR”), which became effective on May 25, 2018 and superseded current EU data protection legislation. GDPR imposes more stringent EU data protection requirements for processors and controllers of personal data. As GDPR is a regulation rather than a directive, it applies throughout all EU member states, but permits member states to enact supplemental requirements in certain areas if they so choose. Noncompliance with GDPR can trigger penalties up to €20 million or 4% of global annual revenues, whichever is higher.  Additionally, several states have begun enacting new data privacy laws. For example, California recently enacted legislation, the California Consumer Privacy Act, or CCPA, that will, among other things, require covered companies to provide new disclosures to California consumers, and afford such consumers new abilities to opt out of certain sales of personal information, when it goes into effect on January 1, 2020. The CCPA has been amended on multiple occasions and is the subject of proposed regulations of the California Attorney General that were released on October 10, 2019. Aspects of the CCPA and its interpretation remain unclear. The effects of the CCPA are significant and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. We cannot yet determine the impact these laws and regulations or any future laws, regulations and standards may have on our business. Such laws, regulations and standards 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.

Further, following a referendum in June 2016 in which voters in the United Kingdom approved an exit from the EU, the United Kingdom government initiated a process in March 2017 to leave the EU by June 2017 (often referred to as “Brexit”). This period has been extended by agreement between the EU and the United Kingdom to January 31, 2020. Brexit has created uncertainty with regard to the regulation of data protection in the United Kingdom.  The United Kingdom recently implemented a Data Protection Bill that substantially implements GDPR, which became effective in May 2018.Whether the United Kingdom’s withdrawal from the EU pursuant to Brexit ultimately transpires, as well as its timing, remain unclear, as do the manners in which U.K. data protection laws or regulations will develop in the medium to longer term, and how data transfers to and from the U.K. will be regulated.

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 18, 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 upon 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.

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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.

Additionally, Brexit has adversely impacted global markets and foreign currencies. In particular, the value of the British pound declined as compared to the U.S. dollar and other currencies.  This volatility in foreign currencies is expected to continue as the U.K. negotiates and executes its exit from the EU, but it is uncertain over what time period this will occur.  A significantly weaker British pound compared to the U.S. dollar could have a negative effect on our business, financial condition and results of operations.

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 Control. 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, re-export 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 or could be used by persons in sanctioned countries 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.

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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 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.

The nature of our business requires the application of complex revenue and expense recognition rules and the current legislative and regulatory environment affecting generally accepted accounting principles is uncertain. Significant changes in current principles could affect our financial statements going forward and changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and harm our operating results.

The accounting rules and regulations that we must comply with are complex and subject to interpretation by the FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. Recent actions and public comments from the FASB and the SEC have focused on the integrity of financial reporting and internal controls. In addition, many companies’ accounting policies are being subject to heightened scrutiny by regulators and the public. Further, the accounting rules and regulations are continually changing in ways that could materially impact our financial statements. For example, in May 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (“ASC 606”), as amended, superseded nearly all existing revenue recognition guidance. The effective date of the new revenue standard was January 1, 2018. The new standard permitted adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. We adopted the new revenue guidance in the first quarter of 2018 using the full retrospective method to restate each prior reporting period presented. We assessed the impact of the new revenue guidance on our arrangements and the new standard had a material impact on our consolidated financial statements. The new guidance impacted the amount and timing of incremental costs of obtaining a contract, such as sales commissions. We generally do not pay sales commissions upon contract renewal. Accordingly, under the new revenue guidance, the sales commissions are recognized over an estimated period of benefit rather than over the non-cancelable term under current guidance. The new guidance also impacted our on-premise solutions, as we are required to recognize as revenue a significant portion of the contract consideration upon delivery of the software compared to the prior practice of recognizing the contract consideration ratably over time for certain arrangements. The new guidance requires incremental disclosures of our revenue arrangements. Adoption of this standard required changes to our business processes, systems and controls to support the new revenue recognition guidance.

We cannot predict the impact of future changes to accounting principles or our accounting policies on our financial statements going forward, which could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of the change. In addition, if we were to change our critical accounting estimates, including those related to the recognition of license revenue and other revenue sources, our operating results could be significantly affected.

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.

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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.

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.

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.

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The adoption of any laws or regulations adversely affecting the growth, popularity or use of the Internet, including laws impacting Internet neutrality, could decrease the demand for our products and increase our operating costs. The current legislative and regulatory landscape regarding the regulation of the Internet and, in particular, Internet neutrality, in the United States is subject to uncertainty. The Federal Communications Commission had previously passed Open Internet rules in February 2015, which generally provided for Internet neutrality with respect to fixed and mobile broadband Internet service. On December 14, 2017, the Federal Communications Commission voted to repeal Open Internet rules generally providing for Internet neutrality with respect to fixed and mobile broadband Internet service regulations and return to a “light-touch” regulatory framework known as the “Restoring Internet Freedom Order.” The FCC’s new rules, which took effect on June 11, 2018, repealed the neutrality obligations imposed by the 2015 rules and granted providers of broadband internet access services greater freedom to make changes to their services, including, potentially, changes that may discriminate against or otherwise harm our business. However, a number of parties have appealed this order, which is currently being reviewed by the D.C. Circuit Court of Appeals; thus, the future impact of the FCC’s repeal and any challenge thereto remains uncertain. Additional changes in the legislative and regulatory landscape regarding Internet neutrality, or otherwise regarding the regulation of the Internet, could also harm our business.

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.

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.

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

At December 31, 2018, we had federal and state net operating loss carryforwards (“NOLs”), of $172.7 million and $94.1 million, respectively. In general, under Section 382 of the Internal Revenue Code of 1986, as amended (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, 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. The Tax Act includes changes to the U.S. federal corporate income tax rate, and our NOLs and other deferred tax assets have been revalued at the newly enacted rate. The revaluation did not have a material impact on our consolidated balance sheet and consolidated statement of operations because we currently maintain a full valuation allowance on our U.S. deferred tax assets.

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.

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.

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We may not have the ability to raise the funds necessary to settle conversions of the Notes in cash, to repurchase the Notes upon a fundamental change, or to repay the Notes in cash at their maturity (if not earlier converted, redeemed, or repurchased), and our future debt may contain limitations on our ability to pay cash upon conversions of Notes or at their maturity or to repurchase the Notes.

Holders of the Notes will have the right to require us to repurchase all or a portion of their Notes upon the occurrence of a fundamental change before the maturity date at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, as described in an Indenture (the “Indenture”) dated August 13, 2019, between us and U.S. Bank National Association, as trustee (the “Trustee”). In addition, upon conversion of the Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the notes being converted as described in the Indenture. Moreover, we will be required to repay the Notes in cash at their maturity unless earlier converted, redeemed, or repurchased. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered therefor or pay cash with respect to Notes being converted or at their maturity.

In addition, our ability to repurchase Notes or to pay cash upon conversions of Notes or at their maturity may be limited by law, regulatory authority, or agreements governing our future indebtedness. Our failure to repurchase Notes at a time when the repurchase is required by the Indenture or to pay cash upon conversions of Notes or at their maturity as required by the Indenture would constitute a default under the Indenture. A default under the Indenture or the fundamental change itself could also lead to a default under agreements governing our existing and future indebtedness. Moreover, the occurrence of a fundamental change under the Indenture could constitute an event of default under any such agreement. If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay such indebtedness and repurchase the notes or pay cash with respect to Notes being converted or at maturity of the Notes.

We are subject to counterparty risk with respect to the Capped Calls.

The counterparties to the Capped Calls are financial institutions and are subject to the risk that one or more of the counterparties may default or otherwise fail to perform, or may exercise certain rights to terminate, their obligations under the Capped Calls. Our exposure to the credit risk of the counterparties is not secured by any collateral.

Global economic conditions have in the past resulted in the actual or perceived failure or financial difficulties of many financial institutions. If a counterparty to one or more Capped Calls becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under such transactions. Our exposure will depend on many factors but, generally, our exposure will increase if the market price or the volatility of our common stock increases. In addition, upon a default or other failure to perform, or a termination of obligations, by a counterparty, the counterparty may fail to deliver the shares of common stock required to be delivered to us under the Capped Calls and we may suffer adverse tax consequences or experience more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the counterparties.

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.

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

We review our goodwill and 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. At September 30, 2019, we had goodwill and intangible assets with a net book value of $204.2 million related to the 2013 Acquisition and the Runbook 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.

Risks Related to Ownership of our Common Stock

The market price of our common stock may be volatile, and you could lose all or part of your investment.

The market price of our common stock since our initial public offering has been and may continue to be subject to wide fluctuations in response to various factors, some of which are beyond our control and may not be related to our operating performance.  Factors that could cause fluctuations in the market price of our common stock include the following:

 

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.

In addition, the stock markets, and in particular the market on which our common stock is 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.

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Certain of our Principal Stockholders hold a significant percentage of our common stock, and their interests may differ from those of other stockholders.

At September 30, 2019, our Principal Stockholders beneficially owned, in the aggregate, approximately 18% of our outstanding common stock and three directors affiliated with our Principal Stockholders serve on our board of directors. Further, we entered into a Stockholders’ Agreement with the Principal Stockholders which provides that the Principal Stockholders are entitled to designate members of our board of directors.  We anticipate that the parties to the Stockholders’ Agreement will agree to vote for these nominees as well as other directors recommended by our nominating and corporate governance committee.

We are no longer a “controlled company” within the meaning of the corporate governance rules of the NASDAQ Stock Market because our Principal Stockholders no longer control more than a majority of our outstanding stock. Although we previously qualified as a “controlled company,” we elected not to take advantage of the “controlled company” exemption and are in full compliance with all corporate governance requirements under the NASDAQ Stock Market rules.

Further, our amended and restated certificate of incorporation provides that, to the fullest extent permitted by law, the doctrine of “corporate opportunity” will not apply to Iconiq, their respective affiliates or any director they designate, pursuant to their rights under the Stockholders’ Agreement in a manner that would prohibit them from investing in competing businesses or doing business with our partners or customers. Accordingly, any director designated by Iconiq will have the rights to pursue business opportunities that may be of interest to the company and which such director would otherwise need to provide to the company.

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.

In November 2017, we filed a shelf registration statement on Form S-3 that registered the sale of 33,738,329 shares of our common stock then held by certain stockholders, from time to time, in secondary offerings. In December 2017, March 2018, May 2018, and March 2019, certain stockholders sold an aggregate of 4,500,000 shares, 8,000,000 shares, 3,500,000 shares, and 4,883,873 shares, respectively, under the registration statement and the remaining 12,854,456 shares registered under the registration statement may be offered and sold without restriction under the Securities Act. Such shares may be offered from time to time in the open market, in block trades, in underwritten offerings or in any other transaction described in the related prospectus. All shares covered by the registration statement are immediately tradeable unless transferred to an affiliate of the Company.

Sales of our common stock by our current stockholders may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause the market price of our common stock to decline and make it more difficult for you to sell shares of our common stock.

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 (the “DGCL”) 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 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 have a classified board of directors with staggered three-year terms;

 

stockholder action by written consent is prohibited;

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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 requires the affirmative vote of the holders of at least 75% of the voting power of our stock entitled to vote thereon, voting together as a single class outstanding; and

 

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.

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.

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 are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (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 increases our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources. 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 are required to disclose changes made in our internal control and procedures on a quarterly basis and are required to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting on an annual basis. Additionally, our independent registered public accounting firm is required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404. 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 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.

As a result of increased disclosure of information in the filings required in a public company, our business and financial condition has 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.

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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 business, and do not anticipate declaring or paying any cash dividends for the foreseeable future.  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 bylaws designate a state or federal court located within 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 bylaws, 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 personal 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 bylaws 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.

 

 

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Use of Proceeds

None.

Issuer Purchases of Equity Securities

None.

Item 6.

Exhibits

The documents listed in the Exhibit Index of this Quarterly Report on Form 10-Q are incorporated by reference or are filed with this Quarterly Report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).

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EXHIBIT INDEX

 

 

 

 

 

Incorporated by Reference

Exhibit

Number

 

Description

 

Form

 

File No.

 

Exhibit

 

Filing Date

 

 

 

 

 

 

 

 

 

 

 

  4.1

 

Indenture, dated as of August 13, 2019, between the Company and U.S. Bank National Association.

 

8-K

 

001-37924

 

4.1

 

8/13/19

 

 

 

 

 

 

 

 

 

 

 

  4.2

 

Form of 0.125% Convertible Senior Note due 2024 (included in Exhibit 4.1).

 

8-K

 

001-37924

 

4.2

 

8/13/19

 

 

 

 

 

 

 

 

 

 

 

  10.1

 

Purchase Agreement, dated August 8, 2019, by and among the Company and Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC, as representatives of the several initial purchasers named in Schedule I thereto.

 

8-K

 

001-37924

 

10.1

 

8/13/19

 

 

 

 

 

 

 

 

 

 

 

  10.2

 

Form of Capped Call Confirmation.

 

8-K

 

001-37924

 

10.2

 

8/13/19

 

 

 

 

 

 

 

 

 

 

 

  31.1

 

Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  31.2

 

Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  32.1†

 

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.INS

 

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

 

 

 

 

 

 

 

+

Indicates management contract or compensatory plan.

The certifications attached as Exhibit 32.1 that accompany this Quarterly Report on Form 10-Q are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of BlackLine, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

BlackLine, Inc.

 

 

By:

/s/ Therese Tucker

 

Therese Tucker

 

Chief Executive Officer

(Principal Executive Officer)

 

Date: November 7, 2019

 

By:

/s/ Mark Partin

 

Mark Partin

 

Chief Financial Officer

(Principal Financial Officer)

 

Date: November 7, 2019

 

61