BLACKLINE, INC. - Quarter Report: 2022 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, 2022
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 o
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 o
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. o
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 28, 2022 was 59,776,873.
BlackLine, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 30, 2022
TABLE OF CONTENTS
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 acquisitions, extension of distribution channels and strategic relationships, product innovation, international expansion, customer growth and expansion, customer service initiatives, expectations regarding our acquisitions, 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; the impact of the COVID-19 pandemic and the related responses by governments and private industry on our business and financial condition, as well as that of our customers and partners; changes in the competitive environment in our industry and the markets in which we operate and our liquidity and capital resources. 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.
3
Part 1 – Financial Information
Item 1. Financial Statements
BLACKLINE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)
| September 30, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 190,514 | $ | 539,739 | |||||||
Marketable securities (amortized cost of $858,271 and $658,886 at September 30, 2022 and December 31, 2021, respectively) | 855,406 | 658,964 | |||||||||
Accounts receivable, net of allowances for credit losses of $2,284 and $2,923 at September 30, 2022 and December 31, 2021, respectively | 108,792 | 125,130 | |||||||||
| Prepaid expenses and other current assets | 22,363 | 23,855 | |||||||||
| Total current assets | 1,177,075 | 1,347,688 | |||||||||
| Capitalized software development costs, net | 30,452 | 23,547 | |||||||||
| Property and equipment, net | 20,636 | 16,321 | |||||||||
| Intangible assets, net | 96,045 | 36,195 | |||||||||
| Goodwill | 443,861 | 289,710 | |||||||||
| Operating lease right-of-use assets | 15,265 | 16,264 | |||||||||
| Other assets | 94,324 | 87,853 | |||||||||
| Total assets | $ | 1,877,658 | $ | 1,817,578 | |||||||
| LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST, AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 5,534 | $ | 7,471 | |||||||
| Accrued expenses and other current liabilities | 51,144 | 50,930 | |||||||||
| Deferred revenue, current | 245,155 | 242,429 | |||||||||
| Finance lease liabilities, current | 981 | 373 | |||||||||
| Operating lease liabilities, current | 5,253 | 4,936 | |||||||||
| Contingent consideration, current | 6,514 | 16,438 | |||||||||
| Total current liabilities | 314,581 | 322,577 | |||||||||
| Finance lease liabilities, noncurrent | 1,050 | 824 | |||||||||
| Operating lease liabilities, noncurrent | 9,953 | 13,248 | |||||||||
| Convertible senior notes, net | 1,382,914 | 1,114,239 | |||||||||
| Contingent consideration, noncurrent | 56,052 | 4,294 | |||||||||
| Deferred tax liabilities, net | 5,274 | 8,175 | |||||||||
| Deferred revenue, noncurrent | 415 | 362 | |||||||||
| Other long-term liabilities | 4,893 | 124 | |||||||||
| Total liabilities | 1,775,132 | 1,463,843 | |||||||||
| Commitments and contingencies (Note 12) | |||||||||||
| Redeemable non-controlling interest (Note 3) | 24,595 | 28,699 | |||||||||
| Stockholders' equity: | |||||||||||
| Common stock | 598 | 590 | |||||||||
| Additional paid-in capital | 363,782 | 625,883 | |||||||||
| Accumulated other comprehensive income (loss) | (3,080) | 298 | |||||||||
| Accumulated deficit | (283,369) | (301,735) | |||||||||
| Total stockholders' equity | 77,931 | 325,036 | |||||||||
| Total liabilities, redeemable non-controlling interest, and stockholders' equity | $ | 1,877,658 | $ | 1,817,578 | |||||||
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, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Subscription and support | $ | 126,081 | $ | 102,924 | $ | 360,289 | $ | 289,749 | |||||||||||||||
| Professional services | 8,187 | 6,478 | 22,692 | 20,631 | |||||||||||||||||||
| Total revenues | 134,268 | 109,402 | 382,981 | 310,380 | |||||||||||||||||||
| Cost of revenues | |||||||||||||||||||||||
| Subscription and support | 25,544 | 17,948 | 75,495 | 50,540 | |||||||||||||||||||
| Professional services | 6,882 | 6,489 | 20,527 | 19,359 | |||||||||||||||||||
| Total cost of revenues | 32,426 | 24,437 | 96,022 | 69,899 | |||||||||||||||||||
| Gross profit | 101,842 | 84,965 | 286,959 | 240,481 | |||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Sales and marketing | 64,540 | 48,799 | 190,567 | 146,410 | |||||||||||||||||||
| Research and development | 27,721 | 18,843 | 80,871 | 56,611 | |||||||||||||||||||
| General and administrative | 31,000 | 11,372 | 74,997 | 59,886 | |||||||||||||||||||
| Total operating expenses | 123,261 | 79,014 | 346,435 | 262,907 | |||||||||||||||||||
| Income (loss) from operations | (21,419) | 5,951 | (59,476) | (22,426) | |||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||
| Interest income | 4,387 | 231 | 6,620 | 412 | |||||||||||||||||||
| Interest expense | (1,482) | (16,110) | (4,386) | (46,582) | |||||||||||||||||||
| Other income (expense), net | 2,905 | (15,879) | 2,234 | (46,170) | |||||||||||||||||||
| Loss before income taxes | (18,514) | (9,928) | (57,242) | (68,596) | |||||||||||||||||||
| Provision for (benefit from) income taxes | 474 | (210) | (12,852) | (78) | |||||||||||||||||||
| Net loss | (18,988) | (9,718) | (44,390) | (68,518) | |||||||||||||||||||
| Net loss attributable to redeemable non-controlling interest | (344) | (252) | (468) | (733) | |||||||||||||||||||
| Adjustment attributable to non-controlling interest | 1,375 | 4,275 | (3,227) | 10,366 | |||||||||||||||||||
| Net loss attributable to BlackLine, Inc. | $ | (20,019) | $ | (13,741) | $ | (40,695) | $ | (78,151) | |||||||||||||||
| Basic net loss per share attributable to BlackLine, Inc. | $ | (0.34) | $ | (0.23) | $ | (0.68) | $ | (1.34) | |||||||||||||||
| Shares used to calculate basic net loss per share | 59,695 | 58,508 | 59,422 | 58,196 | |||||||||||||||||||
| Diluted net loss per share attributable to BlackLine, Inc. | $ | (0.34) | $ | (0.23) | $ | (0.68) | $ | (1.34) | |||||||||||||||
| Shares used to calculate diluted net loss per share | 59,695 | 58,508 | 59,422 | 58,196 | |||||||||||||||||||
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, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net loss | $ | (18,988) | $ | (9,718) | $ | (44,390) | $ | (68,518) | |||||||||||||||
| 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, 2022 and 2021 | (2,052) | (81) | (2,942) | (111) | |||||||||||||||||||
| Foreign currency translation | (147) | 5 | (845) | (199) | |||||||||||||||||||
| Other comprehensive loss | (2,199) | (76) | (3,787) | (310) | |||||||||||||||||||
| Comprehensive loss | (21,187) | (9,794) | (48,177) | (68,828) | |||||||||||||||||||
| Less comprehensive loss attributable to redeemable non-controlling interest: | |||||||||||||||||||||||
| Net loss attributable to redeemable non-controlling interest | (344) | (252) | (468) | (733) | |||||||||||||||||||
| Foreign currency translation attributable to redeemable non-controlling interest | (71) | 11 | (409) | (91) | |||||||||||||||||||
| Comprehensive loss attributable to redeemable non-controlling interest | (415) | (241) | (877) | (824) | |||||||||||||||||||
| Comprehensive loss attributable to BlackLine, Inc. | $ | (20,772) | $ | (9,553) | $ | (47,300) | $ | (68,004) | |||||||||||||||
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 except share data)
| Quarter Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Loss | Deficit | Total | ||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | 59,573 | $ | 596 | $ | 344,264 | $ | (952) | $ | (264,725) | $ | 79,183 | ||||||||||||||||||||||||
| Stock option exercises | 85 | 1 | 1,247 | — | — | 1,248 | |||||||||||||||||||||||||||||
| Vesting of restricted stock units | 118 | 1 | — | — | — | 1 | |||||||||||||||||||||||||||||
| Acquisition of common stock for tax withholding obligations | — | — | (1,864) | — | — | (1,864) | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 21,510 | — | — | 21,510 | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | (2,128) | — | (2,128) | |||||||||||||||||||||||||||||
| Net loss attributable to BlackLine, Inc., including adjustment to redeemable non-controlling interest | — | — | (1,375) | — | (18,644) | (20,019) | |||||||||||||||||||||||||||||
| Balance at September 30, 2022 | 59,776 | $ | 598 | $ | 363,782 | $ | (3,080) | $ | (283,369) | $ | 77,931 | ||||||||||||||||||||||||
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Income (Loss) | Deficit | Total | ||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 58,984 | $ | 590 | $ | 625,883 | $ | 298 | $ | (301,735) | $ | 325,036 | ||||||||||||||||||||||||
| — | — | (324,418) | — | 62,288 | (262,130) | ||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | 58,984 | 590 | 301,465 | 298 | (239,447) | 62,906 | |||||||||||||||||||||||||||||
| Stock option exercises | 202 | 2 | 3,662 | — | — | 3,664 | |||||||||||||||||||||||||||||
| Vesting of restricted stock units | 492 | 5 | — | — | — | 5 | |||||||||||||||||||||||||||||
| Issuance of common stock through employee stock purchase plan | 98 | 1 | 4,465 | — | — | 4,466 | |||||||||||||||||||||||||||||
| Acquisition of common stock for tax withholding obligations | — | — | (7,866) | — | — | (7,866) | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 58,829 | — | — | 58,829 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (3,378) | — | (3,378) | |||||||||||||||||||||||||||||
| Net loss attributable to BlackLine, Inc., including adjustment to redeemable non-controlling interest | — | — | 3,227 | — | (43,922) | (40,695) | |||||||||||||||||||||||||||||
| Balance at September 30, 2022 | 59,776 | $ | 598 | $ | 363,782 | $ | (3,080) | $ | (283,369) | $ | 77,931 | ||||||||||||||||||||||||
7
Quarter Ended September 30, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Income (Loss) | Deficit | Total | ||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | 58,402 | $ | 584 | $ | 596,183 | $ | 244 | $ | (259,970) | $ | 337,041 | ||||||||||||||||||||||||
| Stock option exercises | 96 | 1 | 2,627 | — | — | 2,628 | |||||||||||||||||||||||||||||
| Vesting of restricted stock units | 144 | 1 | — | — | — | 1 | |||||||||||||||||||||||||||||
| Acquisition of common stock for tax withholding obligations | — | — | (2,713) | — | — | (2,713) | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 17,372 | — | — | 17,372 | |||||||||||||||||||||||||||||
| Equity component of the 2026 convertible senior notes, net of issuance costs and tax | — | — | 239 | — | — | 239 | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | (87) | — | (87) | |||||||||||||||||||||||||||||
| Net loss attributable to BlackLine, Inc., including adjustment to redeemable non-controlling interest | — | — | (4,275) | — | (9,466) | (13,741) | |||||||||||||||||||||||||||||
| Balance at September 30, 2021 | 58,642 | $ | 586 | $ | 609,433 | $ | 157 | $ | (269,436) | $ | 340,740 | ||||||||||||||||||||||||
Nine Months Ended September 30, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Income (Loss) | Deficit | Total | ||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 57,682 | $ | 577 | $ | 622,768 | $ | 376 | $ | (201,651) | $ | 422,070 | ||||||||||||||||||||||||
| Stock option exercises | 291 | 3 | 7,671 | — | — | 7,674 | |||||||||||||||||||||||||||||
| Vesting of restricted stock units | 605 | 5 | — | — | — | 5 | |||||||||||||||||||||||||||||
| Issuance of common stock through employee stock purchase plan | 64 | 1 | 5,196 | — | — | 5,197 | |||||||||||||||||||||||||||||
| Acquisition of common stock for tax withholding obligations | — | — | (12,649) | — | — | (12,649) | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 50,123 | — | — | 50,123 | |||||||||||||||||||||||||||||
| Equity component of partial repurchase of 2024 convertible senior notes | — | — | (219,284) | — | — | (219,284) | |||||||||||||||||||||||||||||
| Equity component of 2026 convertible senior notes, net of issuance costs and tax | — | — | 268,324 | — | — | 268,324 | |||||||||||||||||||||||||||||
| Purchase of capped calls | — | — | (102,350) | — | — | (102,350) | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | (219) | — | (219) | |||||||||||||||||||||||||||||
| Net loss attributable to BlackLine, Inc., including adjustment to redeemable non-controlling interest | — | — | (10,366) | — | (67,785) | (78,151) | |||||||||||||||||||||||||||||
| Balance at September 30, 2021 | 58,642 | $ | 586 | $ | 609,433 | $ | 157 | $ | (269,436) | $ | 340,740 | ||||||||||||||||||||||||
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, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss attributable to BlackLine, Inc. | $ | (40,695) | $ | (78,151) | |||||||
| Net loss and adjustment attributable to redeemable non-controlling interest (Note 3) | (3,695) | 9,633 | |||||||||
| Net loss | (44,390) | (68,518) | |||||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 30,986 | 20,175 | |||||||||
| Change in fair value of contingent consideration | (14,113) | (3,426) | |||||||||
| Amortization of debt discount and issuance costs | 4,119 | 39,272 | |||||||||
| Stock-based compensation | 57,410 | 48,789 | |||||||||
| Loss on extinguishment of convertible senior notes | — | 7,012 | |||||||||
| Noncash lease expense | 4,186 | 3,387 | |||||||||
| Accretion of purchase discounts on marketable securities, net | (3,326) | (158) | |||||||||
| Net foreign currency (gains) losses | (1,463) | 478 | |||||||||
| Deferred income taxes | (14,695) | 40 | |||||||||
| Provision for (benefit from) credit losses | 85 | (55) | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | 18,321 | 5,436 | |||||||||
| Prepaid expenses and other current assets | 2,239 | 1,646 | |||||||||
| Other assets | (6,355) | (13,609) | |||||||||
| Accounts payable | (4,571) | (985) | |||||||||
| Accrued expenses and other current liabilities | (612) | 3,665 | |||||||||
| Deferred revenue | 2,548 | 18,672 | |||||||||
| Operating lease liabilities | (5,329) | (3,854) | |||||||||
| Lease incentive receipts | 653 | — | |||||||||
| Other long-term liabilities | 4,566 | — | |||||||||
| Net cash provided by operating activities | 30,259 | 57,967 | |||||||||
| Cash flows from investing activities | |||||||||||
| Purchases of marketable securities | (1,171,808) | (1,107,908) | |||||||||
| Proceeds from maturities of marketable securities | 975,750 | 484,209 | |||||||||
| Capitalized software development costs | (14,952) | (11,240) | |||||||||
| Purchases of property and equipment | (9,742) | (5,197) | |||||||||
| Acquisition, net of cash acquired | (157,738) | — | |||||||||
| Net cash used in investing activities | (378,490) | (640,136) | |||||||||
| Cash flows from financing activities | |||||||||||
| Proceeds from issuance of convertible senior notes, net of issuance costs | — | 1,128,794 | |||||||||
| Partial repurchase of convertible senior notes | — | (432,230) | |||||||||
| Purchase of capped calls related to convertible senior notes | — | (102,350) | |||||||||
| Principal payments under finance lease obligations | (380) | — | |||||||||
| Proceeds from exercises of stock options | 3,669 | 7,679 | |||||||||
| Proceeds from employee stock purchase plan | 4,466 | 5,197 | |||||||||
| Acquisition of common stock for tax withholding obligations | (7,866) | (12,649) | |||||||||
| Financed purchases of property and equipment | (84) | (549) | |||||||||
| Net cash provided by (used in) financing activities | (195) | 593,892 | |||||||||
| Effect of foreign currency exchange rate changes on cash, cash equivalents, and restricted cash | (833) | (201) | |||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | (349,259) | 11,522 | |||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | 539,991 | 367,913 | |||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | 190,732 | $ | 379,435 | |||||||
| Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets | |||||||||||
| Cash and cash equivalents at end of period | $ | 190,514 | $ | 378,977 | |||||||
| Restricted cash included within prepaid expenses and other current assets at end of period | — | 203 | |||||||||
| Restricted cash included within other assets at end of period | 218 | 255 | |||||||||
| Total cash, cash equivalents, and restricted cash at end of period shown in the consolidated statements of cash flows | $ | 190,732 | $ | 379,435 | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
9
BLACKLINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SUPPLEMENTAL CASH FLOWS DISCLOSURE
(in thousands)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Non-cash financing and investing activities | |||||||||||
| Adjustment for adoption of ASU 2020-06 | $ | 262,130 | $ | — | |||||||
| Estimated fair value of contingent consideration | $ | 55,947 | $ | — | |||||||
| Stock-based compensation capitalized for software development | $ | 1,675 | $ | 1,409 | |||||||
| Capitalized software development costs included in accounts payable and accrued expenses and other current liabilities at end of period | $ | 1,150 | $ | 890 | |||||||
| Purchases of property and equipment included in accounts payable and accrued expenses and other current liabilities at end of period | $ | 263 | $ | 211 | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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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 a holding company and conducts its operations through its wholly-owned subsidiary, BlackLine Systems, Inc. (“BlackLine Systems”). BlackLine Systems funded its business with investments from its founder and cash flows from operations until September 3, 2013, when the Company acquired BlackLine Systems, and Silver Lake Sumeru and Iconiq acquired a controlling interest in the Company, which is referred to as the “2013
Acquisition."
On October 2, 2020, the Company acquired Rimilia Holdings Ltd. (“Rimilia”), which is referred to as the “Rimilia Acquisition.”
On January 26, 2022, the Company acquired FourQ Systems, Inc. (“FourQ”), hereinafter referred to as the “FourQ Acquisition.” The primary purpose of the FourQ Acquisition was to enhance our existing intercompany accounting automation capabilities by driving end-to-end automation of traditionally manual intercompany accounting processes.
The Company is headquartered in Woodland Hills, California and has offices in Pleasanton, California, as well as in Australia, Canada, France, Germany, India, Japan, the Netherlands, Poland, Romania, Singapore, and the United Kingdom.
Note 2 – Basis of Presentation, Significant Accounting Policies and Recently-Issued Accounting Pronouncements
The accompanying unaudited 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 unaudited 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, 2021, which was filed with the Securities and Exchange Commission (“SEC”) on February 25, 2022 and as amended in the Annual Report on Form 10-K/A filed on March 24, 2022. The unaudited 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 unaudited condensed consolidated balance sheet at December 31, 2021 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, 2022 are not necessarily indicative of the results expected for the full year ending December 31, 2022.
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.
The extent to which COVID-19 impacts the Company’s business and financial results will depend on numerous continuously evolving factors including, but not limited to, the magnitude and duration of COVID-19, including resurgences; the impact on the Company’s employees; the extent to which it will impact worldwide macroeconomic conditions, as well as variability in such recovery across different geographies, industries, and markets; and governmental and business reactions to the pandemic. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information
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reasonably available to the Company and the unknown future impacts of COVID-19 and macroeconomic conditions at September 30, 2022 and through the date of this report. The accounting matters assessed included, but were not limited to, the Company’s allowance for credit losses and doubtful accounts, and the carrying value of goodwill and other long-lived assets. While there was not a material impact to the Company’s condensed consolidated financial statements at and for the quarter and nine months ended September 30, 2022, the Company’s future assessment of the magnitude and duration of COVID-19 and other factors could result in material impacts to the Company’s condensed consolidated financial statements in future reporting periods.
Significant accounting policies
The Company’s significant accounting policies are detailed in “Note 2 - Significant Accounting Policies" of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes to the Company’s significant accounting policies except for the adoption of ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, as discussed below and the accounting for acquired deferred tax liabilities in a business combination as discussed in "Note 10 - Income Taxes".
Recently-adopted accounting pronouncements
In August 2020, the FASB issued ASU No. 2020-06. This standard eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. For public business entities, it is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years using the fully retrospective or modified retrospective method. The Company adopted the provisions of the new standard effective January 1, 2022 using the modified retrospective method, which resulted in an adjustment of $324.4 million, net of tax of $2.4 million to reclassify the remaining balance of the conversion feature recorded in additional paid in capital to convertible debt for $262.1 million and retained earnings for $62.3 million. Accordingly, the Company no longer carries an equity component of the convertible notes.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This standard addresses diversity in practice and inconsistency related to recognition of an acquired contract liability, and payment terms and their effect on subsequent revenue recognized by the acquirer. For public business entities, it is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Entities should apply the provisions of the new standard prospectively to business combinations occurring on or after the effective date of the standard. Early adoption is permitted, including adoption in an interim period. The Company adopted the provisions of the new standard effective January 1, 2022. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.
Recently-issued accounting pronouncements not yet adopted
In January 2022, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2022-01, Derivatives and Hedging, which expands the scope of the portfolio layer method to include non-prepayable financial assets, and provides additional guidance on the accounting for and disclosure of hedge basis adjustments that are applicable to the portfolio layer method. For public business entities, it is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company has not used derivative instruments to mitigate the impact of our market risk exposures. The Company has not adopted, nor does it intend to early adopt, the provisions of the new standard and does not expect it to have a material impact on the Company’s consolidated financial statements.
Note 3 – 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.
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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 interest in BlackLine K.K. is classified outside of permanent equity in the Company’s unaudited condensed consolidated balance sheets, 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 following table summarizes the activity in the redeemable non-controlling interest for the periods indicated below:
| Quarter Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Balance at beginning of period | $ | 23,635 | $ | 18,032 | $ | 28,699 | $ | 12,524 | |||||||||||||||
| Net loss attributable to redeemable non-controlling interest (excluding adjustment to non-controlling interest) | (344) | (252) | (468) | (733) | |||||||||||||||||||
| Foreign currency translation | (71) | (6) | (409) | (108) | |||||||||||||||||||
| Adjustment to redeemable non-controlling interest | 1,375 | 4,275 | (3,227) | 10,366 | |||||||||||||||||||
| Balance at end of period | $ | 24,595 | $ | 22,049 | $ | 24,595 | $ | 22,049 | |||||||||||||||
Note 4 — Business Combinations
Acquisition of FourQ
On January 26, 2022 the Company completed the FourQ Acquisition for cash consideration of $160.2 million payable at the closing of the acquisition with additional cash payments of up to $73.2 million payable upon certain earnout conditions being met. The FourQ Acquisition enhances the Company's existing intercompany accounting automation capabilities by driving end-to-end automation of traditionally manual intercompany accounting processes. The Company incurred transaction-related costs, which include, but are not limited to, fees for accounting, legal, and advisory services, of less than $0.1 million and $3.4 million during the quarter and nine months ended September 30, 2022, respectively. The transaction-related costs were expensed as incurred.
The contingent consideration was classified as a liability and included in contingent consideration on the accompanying condensed consolidated balance sheet. It will be remeasured on a recurring basis at fair value. To estimate the fair value of the contingent consideration liability, management utilized a Monte Carlo simulation model to value the earnout based on the likelihood of reaching firm-specific targets. Significant inputs used in the fair value measurement of contingent consideration are the amount and timing of new and incremental combined bookings from FourQ and BlackLine, and revenues from a specified FourQ customer over a three-year period subsequent to the acquisition date, as well as the discount rate. At January 26, 2022, the fair value of the contingent consideration liability was $55.9 million.
The Company accounted for the transaction as a business combination using the acquisition method of accounting. The total purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date. The purchase price allocation is preliminary.
The purchase consideration and major classes of assets and liabilities to which the Company allocated the total fair value of purchase consideration of $214.2 million were as follows (in thousands):
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| Cash consideration | $ | 160,224 | |||
| Post-acquisition working capital adjustment | (635) | ||||
| Contingent consideration | 55,947 | ||||
| Less: One-time expense related to accelerated vesting | (1,322) | ||||
| Purchase consideration | $ | 214,214 | |||
| Cash and cash equivalents | $ | 1,164 | |||
| Accounts receivable, net | 1,853 | ||||
| Prepaid expenses and other current assets | 410 | ||||
| Other assets | 143 | ||||
| Property and equipment | 659 | ||||
| Intangible assets | 74,400 | ||||
| Goodwill | 154,151 | ||||
| Accounts payable | (1,537) | ||||
| Accrued liabilities | (2,585) | ||||
| Deferred revenue | (231) | ||||
| Deferred tax liabilities, net | (14,213) | ||||
| Total consideration | $ | 214,214 | |||
The Company believes the amount of goodwill resulting from the acquisition is primarily attributable to increased offerings to customers, and enhanced opportunities for growth and innovation. The goodwill resulting from the acquisition is not tax deductible.
To determine the estimated fair value of intangible assets acquired, the Company engaged a third-party valuation specialist to assist management. All estimates, key assumptions, and forecasts were either provided by, or reviewed by the Company. While the Company chose to utilize a third-party valuation specialist for assistance, the fair value analysis and related valuations reflect the conclusions of the Company and not those of any third party. The fair value measurements of the intangible assets were based primarily on significant unobservable inputs and thus represent a Level 3 measurement as defined in ASC 820. The acquired intangible asset categories, fair value, and amortization periods, were as follows:
| Amortization Period | Fair Value (in thousands) | |||||||||||||
| Developed technology | 7 | $ | 64,900 | |||||||||||
| Customer relationships | 3 | 9,500 | ||||||||||||
| $ | 74,400 | |||||||||||||
The weighted average lives of intangible assets at the acquisition date was 6.5 years.
The identified intangible assets, developed technology and customer relationships, were valued as follows:
Developed technology – The Company valued the finite-lived developed technology using the multi-period excess earnings model ("MPEEM") under the income approach. This method estimates an intangible asset’s value based on the present value of the incremental after-tax cash flows attributable to the intangible asset. The Company applied judgment which involves the use of significant assumptions with respect to the discount rate, obsolescence rate, revenue forecasts, research and development for future technology, and EBITDA forecasts.
Customer relationships – The Company valued the finite-lived customer relationships using the differential cash flow (with-and-without) model. This method assumes that the value of the intangible asset is equal to the difference between the present value of the prospective cash flows with the intangible asset in place and the
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present value of the prospective cash flows without the intangible asset. The Company applied judgment, which involved the use of significant assumptions with respect to the discount rate and the customer ramp-up rate.
The revenue and earnings of the acquired business were included in the Company’s results since the acquisition date and are not material to the Company’s consolidated financial results for the quarter and nine months ended September 30, 2022. Pro forma revenues and results of operations for this acquisition have not been presented as the impact on the Company’s consolidated financial statements would be immaterial.
Note 5 – Intangible Assets and Goodwill
The carrying value of intangible assets was as follows (in thousands):
| September 30, 2022 | |||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||
| Trade name | $ | 15,977 | $ | (14,514) | $ | 1,463 | |||||||||||
| Developed technology | 129,258 | (51,452) | 77,806 | ||||||||||||||
| Customer relationships | 26,089 | (10,859) | 15,230 | ||||||||||||||
| Defensive patent | 2,333 | (787) | 1,546 | ||||||||||||||
| $ | 173,657 | $ | (77,612) | $ | 96,045 | ||||||||||||
| December 31, 2021 | |||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||
| Trade name | $ | 15,977 | $ | (13,317) | $ | 2,660 | |||||||||||
| Developed technology | 64,358 | (43,148) | 21,210 | ||||||||||||||
| Customer relationships | 16,589 | (6,046) | 10,543 | ||||||||||||||
| Defensive patent | 2,333 | (551) | 1,782 | ||||||||||||||
| $ | 99,257 | $ | (63,062) | $ | 36,195 | ||||||||||||
The following table represents the changes in goodwill (in thousands):
| Balance at December 31, 2021 | $ | 289,710 | |||
| Additions from acquisitions | 154,151 | ||||
Balance at September 30, 2022 | $ | 443,861 | |||
Note 6 – Balance Sheet Components
Investments in Marketable Securities
Investments in marketable securities presented within current assets on the condensed consolidated balance sheets consisted of the following (in thousands):
| September 30, 2022 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| Marketable securities | |||||||||||||||||||||||
| U.S. treasury securities | $ | 386,580 | $ | 10 | $ | (1,646) | $ | 384,944 | |||||||||||||||
| Corporate bonds | 73,569 | 603 | (112) | 74,060 | |||||||||||||||||||
| Commercial paper | 259,954 | — | (952) | 259,002 | |||||||||||||||||||
| U.S. government agencies | 138,168 | — | (768) | 137,400 | |||||||||||||||||||
| $ | 858,271 | $ | 613 | $ | (3,478) | $ | 855,406 | ||||||||||||||||
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| December 31, 2021 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| Marketable securities | |||||||||||||||||||||||
| Corporate bonds | $ | 74,144 | $ | 346 | $ | (10) | $ | 74,480 | |||||||||||||||
| Commercial paper | 584,742 | — | (258) | 584,484 | |||||||||||||||||||
| $ | 658,886 | $ | 346 | $ | (268) | $ | 658,964 | ||||||||||||||||
Refer to "Note 7 - Fair Value Measurements" for additional information.
Net gains and losses related to maturities of marketable securities that were reclassified from accumulated other comprehensive loss to earnings, and included in interest income in the accompanying condensed consolidated statements of operations, were $2.8 million and $3.3 million for the quarter and nine months ended September 30, 2022 and $0.1 million and $0.2 million for the quarter and nine months ended September 30, 2021, respectively.
Net gains and losses are determined using the specific identification method. During the quarters and nine months ended September 30, 2022 and 2021, there were no realized gains or losses related to sales of marketable securities recognized in the Company's accompanying condensed consolidated statements of operations.
Marketable securities in a continuous loss position for less than 12 months had an estimated fair value of $725.6 million and $379.7 million, and $3.5 million and $0.3 million of unrealized losses, at September 30, 2022 and December 31, 2021, respectively. At September 30, 2022, there were no marketable securities in a continuous loss position for greater than 12 months.
The Company's marketable securities are considered to be of high credit quality and accordingly, there was no allowance for credit losses related to marketable securities as of September 30, 2022 or December 31, 2021.
The Company’s marketable securities as of September 30, 2022 have a contractual maturity of less than 1 year.
Other Assets
Deferred customer contract acquisition costs are included in other assets in the accompanying condensed consolidated balance sheets and totaled $84.9 million and $80.0 million at September 30, 2022 and December 31, 2021, respectively.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities were comprised of the following (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Accrued salaries and employee benefits | $ | 32,646 | $ | 32,156 | |||||||
| Accrued income and other taxes payable | 6,885 | 9,770 | |||||||||
| Other accrued expenses and current liabilities | 11,613 | 9,004 | |||||||||
| $ | 51,144 | $ | 50,930 | ||||||||
Note 7 – 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):
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| September 30, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Cash equivalents | |||||||||||||||||||||||
| Money market funds | $ | 87,479 | $ | — | $ | — | $ | 87,479 | |||||||||||||||
| Commercial paper | — | 68,600 | — | 68,600 | |||||||||||||||||||
| Marketable securities | |||||||||||||||||||||||
| U.S. treasury securities | 384,944 | — | — | 384,944 | |||||||||||||||||||
| Corporate bonds | — | 74,060 | — | 74,060 | |||||||||||||||||||
| Commercial paper | — | 259,002 | — | 259,002 | |||||||||||||||||||
| U.S. government agencies | — | 137,400 | — | 137,400 | |||||||||||||||||||
| Total assets | $ | 472,423 | $ | 539,062 | $ | — | $ | 1,011,485 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Contingent consideration | $ | — | $ | — | $ | 62,566 | $ | 62,566 | |||||||||||||||
| Total liabilities | $ | — | $ | — | $ | 62,566 | $ | 62,566 | |||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Cash equivalents | |||||||||||||||||||||||
| Money market funds | $ | 432,110 | $ | — | $ | — | $ | 432,110 | |||||||||||||||
| Marketable securities | |||||||||||||||||||||||
| Corporate bonds | — | 74,480 | — | 74,480 | |||||||||||||||||||
| Commercial paper | — | 584,484 | — | 584,484 | |||||||||||||||||||
| Total assets | $ | 432,110 | $ | 658,964 | $ | — | $ | 1,091,074 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Contingent consideration | $ | — | $ | — | $ | 20,732 | $ | 20,732 | |||||||||||||||
| Total liabilities | $ | — | $ | — | $ | 20,732 | $ | 20,732 | |||||||||||||||
The following table summarizes the changes in the contingent consideration liability (in thousands):
| Quarter Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Beginning fair value | $ | 60,821 | $ | 30,410 | $ | 20,732 | $ | 23,490 | |||||||||||||||
| Additions in the period | — | — | 55,947 | — | |||||||||||||||||||
| Change in fair value | 1,745 | (10,346) | (14,113) | (3,426) | |||||||||||||||||||
| Ending fair value | $ | 62,566 | $ | 20,064 | $ | 62,566 | $ | 20,064 | |||||||||||||||
The fair value of the contingent consideration related to the 2013 Acquisition is determined by discounting estimated future taxable income. The significant inputs used in the fair value measurement of the contingent consideration are the timing and amount of taxable income in any given period and determining an appropriate discount rate, which are not based on observable market data and consider the risks 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. At September 30, 2022, the fair value of the contingent consideration liability related to the 2013 Acquisition was $6.9 million.
During the quarter ended September 30, 2022, Rimilia did not meet specified annual recurring revenue thresholds, which relieved the Company of its obligation to pay the contingent consideration, and accordingly, the related liability for the Rimilia Acquisition was reduced to zero.
To determine the fair value of the contingent consideration related to the FourQ Acquisition, management utilized a Monte Carlo simulation model to value the earnout based on the likelihood of reaching firm-specific targets. Significant inputs used in the fair value measurement of contingent consideration are the amount and timing of new and incremental combined bookings from FourQ and BlackLine, and revenues from a specified FourQ customer over a three-year period subsequent to the acquisition date, as well as the discount rate. At
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September 30, 2022, the fair value of the contingent consideration liability related to the FourQ Acquisition was $55.6 million.
Changes in the fair value of contingent consideration are recorded as general and administrative expenses in the unaudited condensed consolidated statements of operations.
Note 8 – Convertible Senior Notes
2024 Notes
The 2024 Notes consisted of the following (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Liability: | |||||||||||
| Principal | $ | 250,000 | $ | 250,000 | |||||||
| Unamortized debt discount | — | (31,562) | |||||||||
| Unamortized debt issuance costs | (2,395) | (2,938) | |||||||||
| Net carrying amount | $ | 247,605 | $ | 215,500 | |||||||
| Carrying amount of the equity component | $ | — | $ | 55,615 | |||||||
The Company carries the 2024 Notes at face value less unamortized issuance costs on the accompanying condensed consolidated balance sheets and presents the fair value for disclosure purposes only. The estimated fair value was determined based on the actual bids and offers of the 2024 Notes in an over-the-counter market on the last trading day of the period. The estimated fair value of the 2024 Notes, based on a market approach at September 30, 2022, was approximately $258.8 million, which represents a Level 2 valuation.
During the quarter ended September 30, 2022, the Company recognized $0.3 million of interest expense related to the amortization of issuance costs and $0.1 million of coupon interest expense. During the quarter ended September 30, 2021, the Company recognized $3.0 million of interest expense related to the amortization of debt discount and issuance costs and $0.1 million of coupon interest expense.
During the nine months ended September 30, 2022, the Company recognized $1.0 million of interest expense related to the amortization of issuance costs and $0.2 million of coupon interest expense. During the nine months ended September 30, 2021, the Company recognized $11.3 million of interest expense related to the amortization of debt discount and issuance costs and $0.3 million of coupon interest expense.
At September 30, 2022, the remaining life of the 2024 Notes was approximately 22 months.
The 2024 Notes were not convertible at September 30, 2022. 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.
There have been no changes to the condition of the 2024 Capped Calls since December 31, 2021, and the Capped Calls are still outstanding as of September 30, 2022.
2026 Notes
The 2026 Notes consisted of the following (in thousands):
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| September 30, 2022 | December 31, 2021 | ||||||||||
| Liability: | |||||||||||
| Principal | $ | 1,150,000 | $ | 1,150,000 | |||||||
| Unamortized debt discount | — | (237,096) | |||||||||
| Unamortized debt issuance costs | (14,691) | (14,165) | |||||||||
| Net carrying amount | $ | 1,135,309 | $ | 898,739 | |||||||
| Carrying amount of the equity component | $ | — | $ | 271,229 | |||||||
The Company carries the 2026 Notes at face value less unamortized issuance costs on the accompanying condensed consolidated balance sheets and presents the fair value for disclosure purposes only. The estimated fair value was determined based on the actual bids and offers of the 2026 Notes in an over-the-counter market on the last trading day of the period. The estimated fair value of the 2026 Notes, based on a market approach at September 30, 2022, was approximately $939.1 million, which represents a Level 2 valuation.
During the quarter and nine months ended September 30, 2022, the Company recognized $1.1 million and $3.2 million of interest expense related to the amortization of issuance costs, respectively.
During the quarter and nine months ended September 30, 2021, the Company recognized $13.0 million and $28.0 million of interest expense related to the amortization of issuance costs, respectively.
At September 30, 2022, the remaining life of the 2026 Notes was approximately 42 months.
The 2026 Notes were not convertible at September 30, 2022. 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.
There have been no changes to the condition of the 2026 Capped Calls since December 31, 2021, and the Capped Calls are still outstanding as of September 30, 2022.
Note 9 – Equity Awards
Stock-based compensation expense
Stock-based compensation expense was as follows (in thousands):
| Quarter Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Cost of revenues | $ | 2,346 | $ | 2,213 | $ | 6,309 | $ | 6,190 | |||||||||||||||
| Sales and marketing | 7,257 | 5,760 | 20,619 | 16,872 | |||||||||||||||||||
| Research and development | 3,847 | 2,788 | 10,554 | 8,264 | |||||||||||||||||||
| General and administrative | 7,449 | 6,169 | 19,928 | 17,463 | |||||||||||||||||||
| $ | 20,899 | $ | 16,930 | $ | 57,410 | $ | 48,789 | ||||||||||||||||
For the quarters ended September 30, 2022 and 2021, stock-based compensation capitalized as an asset was $0.7 million and $0.5 million, respectively.
For the nine months ended September 30, 2022 and 2021, stock-based compensation capitalized as an asset was $1.7 million and $1.4 million, respectively.
Stock options
The following table summarizes activity for awards that contain service-only vesting conditions (in thousands):
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| Outstanding at December 31, 2021 | 2,739 | ||||
| Granted | — | ||||
| Exercised | (228) | ||||
| Forfeited/canceled | (23) | ||||
Outstanding at September 30, 2022 | 2,488 | ||||
Restricted stock units - Service-based
The following table summarizes activity for restricted stock units with service-only vesting conditions (in thousands):
| Nonvested at December 31, 2021 | 1,503 | ||||
| Granted | 1,481 | ||||
| Vested | (587) | ||||
| Forfeited/canceled | (164) | ||||
Nonvested at September 30, 2022 | 2,233 | ||||
Restricted stock units - Performance and Service-based
On April 4, 2022, the Compensation Committee approved grants of performance and service-based restricted stock units totaling 0.2 million target shares. The number of shares that will vest is subject to the achievement of certain performance metrics. The grants include annual performance periods with vesting occurring in February of the year following the end of each annual performance period. Grant dates will be established upon approval of the performance metrics for the respective annual performance period, and the grant-date fair value per share will be equal to the closing price on the grant date for each tranche. The performance metrics for the first tranche were approved in the quarter ended June 30, 2022, and the grant-date fair value of such awards was $5.3 million. On August 19, 2022, the Compensation Committee approved a grant of additional performance and service-based restricted stock units with similar related performance metrics and vesting conditions for which the grant-date fair value was $0.3 million.
Stock-based compensation expense for each tranche will be recognized over the period from grant date to vest date and will be based on the probable outcome at the end of each reporting period. Stock-based compensation expense totaling $1.3 million and $2.5 million was recognized in the quarter and nine months ended September 30, 2022.
Note 10 – 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, 2022 and 2021, the Company recorded $0.5 million in income tax expense and $0.2 million in income tax benefit, respectively. For the nine months ended September 30, 2022 and 2021, the Company recorded $12.9 million and $0.1 million in income tax benefit, respectively. The income tax expense for the quarter ended September 30, 2022, compared to the tax benefit for the quarter ended September 30, 2021, resulted primarily from changes in the mix of profitable foreign jurisdictions and jurisdictions for which tax benefits may be recognized. The increase in income tax benefit for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, resulted primarily from a partial release of $14.2 million of existing valuation allowance as net deferred tax liabilities acquired from FourQ are a source of taxable income to support recognition of existing BlackLine deferred tax assets. The tax benefit was partially offset by the non-recognition of 2022 tax benefits associated with certain UK operations and changes in the mix of profitable foreign jurisdictions. For the quarters and nine months ended September 30, 2022 and 2021, for purposes of calculating its income tax attributed to continuing operations, the Company continued to maintain 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.
The Company acquired FourQ deferred tax liabilities of $17.7 million, which are a source of taxable income to support recognition of acquired FourQ deferred tax assets and existing BlackLine deferred tax assets. BlackLine elected to consider the recoverability of the acquired deferred tax assets before considering the recoverability of
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existing BlackLine deferred tax assets. The acquired net deferred tax liabilities resulted in a release of BlackLine’s existing valuation allowance through earnings of $14.2 million during the nine months ended September 30, 2022.
Note 11 – 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, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net loss attributable to BlackLine, Inc. | $ | (20,019) | $ | (13,741) | $ | (40,695) | $ | (78,151) | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average shares | 59,695 | 58,508 | 59,422 | 58,196 | |||||||||||||||||||
| Add: Dilutive effect of securities | — | — | — | — | |||||||||||||||||||
| Shares used to calculate diluted net loss per share | 59,695 | 58,508 | 59,422 | 58,196 | |||||||||||||||||||
| Basic net loss per share attributable to BlackLine, Inc. | $ | (0.34) | $ | (0.23) | $ | (0.68) | $ | (1.34) | |||||||||||||||
| Diluted net loss per share attributable to BlackLine, Inc. | $ | (0.34) | $ | (0.23) | $ | (0.68) | $ | (1.34) | |||||||||||||||
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):
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Stock options with service-only vesting conditions | 2,488 | 2,855 | |||||||||
| Restricted stock units with service-only vesting conditions | 2,233 | 1,704 | |||||||||
| Restricted stock units with performance and service vesting conditions | 211 | — | |||||||||
| Total shares excluded from net loss per share | 4,932 | 4,559 | |||||||||
Additionally, approximately 3.4 million and 6.9 million weighted average shares underlying the conversion option in the 2024 Notes and the 2026 Notes, respectively, are excluded from the calculation of diluted net loss per share attributable to common stockholders as the effect would be anti-dilutive. The shares are subject to adjustment, up to approximately 4.7 million shares and 9.9 million shares for the 2024 Notes and the 2026 Notes, respectively, if certain corporate events occur prior to the maturity dates or if the Company issues a notice of redemption.
Note 12 – Commitments and Contingencies
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, 2022 and December 31, 2021, 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 was not probable or reasonably estimable.
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Note 13 – Unearned Revenue and Performance Obligations
Revenue totaling $217.0 million and $173.8 million was recognized during the nine months ended September 30, 2022 and 2021, respectively, that was previously included in the deferred revenue balance at December 31, 2021 and 2020, respectively.
Contracted not recognized revenue was $684.6 million at September 30, 2022, of which the Company expects to recognize approximately 56% over the next 12 months and the remainder thereafter.
Note 14 – 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, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| United States | $ | 96,769 | $ | 78,335 | $ | 273,934 | $ | 223,848 | |||||||||||||||
| International | 37,499 | 31,067 | 109,047 | 86,532 | |||||||||||||||||||
| $ | 134,268 | $ | 109,402 | $ | 382,981 | $ | 310,380 | ||||||||||||||||
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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, 2021 filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 25, 2022 (“Annual Report on Form 10-K”), and as amended in the Annual Report on Form 10-K/A filed on March 24, 2022. 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, 2022, we had 354,924 individual users across 4,060 customers. Additionally, we continue to build strategic relationships with technology vendors, professional services firms, business process outsourcers, and resellers.
Our cloud-based products include Account Reconciliations, Transaction Matching, Task Management, Journal Entry, Variance Analysis, Consolidation Integrity Manager, Compliance, Cash Application, Credit & Risk Management, Collections Management, Disputes & Deductions, Team & Task Management, AR Intelligence, Intercompany Workflow, Intercompany Processing, and Netting and Settlement. These products are offered to customers as scalable solutions that support critical accounting processes, such as the financial close, account reconciliations, cash application, intercompany accounting, and compliance.
We derived approximately 94% of our revenue primarily from subscriptions to our cloud-based software platform and approximately 6% from professional services for the nine months ended September 30, 2022. The majority of subscriptions are sold through one-year non-cancellable contracts, with a growing percentage of subscriptions sold through three-year contracts. We price our subscriptions based on a number of factors, primarily the number of users having access to the products and the number of products purchased by the customer. Subscription revenue is recognized ratably over the term of the customer contract. The first year of subscription fees are typically payable within 30 days after execution of a contract, and thereafter upon renewal.
Professional services consist of implementation and consulting services. Although our platform is ready to use immediately after a new customer has access to it, we typically help customers implement our solutions. We also provide consulting services to help customers optimize the use of our products. We charge customers for our consulting services on a time-and-materials basis and we recognize that revenue as services are performed. A limited number of our customers are provided professional services for a fixed fee, which is initially recorded as deferred revenue and recognized on a proportional-performance basis as the services are performed.
We typically invoice customers annually in advance for subscriptions. We also invoice fixed fee implementations in advance and professional services on a time-and-materials basis. We record amounts invoiced for portions of annual subscription periods that have not occurred or services that have not been performed as deferred revenue on our consolidated balance sheet.
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 integrates with SAP’s enterprise resource planning (“ERP”) solutions, and SAP is part of the reseller channel that we use in the ordinary course of business. SAP has the ability to resell our solutions, as an SAP solution-extension (“SolEx”), for which we receive a percentage of the revenues. In the first quarter of 2022, we entered into an agreement with Google Cloud in which the two companies will collaborate on joint selling and go-to-market activities and bring enhanced automation solutions for finance and accounting to new and existing customers.
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Our ability to maximize the lifetime value of our customer relationships will depend, in part, on the willingness of customers to purchase additional user licenses and products from us. We rely on our sales and customer success teams to support and grow our existing customers by maintaining high customer satisfaction and educating customers on the value all our products provide.
The length of our sales cycle depends on the size of a 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 during 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.
On January 26, 2022, we acquired FourQ Systems, Inc. (“FourQ”), which we refer to as the “FourQ Acquisition.” The primary purpose of the FourQ Acquisition was to enhance our existing intercompany accounting automation capabilities by driving end-to-end automation of traditionally manual intercompany accounting processes.
For the quarters ended September 30, 2022 and 2021, we had revenues totaling $134.3 million and $109.4 million, respectively, and we incurred net losses attributable to BlackLine, Inc. of $20.0 million and $13.7 million, respectively.
For the nine months ended September 30, 2022 and 2021, we had revenues totaling $383.0 million and $310.4 million, respectively, and we incurred net losses attributable to BlackLine, Inc. of $40.7 million and $78.2 million, respectively.
COVID-19 Update
In response to the COVID-19 pandemic, we have taken precautionary measures in accordance with guidance provided by government agencies to minimize the risk of the virus to our employees, customers and communities in which we operate, as well as assisted our customers with ongoing challenges associated with the pandemic. We also responded with COVID-19 customer-relief programs to help our community of global accounting and finance professionals.
The broader implications of the COVID-19 pandemic on our business, operating results, and overall financial performance remain uncertain and depend on certain developments, including the pandemic's duration and geographic spread, the distribution and efficacy of vaccines, impact on our customers and our sales cycles, impact on our partners and employees, and impact on the economic environment and financial markets, all of which are uncertain and cannot be predicted. We are conducting business as usual with certain limitations to employee travel, employee work locations, and marketing events, among other modifications, and we continue to adjust our practices and policies to respond to evolving restrictions and recommendations in the jurisdictions where we conduct business. The risk of a cybersecurity incident occurring has increased as more companies and individuals are working remotely and through less secure network connections. As a result, we have increased our investments in network security to help mitigate against such an incident. We cannot provide assurances that our preventative efforts will be successful. We are and will continue to actively monitor the situation and may take further actions that alter our business operations, as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, and stockholders.
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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.
| Sep. 30, 2021 | Dec. 31, 2021 | Mar. 31, 2022 | Jun. 30, 2022 | Sep. 30, 2022 | ||||||||||||||||||||||||||||
| Dollar-based net revenue retention rate | 108 | % | 109 | % | 110 | % | 110 | % | 109 | % | ||||||||||||||||||||||
| Number of customers | 3,704 | 3,825 | 3,897 | 4,003 | 4,060 | |||||||||||||||||||||||||||
| Number of users | 315,144 | 328,389 | 337,939 | 347,932 | 354,924 | |||||||||||||||||||||||||||
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. At September 30, 2022, our dollar-based net revenue retention rate declined marginally from the quarter ended June 30, 2022. 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. We rely on our customer success and sales 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, 2022 and 2021, 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. While the fees for the majority of the products we sell are user-based, we are selling an increasing volume of transactions for our non-user based strategic products, such as Transaction Matching, Intercompany, and Cash Application.
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 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, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| GAAP gross profit | $ | 101,842 | $ | 84,965 | $ | 286,959 | $ | 240,481 | |||||||||||||||
| GAAP gross margin | 75.8 | % | 77.7 | % | 74.9 | % | 77.5 | % | |||||||||||||||
| GAAP net loss attributable to BlackLine, Inc. | $ | (20,019) | $ | (13,741) | $ | (40,695) | $ | (78,151) | |||||||||||||||
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| Quarter Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Non-GAAP gross profit | $ | 107,551 | $ | 87,853 | $ | 302,571 | $ | 248,681 | |||||||||||||||
| Non-GAAP gross margin | 80.1 | % | 80.3 | % | 79.0 | % | 80.1 | % | |||||||||||||||
| Non-GAAP net income attributable to BlackLine, Inc. | $ | 15,064 | $ | 15,090 | $ | 20,791 | $ | 31,789 | |||||||||||||||
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, transaction-related costs (including, but not limited to, accounting, legal, and advisory fees related to the transaction, as well as transaction-related retention bonuses) and stock-based compensation. Non-GAAP gross margin is defined as non-GAAP gross profit divided by GAAP revenues. BlackLine believes that presenting non-GAAP gross margin is useful to investors as it eliminates the impact of certain non-cash expenses and allows a direct comparison of gross margin between periods.
Non-GAAP Net Income (loss) attributable to BlackLine and Diluted Non-GAAP Net Income (loss) attributable to BlackLine, Inc. per share. Non-GAAP net income (loss) attributable to BlackLine is defined as GAAP net loss attributable to BlackLine adjusted for the impact of the provision for (benefit from) income taxes related to acquisitions, amortization of intangible assets, stock-based compensation, the amortization of debt discount and issuance costs from our convertible notes, the change in the fair value of contingent consideration, transaction-related costs, legal settlement gains and costs, adjustment to the value of the redeemable non-controlling interest to the redemption amount, and loss on extinguishment of convertible senior notes. Diluted non-GAAP net income attributable to BlackLine, Inc. per share includes the adjustment for shares resulting from the elimination of stock-based compensation. The Company believes that presenting non-GAAP net income (loss) attributable to BlackLine is useful to investors as it eliminates the impact of items that have been impacted by the company’s acquisitions and other related costs in order to allow a direct comparison of net loss between all periods presented.
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:
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| Quarter Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Non-GAAP Gross Profit: | |||||||||||||||||||||||
| Gross profit | $ | 101,842 | $ | 84,965 | $ | 286,959 | $ | 240,481 | |||||||||||||||
| Amortization of acquired developed technology | 3,011 | 675 | 8,305 | 2,010 | |||||||||||||||||||
| Stock-based compensation expense | 2,346 | 2,213 | 6,309 | 6,190 | |||||||||||||||||||
| Transaction-related costs | 352 | — | 998 | — | |||||||||||||||||||
| Total non-GAAP gross profit | $ | 107,551 | $ | 87,853 | $ | 302,571 | $ | 248,681 | |||||||||||||||
| Gross margin | 75.8 | % | 77.7 | % | 74.9 | % | 77.5 | % | |||||||||||||||
| Non-GAAP gross margin | 80.1 | % | 80.3 | % | 79.0 | % | 80.1 | % | |||||||||||||||
| Non-GAAP Net Income Attributable to BlackLine, Inc.: | |||||||||||||||||||||||
| Net loss attributable to BlackLine, Inc. | $ | (20,019) | $ | (13,741) | $ | (40,695) | $ | (78,151) | |||||||||||||||
| Provision for (benefit from) income taxes | 299 | (636) | (12,692) | (409) | |||||||||||||||||||
| Amortization of intangible assets | 5,182 | 2,630 | 14,550 | 8,430 | |||||||||||||||||||
| Stock-based compensation | 20,802 | 16,877 | 57,159 | 48,695 | |||||||||||||||||||
| Amortization of debt discount and issuance costs | 1,389 | 16,031 | 4,119 | 39,272 | |||||||||||||||||||
| Change in fair value of contingent consideration | 1,745 | (10,346) | (14,113) | (3,426) | |||||||||||||||||||
| Transaction-related costs | 3,272 | — | 13,981 | — | |||||||||||||||||||
| Legal settlement costs | 1,019 | — | 1,709 | — | |||||||||||||||||||
| Adjustment to redeemable non-controlling interest | 1,375 | 4,275 | (3,227) | 10,366 | |||||||||||||||||||
| Loss on extinguishment of convertible senior notes | — | — | — | 7,012 | |||||||||||||||||||
| Total non-GAAP net income attributable to BlackLine, Inc. | $ | 15,064 | $ | 15,090 | $ | 20,791 | $ | 31,789 | |||||||||||||||
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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, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Subscription and support | $ | 126,081 | $ | 102,924 | $ | 360,289 | $ | 289,749 | |||||||||||||||
| Professional services | 8,187 | 6,478 | 22,692 | 20,631 | |||||||||||||||||||
| Total revenues | 134,268 | 109,402 | 382,981 | 310,380 | |||||||||||||||||||
| Cost of revenues | |||||||||||||||||||||||
| Subscription and support | 25,544 | 17,948 | 75,495 | 50,540 | |||||||||||||||||||
| Professional services | 6,882 | 6,489 | 20,527 | 19,359 | |||||||||||||||||||
| Total cost of revenues | 32,426 | 24,437 | 96,022 | 69,899 | |||||||||||||||||||
| Gross profit | 101,842 | 84,965 | 286,959 | 240,481 | |||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Sales and marketing | 64,540 | 48,799 | 190,567 | 146,410 | |||||||||||||||||||
| Research and development | 27,721 | 18,843 | 80,871 | 56,611 | |||||||||||||||||||
| General and administrative | 31,000 | 11,372 | 74,997 | 59,886 | |||||||||||||||||||
| Total operating expenses | 123,261 | 79,014 | 346,435 | 262,907 | |||||||||||||||||||
| Income (loss) from operations | (21,419) | 5,951 | (59,476) | (22,426) | |||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||
| Interest income | 4,387 | 231 | 6,620 | 412 | |||||||||||||||||||
| Interest expense | (1,482) | (16,110) | (4,386) | (46,582) | |||||||||||||||||||
| Other income (expense), net | 2,905 | (15,879) | 2,234 | (46,170) | |||||||||||||||||||
| Loss before income taxes | (18,514) | (9,928) | (57,242) | (68,596) | |||||||||||||||||||
| Provision for (benefit from) income taxes | 474 | (210) | (12,852) | (78) | |||||||||||||||||||
| Net loss | (18,988) | (9,718) | (44,390) | (68,518) | |||||||||||||||||||
| Net loss attributable to redeemable non-controlling interest | (344) | (252) | (468) | (733) | |||||||||||||||||||
| Adjustment attributable to non-controlling interest | 1,375 | 4,275 | (3,227) | 10,366 | |||||||||||||||||||
| Net loss attributable to BlackLine, Inc. | $ | (20,019) | $ | (13,741) | $ | (40,695) | $ | (78,151) | |||||||||||||||
Comparison of Quarters and Nine months ended September 30, 2022 and 2021
Revenues
| Quarter Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
| Subscription and support | $ | 126,081 | $ | 102,924 | $ | 23,157 | 22 | % | $ | 360,289 | $ | 289,749 | $ | 70,540 | 24 | % | |||||||||||||||||||||||||||||||
| Professional services | 8,187 | 6,478 | 1,709 | 26 | % | 22,692 | 20,631 | 2,061 | 10 | % | |||||||||||||||||||||||||||||||||||||
| Total revenues | $ | 134,268 | $ | 109,402 | $ | 24,866 | 23 | % | $ | 382,981 | $ | 310,380 | $ | 72,601 | 23 | % | |||||||||||||||||||||||||||||||
| September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Dollar-based net revenue retention rate | 109 | % | 108 | % | |||||||
| Number of customers | 4,060 | 3,704 | |||||||||
| Number of users | 354,924 | 315,144 | |||||||||
The increase in revenues for the quarter and nine months ended September 30, 2022, compared to the quarter and nine months ended September 30, 2021, was primarily due to an increase in the number of customers,
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an increase in the number of users added and products purchased by existing customers, and an increase in average user price driven by a combination of increased sales of strategic products and renewal price increases, as well as revenues from FourQ. The total number of customers and users at September 30, 2022 increased by 10% and 13%, respectively, as compared to September 30, 2021.
Cost of revenues
| Quarter Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
| Subscription and support | $ | 25,544 | $ | 17,948 | $ | 7,596 | 42 | % | $ | 75,495 | $ | 50,540 | $ | 24,955 | 49 | % | |||||||||||||||||||||||||||||||
| Professional services | 6,882 | 6,489 | 393 | 6 | % | 20,527 | 19,359 | 1,168 | 6 | % | |||||||||||||||||||||||||||||||||||||
| Total cost of revenues | $ | 32,426 | $ | 24,437 | $ | 7,989 | 33 | % | $ | 96,022 | $ | 69,899 | $ | 26,123 | 37 | % | |||||||||||||||||||||||||||||||
| Gross margin | 75.8 | % | 77.7 | % | 74.9 | % | 77.5 | % | |||||||||||||||||||||||||||||||||||||||
The increase in total cost of revenues for the quarter ended September 30, 2022, compared to the quarter ended September 30, 2021, was primarily due to the following:
•$2.7 million increase in depreciation and amortization mainly due to the addition of developed technology from the FourQ Acquisition;
•$1.6 million increase in salaries, benefits, and stock-based compensation driven primarily by higher cost of revenues-related headcount;
•$1.4 million net increase in computer software and data center expenses primarily due to higher spend on cloud hosting services related to the migration of new and existing customers to the Google Cloud Platform, as well as an increase in cloud hosting services in connection with the FourQ Acquisition;
•$1.2 million increase in amortization of developed technology due to net additions to software placed into service; and
•$0.6 million increase in professional services expense.
The increase in total cost of revenues for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was primarily due to the following:
•$7.4 million increase in depreciation and amortization mainly due to the addition of developed technology from the FourQ Acquisition;
•$6.5 million net increase in computer software and data center expenses primarily due to higher spend on cloud hosting services related to the migration of new and existing customers to the Google Cloud Platform, as well as an increase in cloud hosting services in connection with the FourQ Acquisition;
•$4.4 million increase in salaries, benefits, and stock-based compensation driven primarily by higher average cost of revenues-related headcount;
•$3.2 million increase in amortization of developed technology due to net additions to software placed into service; and
•$3.1 million increase in professional services expense.
Sales and marketing
| Quarter Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 64,540 | $ | 48,799 | $ | 15,741 | 32 | % | $ | 190,567 | $ | 146,410 | $ | 44,157 | 30 | % | |||||||||||||||||||||||||||||||
| Percentage of total revenues | 48.1 | % | 44.6 | % | 49.8 | % | 47.2 | % | |||||||||||||||||||||||||||||||||||||||
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The increase in sales and marketing expenses for the quarter ended September 30, 2022, compared to the quarter ended September 30, 2021, was primarily due to the following:
•$12.6 million increase in salaries, sales commissions, stock-based compensation and incentives driven primarily by higher headcount and increased commissions from revenue growth in sales of our solutions;
•$0.9 million increase in computer software-related costs; and
•$0.7 million in transaction-related costs incurred in connection with the FourQ Acquisition in the quarter ended September 30, 2022.
The increase in total sales and marketing expenses for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was primarily due to the following:
•$35.0 million increase in salaries, sales commissions, stock-based compensation and incentives driven primarily by higher headcount and increased commissions from revenue growth in sales of our solutions;
•$2.3 million increase in travel-related expenses;
•$2.2 million increase in computer software-related costs;
•$2.1 million in transaction-related costs incurred in connection with the FourQ Acquisition in the nine months ended September 30, 2022; and
•$1.5 million increase in trade show expenses.
Research and development
| Quarter Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
| Research and development, gross | $ | 32,922 | $ | 22,765 | $ | 10,157 | 45 | % | $ | 95,607 | $ | 67,930 | $ | 27,677 | 41 | % | |||||||||||||||||||||||||||||||
| Capitalized internally developed software costs | (5,201) | (3,922) | (1,279) | 33 | % | (14,736) | (11,319) | (3,417) | 30 | % | |||||||||||||||||||||||||||||||||||||
| Research and development, net | $ | 27,721 | $ | 18,843 | $ | 8,878 | 47 | % | $ | 80,871 | $ | 56,611 | $ | 24,260 | 43 | % | |||||||||||||||||||||||||||||||
| Percentage of total revenues | 20.6% | 17.2% | 21.1% | 18.2% | |||||||||||||||||||||||||||||||||||||||||||
The increase in research and development expenses for the quarter ended September 30, 2022, compared to the quarter ended September 30, 2021, was primarily due to the following:
•$6.2 million increase in salaries, benefits, and stock-based compensation driven primarily by an increase in average headcount;
•$2.1 million in transaction-related costs incurred in connection with the FourQ Acquisition in the quarter ended September 30, 2022;
•$1.0 million increase in computer software-related costs; and
•$0.6 million increase in professional services; partially offset by
•$1.3 million increase in capitalized software due to new significant new and enhanced functionality of our solutions, as well as increased capitalized costs due to higher headcount. Collectively, these increases resulted in a decrease in net expenses.
The increase in total research and development expenses for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was primarily due to the following:
•$16.3 million increase in salaries, benefits, and stock-based compensation driven primarily by an increase in average headcount for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2022;
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•$5.7 million in transaction-related costs incurred in connection with the FourQ Acquisition in the nine months ended September 30, 2022;
•$2.9 million increase in professional services; and
•$1.7 million increase in computer software-related costs; partially offset by
•$3.4 million increase in capitalized software due to new significant new and enhanced functionality of our solutions, as well as increased capitalized costs due to higher headcount. Collectively, these increases resulted in a decrease in net expenses.
General and administrative
| Quarter Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative | $ | 31,000 | $ | 11,372 | $ | 19,628 | 173% | $ | 74,997 | $ | 59,886 | $ | 15,111 | 25% | |||||||||||||||||||||||||||||||||
| Percentage of total revenues | 23.1% | 10.4% | 19.6% | 19.3% | |||||||||||||||||||||||||||||||||||||||||||
The increase in general and administrative expenses for the quarter ended September 30, 2022, compared to the quarter ended September 30, 2021, was primarily due to the following:
•$12.1 million net increase in changes in fair value contingent consideration (refer to Note 7 - “Fair Value Measurements”);
•$3.6 million increase in salaries, benefits, and stock-based compensation driven primarily by an increase in average headcount;
•$1.5 million increase for professional services;
•$1.0 million in legal settlement costs incurred in the quarter ended September 30, 2022; and
•$0.9 million increase in foreign currency losses.
The increase in total general and administrative expenses for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was primarily due to the following:
•$9.5 million increase in salaries, benefits, and stock-based compensation;
•$5.4 million increase for professional services;
•$5.1 million in transaction-related costs incurred in connection with the FourQ Acquisition incurred in the nine months ended September 30, 2022;
•$2.5 million increase in foreign currency losses; and
•$1.7 million in legal settlement costs incurred in the nine months ended September 30, 2022; partially offset by
•$10.7 million in changes in fair value contingent consideration (refer to Note 7 - “Fair Value Measurements”).
Interest income
| Quarter Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest income | $ | 4,387 | $ | 231 | $ | 4,156 | N/M | $ | 6,620 | $ | 412 | $ | 6,208 | N/M | |||||||||||||||||||||||||||||||||
The increase in interest income during the quarter and nine months ended September 30, 2022, compared to the quarter and nine months ended September 30, 2021, was significantly due to increased average interest rates.
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Interest expense
| Quarter Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | $ | 1,482 | $ | 16,110 | $ | (14,628) | (91) | % | $ | 4,386 | $ | 46,582 | $ | (42,196) | (91) | % | |||||||||||||||||||||||||||||||
The decrease in interest expense during the quarter and nine months ended September 30, 2022, compared to the quarter and nine months ended September 30, 2021 was due to the elimination of the debt discount amortization on the 2024 Notes and the 2026 Notes, and a loss of $7.0 million on the partial extinguishment of the 2024 Notes in the quarter ended June 30, 2021 that did not recur in the current year comparative quarter, partially offset by an increase in the amortization of debt issuance costs following the adoption of ASU 2020-06, Debt - Debt with Conversion and other Options.
Provision for (benefit from) income taxes
| Quarter Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
| Provision for (benefit from) income taxes | $ | 474 | $ | (210) | $ | 684 | (326) | % | $ | (12,852) | $ | (78) | $ | (12,774) | N/M | ||||||||||||||||||||||||||||||||
We are subject to federal and state income taxes in the United States and taxes in foreign jurisdictions. For the quarter ended September 30, 2022, 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, 2022 and 2021, we recorded $0.5 million in income tax expense and $0.2 million in income tax benefit, respectively. For the nine months ended September 30, 2022 and 2021, we recorded $12.9 million and $0.1 million in income tax benefit, respectively. The income tax expense for the quarter ended September 30, 2022, compared to the tax benefit for the quarter ended September 30, 2021, resulted primarily from changes in the mix of profitable foreign jurisdictions and jurisdictions for which tax benefits may be recognized. The increase in income tax benefit for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, resulted primarily from a partial release of $14.2 million of existing valuation allowance as net deferred tax liabilities acquired from FourQ are a source of taxable income to support recognition of existing BlackLine deferred tax assets. The tax benefit was partially offset by the non-recognition of 2022 tax benefits associated with certain UK operations and changes in the mix of profitable foreign jurisdictions.
Liquidity and Capital Resources
At September 30, 2022, our principal sources of liquidity were an aggregate of $1.0 billion of cash and cash equivalents and marketable securities, which primarily consist of short-term, investment-grade U.S. treasury securities, corporate bonds, commercial paper and government agency securities. We had $1.4 billion aggregate principal amount of Notes outstanding at September 30, 2022.
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.
Contractual Obligations and Commitments
Notes Payable
In connection with the offering of the 2024 Notes, we entered into the 2024 Capped Calls with certain counterparties covering, subject to anti-dilution adjustments, approximately 3.4 million shares of our common stock and are generally expected to offset the potential economic dilution of our common stock up to the initial cap price. The 2024 Capped Calls have an initial strike price of $73.40 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2024 Notes, and an initial cap price of $106.76 per share, subject to certain adjustments. As of September 30, 2022, all of the 2024 Capped Calls remained outstanding.
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In connection with the offering of the 2026 Notes, we entered into the 2026 Capped Calls with certain counterparties covering, subject to anti-dilution adjustments, approximately 6.9 million shares of our common stock and are generally expected to offset the potential economic dilution of our common stock up to the initial cap price. The 2026 Capped Calls have an initial strike price of $166.23 per share - subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes - and an initial cap price of $233.31 per share, subject to certain adjustments. As of September 30, 2022, all of the 2026 Capped Calls remained outstanding.
Lease Liabilities
As of September 30, 2022, we have obligations totaling $17.2 million related to existing property and equipment leases.
Purchase Obligations
Purchase obligations represent our most significant contractual obligations in the ordinary course of business for which we have not received the related goods or services, in whole or in part. At September 30, 2022, we have $42.2 million of contractual obligations related to four commitments, with $5.7 million payable within 12 months, and have additional contractual obligations with other vendors that are collectively immaterial and which we can readily settle given our liquidity position and capital resources.
Contingent Consideration
We are potentially required to pay the following amounts:
•a maximum of $8.0 million of contingent consideration related to our 2013 Acquisition should we realize a tax benefit from the use of net operating losses generated from the stock option exercises concurrent with the 2013 Acquisition; and
•a maximum of $73.2 million of contingent consideration over the next three years related to our FourQ Acquisition if certain financial performance milestones are met.
Unrecognized Tax Liabilities
As of September 30, 2022, while we have liabilities for unrecognized tax benefits of $5.3 million, due to their nature, there is a high degree of uncertainty regarding the timing of future cash outflows and other events that extinguish these liabilities.
Letters of Credit
Commitments under letters of credit at September 30, 2022 were scheduled to expire as follows (in thousands):
| Total | Less than 1 Year | 1-3 Years | 3-5 Years | Thereafter | |||||||||||||||||||||||||
| Letters of credit | $ | 304 | $ | — | $ | 30 | $ | 218 | $ | 56 | |||||||||||||||||||
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.
Future Capital Requirements
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, future merger and acquisition activity, and the continuing market acceptance of our solutions. From time to time, we have required, and may in the future 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.
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Historical Cash Flows
The following table sets forth a summary of our cash flows for the periods indicated:
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Net cash provided by operating activities | $ | 30,259 | $ | 57,967 | |||||||
| Net cash used in investing activities | $ | (378,490) | $ | (640,136) | |||||||
| Net cash provided by (used in) financing activities | $ | (195) | $ | 593,892 | |||||||
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, change in fair value of contingent consideration, loss on extinguishment of convertible notes, non-cash lease expense, amortization of debt discount and issuance costs, and deferred taxes.
For the nine months ended September 30, 2022, cash provided by operations was $30.3 million, resulting from net non-cash expenses of approximately $63.2 million and net cash flows provided as a result of changes in operating assets and liabilities of $11.5 million, partially offset by our net loss of $44.4 million. The $11.5 million of net cash flows provided as a result of changes in our operating assets and liabilities reflected primarily the following:
•$18.3 million decrease in accounts receivable due to increased collections;
•$4.6 million increase in other long-term liabilities;
•$2.5 million increase in deferred revenue as a result of the growth of our customer and user bases; and
•$2.2 million decrease in prepaid expenses and other current assets.
These changes in our operating assets and liabilities were partially offset by the following:
•$6.4 million increase in other assets due to higher prepaid commissions related to increased sales;
•$5.3 million decrease in operating lease liabilities;
•$4.6 million decrease in accounts payable; and
•$0.6 million decrease in accrued expenses and other current liabilities.
For the nine months ended September 30, 2021, cash provided by operations was $58.0 million, resulting from net non-cash expenses of $115.5 million, and net cash flows provided as a result of changes in operating assets and liabilities of $11.0 million, partially offset by our net loss of $68.5 million. The $11.0 million of net cash flows provided as a result of changes in our operating assets and liabilities reflected the following:
•$18.7 million increase in deferred revenue as a result of the growth of our customer and user bases;
•$5.4 million decrease in accounts receivable due to increased collections;
•$3.7 million increase in accrued expenses and other current liabilities; and
•$1.6 million decrease in prepaid expenses and other current assets.
These changes in our operating assets and liabilities were partially offset by the following:
•$13.6 million increase in other assets due to higher capitalized commissions related to increased sales;
•$3.9 million decrease in operating lease liabilities; and
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•$1.0 million decrease in accounts payable.
Net Cash Used In Investing Activities
Our investing activities consist primarily of investments in, and maturities and sales of, marketable securities, capitalized software development costs, and capital expenditures for property and equipment.
For the nine months ended September 30, 2022, cash used in investing activities was $378.5 million as a result of the following:
•$196.1 million of purchases of marketable securities, net of proceeds from maturities;
•$157.7 million, net of cash acquired, paid for the acquisition of FourQ;
•$15.0 million for capitalized software development costs; and
•$9.7 million in purchases of property and equipment.
For the nine months ended September 30, 2021, cash used in investing activities was $640.1 million as a result of the following:
•$623.7 million of purchases of marketable securities, net of proceeds from maturities;
•$11.2 million in capitalized software development costs; and
•$5.2 million in purchases of property and equipment.
Net Cash Provided By (Used in) Financing Activities
For the nine months ended September 30, 2022, cash used in financing activities was $0.2 million primarily as a result of the following:
•$7.9 million of acquisitions of common stock for tax withholding obligations, partially offset by
•$4.5 million of proceeds from the employee stock purchase plan; and
•$3.7 million of proceeds from exercise of stock options.
For the nine months ended September 30, 2021, cash provided by financing activities was $593.9 million primarily as a result of the following:
•$594.2 million from the issuance of the 2026 Notes, net of the partial repurchase of the 2024 Notes and the purchase of the associated 2026 Capped Calls;
•$7.7 million of proceeds from exercises of stock options; and
•$5.2 million of proceeds from the employee stock purchase plan, partially offset by
•$12.6 million of acquisitions of common stock for tax withholding obligations; and
•$0.5 million of financed purchases of property and equipment.
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 condensed 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, 2021.
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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risks
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 related 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 customers 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 the 2024 Notes. The 2024 Notes have a fixed annual interest rate of 0.125%; therefore, we do not have economic interest rate exposure with respect to the 2024 Notes. In March 2021, we issued $1.15 billion aggregate principal amount of the 2026 Notes. The 2026 Notes have a fixed annual interest rate of 0.0%; therefore, we do not have economic interest rate exposure with respect to the 2026 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 value of the Notes is 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.
We had cash and cash equivalents and marketable securities of $1.0 billion at September 30, 2022. 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, currencies that comprise the majority of our foreign operations and customer sales include the Australian Dollar, British Pound, Canadian Dollar, Euro, Japanese Yen, Polish Zloty, Romanian Leu, and Singapore Dollar. 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 flow. 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, 2022.
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
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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 of 1934, 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, 2022, 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, 2022, our disclosure controls and procedures were effective at a reasonable assurance level.
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, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of 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. Legal Proceedings
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,
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including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our 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.
Summary Risk Factors
Our business is subject to numerous risks and uncertainties that you should consider before investing in our Company, as fully described below. The principal factors and uncertainties that make investing in our Company risky include, among others:
•If we are unable to attract new customers and expand sales to existing customers, our growth could be slower than we expect and our business may be harmed.
•Our business and growth depend substantially on customers renewing their subscription agreements with us, and any decline in our customer renewals could adversely affect our operating results.
•Current and future economic uncertainty and other unfavorable conditions in our industry or the global economy could limit our ability to grow our business and negatively affect our operating results.
•The COVID-19 pandemic is having a material adverse impact on the operations and financial performance of certain of our customers and industries that we serve, which could harm our business and operating results.
•We have a history of losses and we may not be able to generate sufficient revenue to 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.
•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.
•If we are not able to provide successful enhancements, new features or modifications to our software solutions, our business could be adversely affected.
•We derive substantially all of our revenues from a limited number of software solutions, and our growth is dependent on their success.
•If our relationships with technology vendors and business process outsourcers are not successful, our business and growth may be harmed.
•If our security controls are breached or if 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.
•Interruptions or performance problems associated with our software solutions, platform and technology may adversely affect our business and operating results.
•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.
•The market in which we participate is intensely competitive, and if we do not compete effectively, our business and operating results could be harmed.
•The market price of our common stock may be volatile, and you could lose all or part of your investment.
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Risks Related to Our Business and Industry
If we are unable to attract new customers and expand sales to existing customers, our growth could be slower than we expect and our business may be harmed.
Our growth depends in part upon increasing our customer base. Our ability to achieve significant growth in revenues will depend, in large part, upon the effectiveness of our sales and marketing efforts, both domestically and internationally. We may have difficulty attracting potential customers that rely on tools such as Excel, or that have already invested substantial personnel and financial resources to integrate on-premise or other software into their businesses, 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. As a result of the pandemic, our sales efforts for the past two years have focused on digital events, digital lead generation, and tools to help our sales representatives connect with prospects virtually, however, there is no guarantee these relatively new marketing efforts will be successful, and our business may be harmed.
Our growth also depends upon our ability to add users and sell additional products to our existing customers. It is important for the 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, or 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.
Our sales and marketing efforts may be impacted by geopolitical developments and other events beyond our control, such as the COVID-19 pandemic and macroeconomic trends. Such events can increase levels of political and economic unpredictability globally and increase the volatility of global financial markets. In addition, effects of the pandemic such as the ongoing supply chain disruption and labor shortages have affected us, our customers, and our vendors. Moreover, in response to COVID-19, we shifted our customer events to virtual-only experiences and we continue to adjust our practices and policies to respond to evolving restrictions and recommendations in the jurisdictions where we conduct business, including a partial return to in-person customer events. While COVID-19 related restrictions have eased in many locations, evolving and uncertain conditions caused by the pandemic could adversely affect our customers’ ability or willingness to attend our events, purchase new or additional products or services, or delay prospective customers’ purchasing decisions, or reduce the value or duration of their subscription agreements, all of which could adversely affect our growth.
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 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 contract term expires. Although our agreements typically include automatic renewal language, our customers may cancel their agreements at the expiration of the 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. For example, macroeconomic trends and the economic effects of COVID-19 have impacted and may continue to impact our renewal rate. Any prolonged shut down of a significant portion of global economic activity or a downturn in the global economy would adversely affect the industries in which our customers operate, which could adversely affect our customers’ ability or willingness to renew their subscription agreements or could cause our customers to downgrade the terms of their subscription agreements.
Further, 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
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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. In response to COVID-19, many of our competitors offered free products or services to attract new customers. For a time, we offered free access to our entire training library and offered existing customers six months of complimentary access to the Task Management and Reporting modules to enable a more effective remote close. In addition, we are now offering complimentary coaching sessions with our existing customers. We may have to provide additional free products, services or modules in order to retain our customers, which could adversely impact our operating results over time. If our customers do not renew their agreements with us or renew on terms less favorable to us, our revenues may decline.
Current and future economic uncertainty and other 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. General macroeconomic conditions, such as a recession or rising inflation rates or an economic downturn in the United States or internationally, could adversely affect demand for our products and make it difficult to accurately forecast and plan our future business activities. For example, as a result of the COVID-19 pandemic, customers delayed and deferred purchasing decisions, and for a period of time, there was a deterioration in near-term demand. 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. Services may decrease sequentially as new implementation projects are delayed. Weakening economic conditions could affect the rate of accounting and finance and information technology spending and adversely affect our current or potential customers’ ability or willingness to purchase our cloud platform, as well as delay purchasing decisions, reduce the value or duration of their subscription contracts, or affect attrition rates, all of which would adversely affect our operating results. Prolonged economic uncertainties relating to macroeconomic trends or COVID-19 could limit our ability to grow our business and negatively affect our operating results. Unfavorable trends in the national or global economy, such as rising interest rates and conditions resulting from financial and credit market fluctuations may cause our customers and prospective customers 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. The occurrence of a natural disaster or global public health crisis such as the COVID-19 pandemic or geopolitical uncertainty or war, could cause, and has caused customers to request concessions, including extended payment terms, free modules or better pricing.
In addition, our customers may be affected by changes in trade policies, treaties, government regulations and tariffs. Trade protection measures, retaliatory actions, tariffs and increased barriers, policies favoring domestic industries, or increased import or export licensing requirements or restrictions, such as trade sanctions against Russia in response to the war in Ukraine, could have a negative effect on the overall macro economy and our customers, which could have an adverse impact on our operating results.
We are currently operating in a period of economic uncertainty and cannot predict the timing, strength or duration of any economic downturn. To the extent unfavorable conditions in the national and global economy persist, or worsen, our business could be harmed as current and potential customers may reduce or postpone spending or choose not to purchase or renew subscriptions to our products, which they may consider discretionary. For example, the aftermath of Brexit continues to cause significant political and economic uncertainty in both the UK and the European Union ("EU"). As a result, the level of economic activity generally in this region could be adversely impacted, negatively affecting our customers' use of our products and our operating results.
Uncertain economic conditions may also adversely affect third parties with which we have entered into relationships and upon which we depend in order to grow our business, such as technology vendors and public cloud providers. As a result, we may be unable to continue to grow in the event of future economic slowdowns. See Risks Related to Our Dependence on Third Parties.
The COVID-19 pandemic is having a material adverse impact on the operations and financial performance of certain of our customers and industries that we serve, which could harm our business and operating results.
In response to the ongoing COVID-19 pandemic, we have taken precautionary measures intended to minimize the risk of COVID-19 to our employees, our customers, and the communities in which we operate, which has, and may continue to negatively impact our business. We continue to monitor the situation and adjust our policies to
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reflect current guidance related to COVID-19 and its variants. These precautionary measures could negatively affect our customer success efforts, sales and marketing efforts, delay and increase the length of our sales cycle, or create operational or other challenges, any of which will harm our business and operating results. In addition, COVID-19 has disrupted the operations of our customers and partners, and may continue to disrupt their operations for an indefinite period of time, including as a result of travel restrictions and/or business shut downs, uncertainty in the financial markets or other harm to their business and financial results resulting in delayed purchasing decisions, extended payment terms, and postponed or cancelled projects, all of which will negatively impact our business and operating results, including sales and cash flows. The risk of a cybersecurity incident occurring has also increased as more companies and individuals work remotely, and potentially expose us to new, complex threats. More generally, COVID-19 has adversely affected economies and financial markets globally, which has led to volatile financial markets, and may lead to an extended economic downturn and a resulting decrease in technology spending, which could adversely affect demand for our offerings and harm our business and operating results. It is not possible at this time to estimate the full extent of the impact of COVID-19 on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted.
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 to 1,915 at September 30, 2022 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. Labor shortages and increased employee mobility may make it more difficult to hire and retain a sufficient number of employees to support our growth. For example, labor shortages have created even greater competition for engineering talent, and we have had to expend additional resources to respond to attrition and to hire and retain new engineers. Additionally, due to COVID-19, we shut down certain workplaces and required our employees in those locations to work remotely. We continue to adjust our practices and policies to respond to evolving restrictions and recommendations in the jurisdictions where we conduct business. However, our workforce continues to be primarily remote, and we expect that our workplace will be fully or partially remote for the near term. We may experience difficulties onboarding new employees remotely. 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 and cause us to realign resources in order to improve operational efficiency, which may include a slowdown in hiring or reduction in force. Moreover, if we fail to manage our anticipated growth or any realignment of resources in a manner that preserves the key aspects of our corporate culture, employee morale, productivity and 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.
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 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 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. We cannot be certain that any new software solutions or products we introduce 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 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 of their customers or employees. Additionally, we maintain our own proprietary, confidential and otherwise sensitive information. Our platform is at risk for security breaches and incidents as a result of third-party action, employee, vendor or contractor error, malfeasance, ransomware and other malicious software, or other factors. The risk of a cybersecurity incident occurring has increased as more companies and individuals work remotely, and potentially expose us to new, complex threats. Additionally, due to political uncertainty and military actions associated with the war in Ukraine, we and our service providers are vulnerable to heightened risks of cybersecurity incidents and security and privacy breaches from or affiliated with nation-state actors. If any unauthorized or inadvertent access to, or a security breach or incident impacting our platform or other systems or networks used in our business occurs, or is believed to occur, such an event could result in the loss, alteration, or unavailability of data, unauthorized access to, or use or disclosure 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. Additionally, service providers who store or otherwise process data on our behalf, including third party and public-cloud infrastructure, also face security risks. As we rely more on third-party and public-cloud infrastructure, such as Google Cloud Platform, and other third-party service providers, we will become more dependent on third-party security measures to protect against unauthorized access, cyberattacks and the mishandling of customer, employee and other confidential data and we may be required to expend significant time and resources to address any incidents related to the failure of those third-party security measures. Our ability to monitor our third-party service providers' data security is limited, and in any event, attackers may be able to circumvent our third-party service providers' data security measures. There have been and may continue to be significant attacks on certain third-party providers, and we cannot guarantee that our or our third-party providers' systems and networks have not been breached, or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our systems and networks or the systems and networks of third parties that support us and our platform. We may also suffer breaches of our internal systems. Security breaches or incidents impacting our platform or our internal systems could also result in significant costs incurred in order to remediate or otherwise respond to a breach or incident, which 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 costs, expenses and liabilities. We may be required to or find it appropriate to expend substantial capital and other resources to alleviate problems caused by any actual or perceived security breaches or incidents.
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.
We incur significant expenses to minimize the risk of security breaches, including deploying additional personnel and protection technologies, training employees annually, and engaging third-party experts and contractors. We continually increase our investments in cybersecurity to counter emerging risks and threats. If a high profile security breach or incident occurs with respect to another Software as a Service (“SaaS”) provider or other technology companies, our current and potential customers 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 customers or attract new ones. Such a breach or incident, or series of breaches or incidents, could also result in regulatory or contractual security requirements that could make compliance challenging. Even in the absence of any security breach or incident, customer concerns about privacy, security, or data protection may deter them from using our
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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 often 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 and incidents that may remain undetected for an extended period of time. Periodically, we experience cyber security events including “phishing” attacks targeting our employees, web application and infrastructure 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 electronic warfare techniques, new discoveries in the field of cryptography and new and sophisticated methods used by criminals including phishing, social engineering or other illicit acts. We may experience security breaches and incidents introduced through the tools and services we use. For example, in the fourth quarter of 2020, we became aware of reports that an update to widely-used IT infrastructure management software provided by one of our vendors, SolarWinds Corporation, had been compromised by attackers. We have evaluated our internal systems and networks for vulnerable versions of the affected software, and we have detected no indicators of compromise. While we believe we were not negatively affected by this incident, we have invested time and resources to evaluate and protect our environment from potential supply chain risks, and we continue to monitor our infrastructure, adjust our intrusion detection capabilities, and practice security-by-design principles in our software development lifecycle to help prevent third-party related incidents. However, there can be no assurances that our defensive measures will prevent cyber-attacks or other security breaches or incidents, and any such attacks, breaches or 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 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, be perceived to 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 privacy, security, and data protection 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 current 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 will 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.
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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.
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, many of whom are new, in the areas of research and development, operations, security, marketing, sales and general and administrative functions. Changes in our executive management team resulting from the hiring or departure of executives could disrupt our business, and could impact our ability to preserve our culture, which could negatively affect our ability to recruit and retain personnel. 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. Any such departure could be particularly disruptive in light of the recent leadership transition and to the extent we experience management turnover, competition for top management is high and it may take months to find a candidate that meets our requirements. Accordingly, the loss of one or more of our executive officers or key employees 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, and this difficulty may be heightened by restrictions on travel and social distancing requirements, as well as labor shortages, higher employee turnover and slower hiring rates associated with the COVID-19 pandemic. In addition, we may need to increase our employee compensation levels in response to competition, rising inflation or labor shortages, which would increase our operating costs and reduce our profitability. 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 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 respective 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, due to volatile market conditions, stock price fluctuations or otherwise, 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 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 will 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. COVID-19 has adversely affected economies and financial markets globally, with many businesses cutting spending on information technology deemed nonessential. During the past twelve months, we have seen certain new and
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existing customers halt or decrease investment in infrastructure, which has negatively impacted our business, operating results, and financial condition. Future deterioration in general economic conditions, including as a result of COVID-19 or the war in Ukraine, or a slow economic recovery, may also cause our customers to reduce their overall information technology spending, and such reductions 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 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.
Failure to effectively organize or expand our sales resources 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. As of September 30, 2022, our sales and marketing teams included 853 employees. As we have 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. Due to COVID-19, our sales and marketing teams generally avoided in-person meetings and have been primarily engaging with customers online and through other communications channels, including virtual meetings. There is no guarantee that our sales and marketing teams will be as successful or effective using these other communications channels as they try to build relationships. If we cannot provide our teams with the tools and training to enable them to do their jobs efficiently and satisfy customer demands, we may not be able to achieve anticipated revenue growth as quickly as expected. Moreover, some industries particularly impacted by COVID-19, such as travel, hospitality, retail, or oil and gas have significantly cut or eliminated capital expenditures at this time. As such, we have de-emphasized building new relationships with customers in those industries during the pandemic, which could harm our customer base.
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 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 markets where we do business. Our business will be harmed if our sales expansion efforts do not generate a significant increase in revenue.
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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.
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 January 2022, we completed the FourQ Acquisition, in October 2020, we completed the Rimilia Acquisition, and in 2018, we entered into our Japanese Joint Venture (defined below). 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.
Negotiating these transactions can be time-consuming, difficult, and expensive, and our ability to complete these transactions may be subject to approvals that are beyond our control. Consequently, these transactions, even if announced, may not be completed. In connection with a strategic transaction, we may:
•issue additional equity or convertible debt 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; or
•become subject to adverse tax consequences, substantial depreciation, and amortization, or deferred compensation charges.
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. 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.
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
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unable to implement our platform successfully, or are unable to do so in a timely manner, customer perceptions of our platform and company may be impaired, our reputation and brand may suffer, and customers may choose not to renew or expand the use of our platform.
Our customers and third-party resellers may need training in the proper use of our platform to maximize its potential. If our platform is not implemented or used correctly or as intended, including if customers input incorrect or incomplete financial data into our platform, inadequate performance may result. Because our customers rely on our platform to manage their financial close and other financial tasks, the incorrect or improper implementation or use of our platform, our failure to train customers on how to efficiently and effectively use our platform, or our failure to provide adequate product support to our customers, may result in negative publicity or legal claims against us. Also, as we continue to expand our customer base, any failure by us to properly provide these services will likely result in lost opportunities for additional subscriptions to our platform.
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 condition.
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.
Risks Related to Our Financial Performance or Results
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 $40.7 million and $78.2 million for the nine months ended September 30, 2022 and 2021, respectively. We had an accumulated deficit of $283.4 million at September 30, 2022. 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.
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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, including the effects of COVID-19 or the war in Ukraine;
•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.
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 operating results and financial metrics difficult.
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:
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•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.
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 related 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 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.
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Additionally, Brexit has and may continue to adversely impact global markets and foreign currencies. This volatility in foreign currencies is expected to continue now that the United Kingdom has completed 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 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.
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, 2022, we had goodwill and intangible assets with a net book value of $539.9 million primarily related to acquisitions. 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.
Our ability to use our net operating losses to offset future taxable income may be subject to limitations.
As of December 31, 2021, we had federal and state net operating loss carryforwards (“NOLs”) of $277.2 million and $147.6 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 taxable income. 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 legislation commonly referred to as the Tax Cuts and Jobs Act of 2017, as modified by the Coronavirus Aid, Relief, and Economic Security Act, includes changes to the U.S. federal corporate income tax rate and changes to the rules governing the deductibility of certain NOLs, which may impact our ability to utilize such NOLs.
Risks Related to Our Dependence on Third Parties
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 and Ernst & Young, 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 integrates with SAP’s ERP solutions. SAP is part of the reseller channel that we use in the ordinary course of business. SAP has the ability to resell our solutions as an SAP solution-extension (“SolEx”), for which we receive a percentage of the revenues. 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
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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 resold by SAP as a solution extension, 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.
We rely on Google Cloud Platform (GCP), Microsoft Azure (Azure), Amazon Web Services (AWS) and third-party data centers (collectively, “public cloud providers”) to deliver our cloud-based software solutions, and any disruption of our use of public cloud providers could negatively impact our operations and harm our business.
We manage our software solutions and serve most of our customers using a cloud-based infrastructure that has historically been operated in a limited number of third-party data center facilities in North America and Europe. We are developing plans to migrate some of our third-party data centers to GCP, increasing our reliance on this cloud provider. Additionally, we rely on Azure to serve Rimilia customers, and we rely on AWS to serve FourQ customers. As we implement the transition to GCP, there could be occasional planned or unplanned downtime for our cloud-based software solutions and potential service delays, all of which will impact our customers’ ability to use our solutions. We may also need to divert resources away from other important business operations, which could harm our business and growth. Additionally, if the costs to migrate to GCP are greater than we expect or take significantly more time than we anticipate, our business could be harmed.
We do not control the operation of our public cloud providers. Any changes in third-party service levels or any disruptions or delays from errors, defects, hacking incidents, security breaches, computer viruses, DDoS attacks, bad acts or performance problems could harm our reputation, damage our customers’ businesses, and adversely affect our business and operating results. Our public cloud providers are also vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, war, public health crises, such as COVID-19, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events. We may have limited remedies against third-party providers in the event of any service disruptions. If our third-party public cloud providers are compromised or unavailable or our customers are unable to access our solutions for any reason, our business would be materially and adversely affected.
Our customers have experienced minor disruptions and outages in accessing our solutions in the past, and may 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 public cloud providers. Our public cloud 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 our customers. 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 requires lead time. As we continue to restructure our data management plans, and increase our cloud hosting capacity, 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. Our public cloud providers have no obligations to renew their agreements with us on commercially reasonable terms, or at all. If any of our public cloud providers increases pricing terms, terminates or seeks to terminate our contractual relationship, establishes more favorable relationships with our competitors, or changes or interprets their terms of service or policies in a manner that is unfavorable with respect to us, we may be required to transfer to other providers. If we are required to transfer to other providers, we would incur significant costs and experience possible service interruption in connection with doing so.
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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.
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.
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, including third-party SaaS applications, 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.
Risks Related to Our Legal and Regulatory Environment
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 personnel in Australia, Canada, France, Germany, India, Japan, Mexico, the 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 Company B.V. ("Runbook"), a Netherlands-based provider of financial close automation software solutions to SAP customers, which is referred to as the "Runbook Acquisition". 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”). In October 2020, we acquired Rimilia ("Rimilia"), a United Kingdom-based provider of accounts receivable automation solutions that enable organizations to control cash flow and cash collection in real time. This acquisition is referred to as the "Rimilia Acquisition." On January 26, 2022, we acquired FourQ, which is a U.S.-based company with operations in India and Mexico (the "FourQ Acquisition"). We derived approximately 28% and 28% of our revenues from sales outside the United States in the nine months ended September 30, 2022 and 2021, respectively. Any international expansion efforts that we may undertake, such our Japanese Joint Venture, our Rimilia Acquisition, or our FourQ Acquisition, 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;
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•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, such as sanctions against Russia in response to the war in Ukraine;
•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 increasing inflation;
•the impact of natural disasters, climate change, war, including the war in Ukraine, and public health pandemics, such as COVID-19, on employees, customers, partners, third-party contractors, travel and the global economy; and
•reduced or varied protection for intellectual property rights in some countries.
These factors may cause our international costs of doing business to exceed our comparable domestic costs. Operating in international markets also requires significant management attention and financial resources. Any negative impact from our international business efforts could negatively impact our business, results of operations and financial condition as a whole.
We use third-party contractors outside of the United States to supplement our research and development capabilities, which may expose us to risks, including risks inherent in foreign operations.
We use third-party contractors outside of the United States to supplement our research and development capabilities. We currently use third-party contractors located in Romania, the Netherlands, China and India. Outbreaks of pandemic diseases, such as COVID-19, or the fear of such events, have required us to shut down certain workplaces, which could decrease productivity and increase reliance on remote solutions, which present different security challenges. Further, ongoing geopolitical tensions related to Russia's invasion of Ukraine have affected other regions, such as China and Germany, which may negatively impact our third-party contractors in those locations. 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 privacy, security, or data protection 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.
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.
Privacy, security, and data protection are significant concerns in the United States, Europe and 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 highly fragmented and 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 personal information and other data related to individuals, and federal and state consumer protection laws are being applied to enforce regulations related to the
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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 or incidents 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 EU, where we conduct business and have offices or utilize vendors, 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. For example, the EU General Data Protection Regulation (the "GDPR") imposes stringent EU data protection requirements for processors and controllers of personal data. As a regulation, the GDPR applies throughout all EU member states but permits member states to enact supplemental requirements in certain areas. Noncompliance with the GDPR can trigger penalties up to €20 million or 4% of global annual revenues, whichever is higher.
With regard to transfers of personal data from EU data subjects, the “Schrems II” decision issued by the Court of Justice of the European Union ("CJEU") on July 16, 2020 invalidated the EU-U.S. Privacy Shield framework, and the Swiss data protection authority determined that the Swiss-U.S. Privacy Shield was no longer sufficient for the United States to be deemed adequate as a data transfer party. Following these decisions, we rely on the EU Standard Contractual Clauses (the "SCCs") as our primary mechanism for transfer of personal data of EU data subjects from the European Economic Area (the "EEA") and Switzerland to other jurisdictions without the European Commission's adequacy decision, including the United States. On June 4, 2021, the European Commission issued new SCCs that account for the CJEU's decision and other developments, and were and are required to be put in place over time. The new SCCs and guidance provided by the European Data Protection Board (the "Recommendations") obligate BlackLine to conduct transfer impact assessments for cross-border data transfers and possibly adopt supplemental security measures. There is no guarantee that our customers will be satisfied with our assessments or supplemental measures.
We may, in addition to other impacts, experience additional costs associated with increased compliance burdens following the Schrems II decision, the new SCCs and the Recommendations, and in connection with regulatory guidance and other developments relating to cross-border data transfers, and we and our customers face the potential for regulators in the EEA to apply different standards to the transfer of personal data from the EEA to the United States, and to block, or require ad hoc verification of measures taken with respect to, certain data flows from the EEA to the United States. Further, on June 28, 2021, the EU Commission adopted an "adequacy decision," which allows for free flow of personal data between the EU and the United Kingdom. This adequacy decision includes a "sunset clause," which strictly limits its duration to four years. During this four-year period, the Commission could intervene at any time if the United Kingdom deviates from the level of protection currently in place. The United Kingdom has enacted legislation substantially implementing the GDPR, with penalties for noncompliance of up to the greater of £17.5 million or four percent of worldwide revenues. It is, however, uncertain how data protection laws and related regulations will develop in the United Kingdom over time, and if and when the Commission might make use of this right to intervene. Any restriction on the free flow of personal data between the EU and the United Kingdom could adversely impact our customers' use of our products and our operating results. Further, the United Kingdom has, like the EU, adopted new standard contractual clauses for use when transferring personal data outside its borders, which we are required to implement over time. We also may be required to engage in new contract negotiations with third parties that aid in processing data on our behalf and to modify our related policies or procedures. Our means for transferring personal data from the EEA, Switzerland, and the United Kingdom may not be adopted by all of our customers and may be subject to legal challenge by data subjects and protection authorities. We may also experience reluctance or refusal by European customers to use our solutions due to potential risk exposure. We and our customers face a risk of fines and other enforcement actions taken by EU and national data protection authorities regarding cross-border data transfers, including from and to the United States. Any such fines or enforcement actions could result in substantial costs and diversion of resources, distract management and technical personnel and negatively affect our business, operating results and financial condition.
Jurisdictions outside of the United States and the EU are also passing more stringent privacy, data protection and data security laws. For example, on July 8, 2019, Brazil enacted the General Data Protection Law (Lei Geral de Proteção de Dados Pessoais) (Law No. 13,709/2018) (“LGPD”), and on June 5, 2020, Japan passed amendments to its Act on the Protection of Personal Information (“APPI”), which came into effect on April 1, 2022. Both laws
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broadly regulate the processing of personal information in a manner comparable to the GDPR, and violators of the LGPD and APPI face substantial penalties. We continue to see jurisdictions imposing data localization laws, which require personal information, or certain subcategories of personal information, to be stored in the jurisdiction of origin. These regulations may inhibit our ability to expand into those markets or prohibit us from continuing to offer services in those markets without significant additional costs.
In China, we continue to monitor legal and government advisory developments regarding the Chinese Cybersecurity Law and Cybersecurity Review Measures for impact to our business related to cross-border transfer limitations and evolving privacy, security, and data protection requirements. On August 20, 2021, the Personal Information Protection Law of the People's Republic of China ("PIPL") was adopted and went into effect on November 1, 2021. PIPL shares similarities with the GDPR, including extraterritorial application, data minimization, data localization, and purpose limitation requirements, and obligations to provide certain notices and rights to citizens of China. PIPL allows for fines of up to 50 million renminbi or 5% of revenue in the prior year. Any additional laws that may be passed, and any guidance under such laws or existing laws may impose requirements that potentially conflict or would otherwise be challenging to comply with. PIPL and any such other laws relating to privacy, data protection and cybersecurity in China may require us to modify our operations, and may limit our ability to collect, retain, store, use, share, disclose, transfer, disseminate, and otherwise process personal data, may require additional investment of resources in our compliance programs, may impact strategies, and could result in increased compliance costs and/or changes in our ongoing or planned business practices and policies.
Regulation of privacy, data protection and data security has also become more stringent in the United States. For example, California enacted the California Consumer Privacy Act (“CCPA”), that, among other things, gives California residents expended rights to access and delete their personal information, opt out of certain sales of personal information, and receive detailed information about how their personal information is used. It also provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA became effective on January 1, 2020. Regulations of the California Attorney General came into effect on August 14, 2020. 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. Moreover, a new privacy law, the California Privacy Rights Act (“CPRA”) was approved by California voters on November 3, 2020. The CPRA takes effect on January 1, 2023, and becomes enforceable on July 1, 2023. It significantly modifies and expands upon the CCPA, creating new customer rights and imposing additional obligations on businesses that collect data from California consumers. The CCPA, as amended by the CPRA, may increase our compliance costs and potential liability. The enactment of the CCPA has prompted similar legislative developments in other states such as Virginia, which in March 2021 enacted a Consumer Data Protection Act that will go into effect January 1, 2023, Colorado, which in June 2021 enacted a Colorado Privacy Act that will go into effect July 1, 2023, Utah, which in March 2022 enacted a Consumer Privacy Act that will go into effect December 31, 2023, and Connecticut, which in May 2022 enacted the Connecticut Act Concerning Personal Data Privacy and Online Monitoring that will go into effect on July 1, 2023. Other state legislatures are considering similar laws, and as additional U.S. states pass privacy and data security laws, these laws may place different obligations or limitations on the processing of personal information of individuals in those states, and it may become more complex to comply with these laws, and our compliance costs and potential liability may increase. The U.S. federal government is also contemplating federal privacy legislation. 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.
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.
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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, 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 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, regions, 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 regions 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.
In addition, various countries could enact 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 current 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.
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 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.
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,
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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. The D.C. Circuit Court of Appeals recently upheld the FCC’s repeal, but ordered the FCC to reconsider certain elements of the repeal; thus the future impact of the FCC's repeal and any changes thereto remains uncertain. In addition, in September 2018, California enacted the California Internet Consumer Protection and Net Neutrality Act of 2018, making California the fourth state to enact a state-level net neutrality law since the FCC repealed its nationwide regulations. This act mandated that all broadband services in California be provided in accordance with California's net neutrality requirements. The U.S. Department of Justice has sued to block the law going into effect, and California has agreed to delay enforcement until the resolution of the FCC's repeal of the federal rules. A number of other states are considering legislation or execution action that would regulate the conduct of broadband providers. In its recent decision on the FCC’s repeal, the D.C. Circuit Court of Appeals also ruled that the FCC does not have the authority to bar states from passing their own net neutrality rules. It is uncertain whether the FCC will argue that some state net neutrality laws are preempted by federal law and challenge such state net neutrality laws on a case-by-case basis. We cannot predict whether the FCC order or state initiatives will be modified, overturned or vacated by legal action. Additional changes in the legislative and regulatory landscape regarding internet neutrality, or otherwise regarding the regulation of the internet, could also harm our business.
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.
U.S. tax laws that, among other things, include 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 increase our effective tax rate. 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. In addition, the United States has recently enacted the Inflation Reduction Act, which includes, among other provisions, an alternative minimum tax on adjusted financial statement income and a 1% excise tax on stock buybacks. These and other proposed or implemented changes in U.S. tax law could adversely impact our financial results. Finally, current and future changes to non-U.S. tax laws, including the continuing development of the Organization for Economic Cooperation and Development Base Erosion and Profit Shifting recommendations, could negatively impact the anticipated tax benefits of our international structure or increase taxes imposed upon us.
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.
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Risks Related to Our Intellectual Property
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 two patents and 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.
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 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.
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;
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•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 perceived privacy, security, or data protection incidents;
•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, such as Russia's invasion of Ukraine, incidents of terrorism, outbreaks of pandemic diseases, such as COVID-19, presidential elections, civil unrest, or responses to these events.
In addition, the stock markets, and in particular the Nasdaq 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 and stock prices generally dropped significantly in the fourth quarter of 2021 and first half of 2022. 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.
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.
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.
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.
Risks Related to Our Outstanding Convertible Notes
We may not have sufficient cash to settle conversions of the Notes in cash, to repurchase the Notes upon a fundamental change, or to repay the principal amount of the Notes in cash at their maturity, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the Notes.
Holders of either series of the Notes will have the right to require us to repurchase all or a portion of such Notes upon the occurrence of a fundamental change before the applicable maturity date at a repurchase price equal to 100% of the principal amount of such Notes to be repurchased, plus accrued and unpaid interest or special interest, if any, as described in the applicable indenture governing such Notes. In addition, upon conversion of the Notes of the applicable series, 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 such Notes being converted, as described in the applicable indenture governing such Notes. Moreover, we will be required to repay the Notes of the applicable series in cash at their respective maturity unless earlier converted, redeemed, or repurchased. However, we may not have enough available cash on hand or be able to obtain financing at the time we are required to make repurchases of such Notes surrendered therefor or pay cash with respect to such series of Notes being converted or at their respective maturity. Further, if either series of the Notes convert and we elect to issue common stock in lieu of cash upon conversion, our existing stockholders could suffer significant dilution.
In addition, our ability to repurchase the Notes of the applicable series or to pay cash upon conversions of the Notes or at their respective maturity may be limited by law, regulatory authority, or agreements governing our future
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indebtedness. Our failure to repurchase such Notes at a time when the repurchase is required by the applicable indenture governing such Notes or to pay cash upon conversions of such Notes or at their respective maturity as required by the applicable indenture governing such Notes would constitute a default under such indenture. A default under such 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 applicable indenture governing the Notes 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 such series of Notes or pay cash with respect to such series of Notes being converted or at maturity of such series of Notes.
Our current and future indebtedness may limit our operating flexibility or otherwise affect our business.
Our existing and future indebtedness could have important consequences to our stockholders and significant effects on our business. For example, it could:
•make it more difficult for us to satisfy our debt obligations, including the Notes;
•increase our vulnerability to general adverse economic and industry conditions;
•require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund working capital and other general corporate purposes;
•limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•restrict us from exploiting business opportunities;
•place us at a competitive disadvantage compared to our competitors that have less indebtedness; and
•limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general purposes.
Any of the foregoing could have a material adverse effect on our business, results of operations or financial condition.
The conditional conversion feature of each series of the Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of either series of Notes is triggered, holders of the Notes of such series will be entitled under the applicable indenture governing the Notes to convert such Notes at any time during the specified periods at their option. At September 30, 2022, the conditional conversion features of the Notes were not triggered. If one or more holders of a series elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation in cash, which could adversely affect our liquidity. In addition, in certain circumstances, such as conversions by holders or redemption, we could be required under applicable accounting rules to reclassify all or certain of the outstanding principal of such series of Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
We are subject to counterparty risk with respect to the Capped Calls.
In connection with the issuance of the Notes, we entered into the Capped Calls with the counterparties with respect to each series of Notes.
The counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions at any time prior to the respective maturity of the Notes (and are likely to do so on each exercise date of the capped call transactions). This activity could also cause or prevent an increase or a decrease in the market price of our common stock.
In addition, global economic conditions have in the past resulted in the actual or perceived failure or financial difficulties of many financial institutions. The counterparties to the Capped Calls are financial institutions and we will
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be 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. 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 transaction. Our exposure will depend on many factors but, generally, it will increase if the market price or the volatility of our common stock increases. Upon a default or other failure to perform, or a termination of obligations, by a counterparty, we may suffer adverse tax consequences and 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.
General Risk Factors
We may require additional capital to support business growth, and this capital may 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, or we may opportunistically decide to raise capital. 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 or convertible debt 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.
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 of 2002 (the "Sarbanes-Oxley Act"), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of Nasdaq, 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 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
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and practice, regulatory authorities may initiate legal proceedings against us and our business, financial conditions, and operating results may be adversely affected.
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. 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.
We may 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 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.
Natural disasters, climate change, and other events beyond our control could harm our business.
Natural disasters, climate change, 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, climate-related events, pandemics, such as COVID-19, terrorism, political unrest, geopolitical instability, war, such as the war in Ukraine, 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, could decrease demand for our solutions, and could cause us to incur substantial expense. 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, and is projected to continue to experience, major earthquakes, droughts, heat waves, wildfires, and power shutoffs associated with wildfire prevention. Significant recovery time could be required to resume operations and our business could be harmed in the event of a major earthquake or other catastrophic event. Our insurance may not be sufficient to cover related losses or additional expenses that we may sustain. In addition, we may be subject to increased regulations, reporting requirements, standards, or expectations regarding the environmental impacts of our business, and failure to comply with such regulations, requirements, standards or expectations could adversely affect our reputation, business or financial performance.
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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
| Exhibit Number | Description | Form | File No. | Exhibit | Filing Date | |||||||||||||||||||||||||||
| 31.1 | ||||||||||||||||||||||||||||||||
| 31.2 | ||||||||||||||||||||||||||||||||
| 32.1† | ||||||||||||||||||||||||||||||||
| 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) | |||||||||||||||||||||||||||||||
†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/ Marc Huffman | ||||||||||
| Marc Huffman | |||||||||||
| Chief Executive Officer | |||||||||||
| (Principal Executive Officer) | |||||||||||
| Date: November 4, 2022 | |||||||||||
| By: | /s/ Mark Partin | ||||||||||
| Mark Partin | |||||||||||
| Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
| Date: November 4, 2022 | |||||||||||
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