424B4 1 d76087d424b4.htm 424B4 424B4
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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-213334

6,000,000 Shares

 

LOGO

Class A Common Stock

 

 

This is an initial public offering of shares of Class A common stock of Apptio, Inc.

Following this offering, we will have two classes of authorized common stock, Class A common stock and Class B common stock. All shares of our capital stock outstanding prior to this offering will convert into shares of our Class B common stock. The rights of the holders of Class A common stock and Class B common stock will be identical, except with respect to voting and conversion rights. Each share of Class A common stock will be entitled to one vote per share. Each share of Class B common stock will be entitled to ten votes per share and is convertible into one share of Class A common stock. Outstanding shares of Class B common stock will represent approximately 98% of the voting power of our outstanding capital stock immediately following the closing of this offering.

Prior to this offering, there has been no public market for the Class A common stock. The initial public offering price per share is $16.00. Our Class A common stock has been approved for listing on The NASDAQ Global Market under the symbol “APTI.”

We are an “emerging growth company” as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for this and future filings.

Investing in our Class A common stock involves risks. See the section of this prospectus captioned “Risk Factors” beginning on page 14 to read about factors you should consider before buying shares of the Class A common stock.

 

 

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

 

 

 

           Per Share                    Total          

Initial public offering price

   $ 16.00           $ 96,000,000   

Underwriting discount

   $ 1.12           $ 6,720,000   

Proceeds, before expenses, to us

   $ 14.88           $ 89,280,000   

To the extent that the underwriters sell more than 6,000,000 shares of Class A common stock, the underwriters have the option to purchase up to an additional 900,000 shares from us at the initial public offering price less the underwriting discount.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on September 28, 2016.

 

Goldman, Sachs & Co.   J.P. Morgan    BofA Merrill Lynch

 

Barclays   Jefferies    RBC Capital Markets   

Pacific Crest Securities

a division of KeyBanc Capital Markets

Prospectus dated September 22, 2016


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Table of Contents

TABLE OF CONTENTS

 

    Page

PROSPECTUS SUMMARY

    1   

RISK FACTORS

    14   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

    44   

USE OF PROCEEDS

    46   

DIVIDEND POLICY

    47   

CAPITALIZATION

    48   

DILUTION

    50   

SELECTED CONSOLIDATED FINANCIAL DATA

    52   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    55   

BUSINESS

    87   

MANAGEMENT

    106   

EXECUTIVE COMPENSATION

    115   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

    130   

PRINCIPAL STOCKHOLDERS

    134   

DESCRIPTION OF CAPITAL STOCK

    137   

SHARES ELIGIBLE FOR FUTURE SALE

    144   

MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO NON-U.S. HOLDERS OF CLASS A COMMON STOCK

    147   

UNDERWRITING

    151   

LEGAL MATTERS

    156   

EXPERTS

    156   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

    156   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

    F-1   

 

 

Through and including October 17, 2016 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

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

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. It does not contain all of the information that may be important to you and your investment decision. You should carefully read this entire prospectus, including the matters set forth under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes.

Overview

We are the leading provider of Technology Business Management, or TBM, solutions. We pioneered the TBM software category to provide the strategic business management system for the CIO because IT needed a data-driven system comparable to those leveraged by other enterprise functions such as sales, human resources and finance. Our cloud-based platform and SaaS applications enable IT leaders to analyze, optimize and plan technology investments, and to benchmark their financial and operational performance against peers. We empower IT leaders to transform IT into a service provider, to navigate the cloud transition, and to shift technology resources to drive more business innovation.

Our TBM solutions consist of a powerful, cloud-based platform and a suite of SaaS applications: Cost Transparency, IT Benchmarking, Business Insights, Bill of IT and IT Planning. Our data and analytics platform leverages proprietary modeling capabilities, powerful self-service analytics and planning workflows to enable customers to make actionable, data-driven strategic and operational decisions. Our platform automatically aggregates, cleanses and establishes relationships across large amounts of customer data from disparate sources and maps the data into our standard IT operating model. Our solutions are the business system of record for our customers’ IT organizations.

Our growing customer base, which includes over 40% of the FORTUNE 100, spans a broad spectrum of industries, including financial services, professional services, technology, energy, consumer goods, manufacturing, healthcare, media, retail and transportation, as well as federal and state government agencies. We offer our solutions on a subscription basis, with subscription fees based on spend managed by our applications and the number of applications or capabilities for which the customer has subscribed. Our customers’ annual IT spend ranges from less than $10 million to billions of dollars.

We formed the Technology Business Management Council, or TBM Council, as a separate non-profit entity in 2012 to foster the growth of the TBM category. The TBM Council has become the leading community for CIOs, IT professionals and IT finance professionals dedicated to advancing the discipline of managing the business of IT, with over 2,900 members. This community establishes industry-endorsed best practices for TBM and helps create a powerful network effect for TBM solutions.

We had total revenue of $73.8 million, $106.6 million and $129.3 million in 2013, 2014 and 2015, respectively, reflecting a year-over-year increase of 45% and 21% in 2014 and 2015, respectively. For 2013, 2014 and 2015, our net losses were $23.7 million, $32.9 million and $41.0 million, respectively, as we focused on growing our business.

 



 

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Industry Background

Digitalization of business processes has increasingly made technology a strategic priority for enterprises of all sizes and across industries. Rapid innovation in technology, particularly the emergence of cloud computing, is simultaneously increasing the complexity of technology decision making and fundamentally transforming the way IT services are delivered. To gain and maintain a competitive advantage, IT leaders must focus more time and resources on transforming their IT business, and less time managing legacy infrastructure and applications.

In today’s world, IT professionals must not only measure and manage traditional infrastructure, but also a wide array of modern IT options, such as cloud computing and IT purchased directly by business units. IT leaders are faced with the need to evaluate hybrid approaches to IT, using a mixture of public cloud, private cloud and owned infrastructure solutions in order to best suit their application, workload and business needs.

The challenge with traditional approaches to managing IT is that technology and business leaders do not always have the data and analytics to understand how technology spending and services align to business priorities. The IT function has historically lacked the insight into costs, capacity, and utilization necessary to make data-driven decisions. However, business and IT leaders desire the ability to make fast decisions, drive innovation and adopt new technology to drive better business results, while also demanding better control, cost management and asset utilization. In order to be aligned on objectives, business and IT leaders need data and analytical solutions to drive optimal business results. The benefits the cloud provides in agility and cost are driving greater urgency by IT leaders to adopt solutions enabling them to understand their existing infrastructure and make decisions on how their infrastructure needs evolve as part of an ongoing transition.

Given these factors, we believe that there is significant pent up demand for a single system of record to manage the business of IT.

Our Opportunity

We believe the total addressable market for TBM solutions is large and largely unpenetrated. The total addressable market for our solutions is driven by global IT spend, which Gartner, an independent technology industry and market research firm, expects to be $2.7 trillion in 2016, which is the sum of all enterprise IT spending by vertical industry market worldwide.1 Subscription fees for our applications are based primarily on the customer’s annual costs being managed by our applications and the number of applications or capabilities for which the customer has subscribed. We typically sell a subset of the five applications we offer so that customers can realize a rapid time to value from a targeted implementation, and seek to sell additional applications over time. Assuming full deployment of all of our current applications, subscription fees typically range from 0.1% to 0.5% of a customer’s annual IT spend. With a reasonable expectation of our ability to penetrate the market, we believe that the current total addressable market for our existing TBM solutions is approximately $6 billion.

We also believe that, with the development of additional capabilities and applications, our platform can be extended to other areas of customers’ businesses. In fact, our solutions are currently deployed by several customers to address a variety of non-IT, enterprise business management use cases in shared services such as legal, human resources and facilities and for analyzing operational

 

1  See Gartner note (1) in the section of this prospectus captioned “Special Note Regarding Forward Looking Statements.”

 



 

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metrics, and we believe that enterprise business management use cases such as these represent future market opportunities. If we are successful in our strategy of developing and selling additional applications beyond our current offerings, we believe that our market opportunity will expand.

Our Technology Business Management Solutions

We provide the business system of record used by our customers’ IT organizations to analyze, optimize and plan investments, and benchmark their financial and operational performance against peers. Our TBM solutions consist of a powerful, cloud-based platform and a suite of SaaS applications that empower IT leaders to understand, communicate and transform IT to drive greater value from technology investments.

Key elements of our solutions include:

 

    Adaptive Data Management. Our purpose-built, cloud-based data and analytics platform aggregates, cleanses and correlates large amounts of customer data from a wide variety of disparate sources. Our typical customer starts with a handful of data sources and has the option to integrate data from hundreds of sources ranging from general ledger data, human resources data, billing data, and service management and other operational data.

 

    Standard IT Operating Model and Taxonomy. Our platform is underpinned by a flexible framework that provides a standard model for how IT costs are captured, categorized and allocated to IT services and business services.

 

    Visual Modeling and Powerful Calculation Engine. Our visual modeling capabilities allow users to intuitively build and manage the financial and operational model of their IT organization.

 

    Intuitive, Self-Service Analytics. Our analytics interface is powerful, yet easy to use by a broad range of IT and business users.

 

    Modular Applications. Our platform currently includes five SaaS applications that can be deployed in a modular fashion: Cost Transparency, IT Benchmarking, Business Insights, Bill of IT and IT Planning.

Our platform provides the following benefits:

 

    Increase the Value of IT. Our solutions deliver transparency and actionable insights to IT leaders, enabling them to manage IT in the context of the business. As a result, our solutions enable IT leaders to change their IT organizations from a reactive cost center to a proactive service provider and increase the return on business investments through initiatives such as application rationalization and infrastructure optimization.

 

    Understand and Communicate IT Costs. Our solutions provide IT and business leaders with a business system of record that gives a comprehensive, transparent and up-to-date view of the costs of IT services associated with specific business functions and services. With this insight, IT leaders can work with business leaders to evaluate different IT options, such as cloud versus owned infrastructure and custom-built or purchased versus SaaS applications, and make better, data-driven decisions.

 



 

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    Optimize IT Investments to Drive Better Business Results. Our solutions enable IT professionals to more efficiently manage existing IT investments and focus incremental effort and spend on innovating and expanding technology investments where they can drive the most value for the business. In addition, our solutions, with their dynamic analytics, key performance indicators, and benchmarking capabilities, allow professionals to optimize investments on an ongoing basis, unlike initiatives based on the advice of consultants or internally developed legacy business processes held together by spreadsheets.

 

    Plan IT Investments. IT professionals can collaborate with the business to understand their demand for IT services, and then plan efficiently and predictably to meet these demands.

 

    Transform IT into a Service Provider. Our solutions enable IT to be delivered as a service regardless of whether it is provided by internal resources, cloud providers or other external service providers. Using our solutions, IT leaders can provide transparency into total and unit costs of alternatives and are able to correlate costs to expected value. This empowers business leaders with real, data-driven choices to better align IT and business objectives.

Our Competitive Strengths

The following strengths are key to our success:

 

    TBM Category Creation and Thought Leadership. We pioneered the TBM category and are its market and thought leader. We believe our efforts and position at the center of the TBM ecosystem allow us to benefit from a network effect, accelerating market adoption of TBM solutions and customer acquisition.

 

    High Profile Reference Accounts and CIO Engagement. We currently have over 325 customers across various industries, with over 40% of the FORTUNE 100 using our solutions. Our high profile customers and CIO engagement leads to enhanced credibility and better lead generation and conversion.

 

    Deep IT Business Process Expertise. We have a deep and unique understanding of the role of IT, IT business processes and how IT can maximize business value. We embed this expertise into our purpose-built solutions and these efforts allow us to deliver a compelling value proposition to customers.

 

    Unique Data Set. We have built a large and unique aggregated data set of customer IT spend across a spectrum of industries, geography and amount of spend. We believe that this data set is the most extensive, granular and up-to-date data set of its kind. This allows us to deliver solutions that provide unique benchmarking capabilities. As our customer base continues to grow, our data set will become deeper and richer, increasing its value.

 

    Unbiased Approach. Our focus on TBM allows us to provide customers an unbiased assessment of IT solutions offered by providers of infrastructure, applications and services. We believe this has led to deep customer trust. Customers need not be concerned that we have a competing agenda and seek to drive technology decisions that will benefit us economically.

 



 

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    Proven, Enterprise Class Cloud-Based Platform. Our solutions are cloud-based, allowing us to provide enterprise-class software solutions that are regularly updated and highly scalable to customers around the globe.

Our Growth Strategy

We are pursuing the following strategies to grow our business:

 

    Expand Our Customer Base. We believe the market for TBM solutions is large, growing and under-penetrated. We intend to leverage our strong brand, leadership position, high-profile customer base from a wide range of industries and experienced sales team to target customers with a wide range of IT spend and across industries.

 

    Further Maximize Our Existing Customer Base. Many customers initially subscribe for a subset of the applications we offer so they can realize rapid time to value by reducing costs or shifting technology investments to where they will be most productive. We seek to generate additional revenue from customers by selling subscriptions to other existing or newly developed applications and modules, and expanding the use of our solutions to additional business units.

 

    Continue to Foster the IT Leader Community. We will continue to support the TBM Council and leverage our leadership position in a large and growing IT leader community to increase awareness and adoption of TBM solutions. Our relationship with the TBM Council helps us introduce a growing body of CIOs and other leaders to the advantages of TBM and to our solutions, and continues to create a network effect as members exchange information, ideas and experiences with TBM.

 

    Continue to Deliver Innovative Products. We have made, and will continue to make, significant investments in product development to enhance the capabilities of our existing applications and expand the number of applications on our extensible platform to address customers’ evolving needs.

 

    Leverage Our Unique Position to Deliver Valuable Benchmarking Data. Over time, we believe there will be substantial opportunities to leverage our large, unique and growing aggregated data set by embedding data insights in our solutions or by selling data to customers or third parties on a standalone basis.

 

    Expand Internationally. We have a growing presence in Europe and Australia. We believe that there is significant opportunity for our TBM solutions outside of the United States, and we intend to expand our direct sales force and third-party relationships to further penetrate these and other regions.

 

    Expand into Enterprise Business Management. Many shared services groups, such as legal, facilities and human resources, face similar challenges to IT in making data-driven decisions and lack a software solution to help them do so. We believe a substantial market exists for enterprise business management outside of the IT organization.

 



 

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Risks Associated with Our Business

Our business is subject to numerous risks and uncertainties, including those highlighted in the section of this prospectus captioned “Risk Factors” immediately following this prospectus summary. Some of these risks are:

 

    We have a history of losses, our revenue growth rate may decline and we expect our costs to increase. As our costs increase, we may not be able to generate sufficient revenue to achieve or maintain profitability in the future.

 

    The TBM market is relatively new and increasingly competitive and if the market fails to further develop or we are unable to compete effectively, our business, results of operations, financial condition and growth prospects will be harmed.

 

    If we fail to acquire new customers, convince our existing customers to adopt our solutions, renew their subscriptions and purchase additional subscriptions, or to adapt our solutions to changing market dynamics and customer preferences, or to achieve increased market acceptance of our TBM solutions, our business, results of operations, financial condition and growth prospects will be harmed.

 

    We have a limited operating history, which makes it difficult to predict our future operating results. Our quarterly operating results may fluctuate and be unpredictable, and because we recognize revenue from subscriptions ratably over the term of the agreement, near-term changes in sales may not be reflected immediately in our operating results.

 

    We may not achieve anticipated revenue growth from expanding our sales force or from our development efforts, if at all.

 

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

Corporate Information

We were incorporated in Delaware in October 2007. Our principal executive offices are located at 11100 NE 8th Street, Suite 600, Bellevue, Washington 98004. Our telephone number is (866) 470-0320. Our website address is www.apptio.com. Information contained on, or that can be accessed through, our website does not constitute part of this prospectus and inclusions of our website address in this prospectus are inactive textual references only.

Unless the context indicates otherwise, as used in this prospectus, the terms “Apptio,” “the Company,” “we,” “us” and “our” refer to Apptio, Inc. and its subsidiaries, Apptio Europe Limited, Apptio GmbH, Apptio Nordic ApS, Apptio NL B.V., Apptio Pty Ltd and Apptio Technology Canada Ltd. We use “APPTIO®”, “APPTIO TBM UNIFIED MODEL®”, “ATUM®”, the Dissolving Circle Logo Design and other marks as trademarks in the United States and other countries. This prospectus contains references to our trademarks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the ® or ™ symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other entities’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other entity.

 



 

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Additionally, we are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, and therefore we may take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments. In addition, the JOBS Act provides that an “emerging growth company” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption and, therefore, we will not be subject to the same implementation timing of new or revised accounting standards as other public companies that are not “emerging growth companies” until these standards apply to private companies unless we elect to early adopt as permitted by the relevant guidance for private companies.

 



 

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The Offering

 

Class A common stock offered by us

6,000,000 shares.

 

Class A common stock to be outstanding after this offering

6,000,000 shares (or 6,900,000 shares if the underwriters exercise their option to purchase additional shares in full).

 

Class B common stock to be outstanding after this offering

31,285,839 shares.

 

Total Class A common stock and Class B common stock to be outstanding after this offering

37,285,839 shares.

 

Option to purchase additional shares of Class A common stock from us

900,000 shares.

 

Use of proceeds

We estimate that the net proceeds from the sale of shares of Class A common stock in this offering will be approximately $86.0 million (or approximately $99.4 million if the underwriters exercise their option to purchase additional shares in full), based upon the initial price to public of $16.00 per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering to repay $20.2 million principal and pre-payment fees for amounts borrowed under our credit facilities, and the remainder for working capital and other general corporate purposes, including making investments in our sales, marketing, professional services and product development organizations. Additionally, we may choose to expand our current business through acquisitions of or investments in other complementary businesses, technologies, or other assets. However, we currently have no agreements or commitments with respect to any such acquisitions or investments. See the section of this prospectus captioned “Use of Proceeds” for additional information.

 

Voting rights

Shares of Class A common stock are entitled to one vote per share.

 

  Shares of Class B common stock are entitled to 10 votes per share.

 

 

Holders of Class A common stock and Class B common stock will generally vote together as a single class, unless otherwise required by law or our certificate of incorporation. The holders of our outstanding Class B common stock will hold approximately 98% of the voting power of our outstanding capital stock following this offering. Our executive officers and directors and their related parties, which include funds affiliated with Madrona Venture Group and Shasta Ventures, and the other holder of 5% or more of our common stock, will

 



 

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collectively beneficially own shares representing 66.2% of the voting power of our outstanding capital stock following this offering. Consequently, the holders of Class B common stock will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our directors and the approval of any change in control transaction. See the sections of this prospectus captioned “Principal Stockholders” and “Description of Capital Stock” for additional information.

 

Trading symbol

“APTI”.

Prior to the closing of this offering, we had one class of common stock. Upon the closing of this offering, we will have authorized a new class of Class A common stock and a new class of Class B common stock. All currently outstanding shares of common stock and convertible preferred stock (including shares issuable upon the exercise of the warrants described below) will convert into shares of new Class B common stock. In addition, all currently outstanding options to purchase shares of capital stock will become exercisable for shares of new Class B common stock.

The number of shares of common stock to be outstanding following this offering is based on 31,285,839 shares of common stock outstanding as of June 30, 2016, and excludes:

 

    11,394,824 shares of Class B common stock issuable upon exercise of options outstanding as of June 30, 2016, at a weighted-average exercise price of $9.28 per share;

 

    551,548 shares of Class B common stock reserved for future issuance under our 2007 Stock Plan as of June 30, 2016. Our 2007 Stock Plan has been terminated and no further awards will be granted under it;

 

    222,920 shares of Class B common stock reserved for future issuance under our 2011 Executive Equity Incentive Plan as of June 30, 2016. Our 2011 Executive Equity Incentive Plan has been terminated and no further awards will be granted under it;

 

    an aggregate of 4,550,000 shares of Class A common stock reserved for future issuance under our 2016 Equity Incentive Plan and 2016 Employee Stock Purchase Plan, each of which became effective on the business day immediately prior to the date of effectiveness of the registration statement of which this prospectus forms a part; and

 

    75,214 shares of Class B common stock issuable upon the exercise of warrants outstanding as of June 30, 2016 at a weighted-average exercise price of $9.52 per share, after conversion of the convertible preferred stock.

Unless otherwise indicated, other than in our consolidated financial statements, this prospectus reflects and assumes the following:

 

    the reclassification of outstanding common stock into an equivalent number of shares of newly authorized Class B common stock, which will occur immediately prior to the closing of this offering, and the authorization of Class A common stock;

 



 

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    the conversion of all outstanding shares of convertible preferred stock into an aggregate of 18,239,475 shares of Class B common stock immediately prior to the closing of this offering;

 

    the filing of the certificate of incorporation immediately prior to the closing of this offering; and

 

    no exercise by the underwriters of their option to purchase up to an additional 900,000 shares of Class A common stock.

 



 

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Summary Consolidated Financial Data

We derived the following summary consolidated statements of operations data for the years ended December 31, 2014 and 2015 from audited consolidated financial statements appearing elsewhere in this prospectus. We derived the following summary consolidated statement of operations data for the year ended December 31, 2013 from audited consolidated financial statements not included in this prospectus. We derived the following summary consolidated statements of operations data for the six months ended June 30, 2015 and 2016 and the summary consolidated balance sheet data as of June 30, 2016 from unaudited consolidated financial statements appearing elsewhere in this prospectus. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair presentation of the financial statements. Historical results are not necessarily indicative of the results that may be expected in the future and the results for the six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the full year or any other period. The summary financial data set forth below should be read together with the financial statements and the related notes to those statements, as well as the sections of this prospectus captioned “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    Year Ended December 31,     Six Months Ended
June 30,
 
    2013     2014     2015     2015     2016  
   

(in thousands, except per share amounts)

 

Consolidated Statements of Operations Data

         

Revenue:

         

Subscription

  $     54,206      $     78,719      $     99,924      $     47,242      $     61,681   

Professional services

    19,562        27,896        29,327        14,913        13,941   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    73,768        106,615        129,251        62,155        75,622   

Cost of revenue:

         

Subscription(1)

    8,325        14,686        23,457        11,142        13,039   

Professional services(1)

    19,034        25,731        25,720        13,036        12,712   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue(1)

    27,359        40,417        49,177        24,178        25,751   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    46,409        66,198        80,074        37,977        49,871   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Research and development(1)

    17,804        23,099        30,553        14,674        17,057   

Sales and marketing(1)

    43,415        60,775        71,337        33,274        35,956   

General and administrative(1)

    8,597        14,245        17,763        7,698        10,684   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    69,816        98,119        119,653        55,646        63,697   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (23,407     (31,921     (39,579     (17,669     (13,826

Other income (expense):

         

Interest (expense) income and other, net

    (51     2        (18     19        (434

Foreign exchange loss

    (163     (697     (1,301     (607     (407
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (23,621     (32,616     (40,898     (18,257     (14,667

Provision for income taxes

    (114     (256     (109     (149     (214
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (23,735   $ (32,872   $ (41,007   $ (18,406   $ (14,881
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

  $ (2.11   $ (2.72   $ (3.24   $ (1.47   $ (1.14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted

    11,256        12,080        12,653        12,485        13,016   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted(2)

      $ (1.33     $ (0.48
     

 

 

     

 

 

 

Weighted-average shares used to compute pro forma net loss per share attributable to common stockholders, basic and diluted(2)

        30,893          31,256   
     

 

 

     

 

 

 

 



 

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(1) Includes stock-based compensation expense as follows:

 

     Year Ended December 31,      Six Months Ended
June 30,
 
     2013      2014      2015      2015      2016  
     (in thousands)  

Cost of revenue:

              

Subscription

   $ 75       $ 220       $ 482       $ 196       $ 332   

Professional services

     314         609         738         395         367   

Research and development

     836         1,465         2,283         1,160         1,267   

Sales and marketing

     1,047         2,006         2,477         1,210         1,441   

General and administrative

     789         1,466         1,835         894         1,008   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $           3,061       $           5,766       $           7,815       $           3,855       $           4,415   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) See Note 8 of the notes to our consolidated financial statements included in this prospectus for an explanation of the method used to calculate basic and diluted net loss per share and pro forma net loss per share attributable to common stockholders and the weighted-average number of shares used in the computation of the per share amounts.

 

     As of June 30, 2016  
     Actual       Pro Forma(1)       Pro Forma
  As Adjusted(2)  
 
     (in thousands)  

Consolidated Balance Sheet Data

      

Cash and cash equivalents

   $     42,052      $ 42,052      $ 107,832   

Working capital, excluding deferred revenue

     71,965        71,965        138,292   

Total assets

     107,485        107,485        173,265   

Deferred revenue, current and non-current

     82,184        82,184        82,184   

Long-term debt, current and non-current, net of debt issuance costs

     19,432        19,432          

Preferred stock warrant liability

     406                 

Convertible preferred stock

     133,809                 

Accumulated deficit

     (183,652     (183,652     (184,420

Total stockholders’ (deficit) equity

     (151,931     (17,716     67,496   

 

(1) Reflects (a) the automatic conversion of all outstanding shares of our convertible preferred stock as of June 30, 2016 into an aggregate of 18,239,475 shares of Class B common stock which conversion will occur immediately prior to the closing of this offering, as if such conversion had occurred on June 30, 2016; and (b) the conversion of warrants to purchase 27,321 shares of convertible preferred stock into warrants to purchase 27,321 shares of Class B common stock.

 

(2) Gives effect to (a) the pro forma adjustments set forth above, (b) the sale and issuance by us of 6,000,000 shares of Class A common stock in this offering at the initial price to public of $16.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and (c) the application of such proceeds as described in the section of this prospectus captioned “Use of Proceeds.”

 



 

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Non-GAAP Financial Measures

In addition to our results determined in accordance with U.S. generally accepted accounting principles, or GAAP, we believe the following non-GAAP measure is useful in evaluating our business performance. We regularly review the liquidity measure set forth below.

     Year Ended December 31,     Six Months Ended
June 30,
 
     2013     2014     2015         2015             2016      
     (in thousands)  

Other Non-GAAP Financial Data:

          

Free cash flow(1)

   $ (15,480   $ (24,276   $ (18,234   $ (8,071   $ (3,729

 

(1) We define free cash flow as net cash used in operating activities, plus purchases of property and equipment.

We believe free cash flow facilitates period-to-period comparisons of liquidity. We consider free cash flow to be an important measure because it measures the amount of cash we generate from our operations after our capital expenditures and reflects changes in working capital. We use free cash flow in conjunction with traditional GAAP measures as part of our overall assessment of our liquidity, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our liquidity.

Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our free cash flow should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.

We compensate for these limitations by providing investors and other users of our financial information reconciliations of free cash flow to the related GAAP financial measure, net cash used in operating activities. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view free cash flow in conjunction with the related GAAP financial measure.

The following table provides a reconciliation of net cash used in operating activities to free cash flow.

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2013     2014     2015         2015             2016      
     (in thousands)  

Net cash used in operating activities

   $ (11,264   $ (17,957   $ (10,591   $ (3,312   $ (1,409

Plus: purchases of property and equipment

     (4,216     (6,319     (7,643     (4,759     (2,320
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ (15,480   $ (24,276   $ (18,234   $ (8,071   $ (3,729
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 



 

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RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. Before making an investment decision, you should carefully consider the risks and uncertainties described below, which we believe are the material risks associated with our business and this offering. Our business, financial condition, operating results or growth prospects could be harmed by any of these risks. In that event, the trading price of our Class A common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to all of the other information contained in this prospectus, including our financial statements and related notes.

Risks Related to Our Business and Industry

We have a history of losses and we expect our revenue growth rate to decline. As our costs increase, we may not be able to generate sufficient revenue to achieve or maintain profitability in the future.

We incurred net losses of $23.7 million, $32.9 million and $41.0 million in 2013, 2014 and 2015, respectively, and $18.4 million and $14.9 million in the six months ended June 30, 2015 and 2016, respectively. We had an accumulated deficit of $183.7 million at June 30, 2016. We expect that our revenue growth rate will decline over time. We may not be able to generate sufficient revenue to achieve or sustain profitability. We expect to continue to incur losses for the foreseeable future and we expect our costs to increase in future periods as we expend substantial financial and other resources on, among other things:

 

    sales and marketing, including a continued expansion of our direct sales organization which will require time before these investments generate sales results;

 

    hiring of additional employees for our research and development team to support growth, our technology and datacenter infrastructure, enhancements to our cloud architecture, improved disaster recovery protection, increasing security, compliance and operations expenses, and expenses related to required certifications and third-party attestations;

 

    other software development, including enhancements and modifications related to our business applications, including investments in our software development team;

 

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

 

    continued growth of the customer success team; and

 

    general and administration, including significantly increasing expenses in accounting and legal related to the increase in the sophistication and resources required for public company compliance and other work arising from the growth and maturity of the company.

These expenditures may not result in additional revenue or the growth of our business. If we fail to continue to grow revenue or to achieve or sustain profitability, the market price of our Class A common stock could decline.

We have a limited operating history, which makes it difficult to evaluate our prospects and future operating results.

We were incorporated in 2007 and introduced our first solution in 2008. Our limited operating history makes our ability to forecast future operating results difficult and subjects us to a number of uncertainties, including our ability to plan and model future growth. Our revenue grew 46%, 45% and

 

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21% in 2013, 2014 and 2015, respectively, compared to the prior year, and by 22% in the six months ended June 30, 2016 compared to the same period in the prior year; however, our historical revenue growth is not necessarily indicative of our future performance. Our revenue growth is expected to decline in future periods due to a number of reasons, which may include the maturation of our business, increase in overall revenue over time, slowing demand for our applications, increasing competition, a decrease in the growth of the markets in which we compete, or if we fail, for any reason, to continue to capitalize on growth opportunities, a decrease in our renewal rates, or a decline in available opportunities as a result of our increased market penetration in one or more of our markets.

We have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as determining appropriate investments of our limited resources, market adoption of our current and future applications, competition from other companies, acquiring and retaining customers, hiring, integrating, training and retaining skilled personnel, developing new applications, determining prices and contract terms for our applications, and unforeseen expenses and challenges in forecasting accuracy. If our assumptions regarding these risks and uncertainties, which we use to plan our business, are incorrect or change, or if we do not address these risks successfully, our prospects, operating results and business could be harmed.

If the TBM market fails to develop, or we are unable to maintain our leadership within that market category, our business, results of operations, financial condition and growth prospects could be harmed.

Our business model depends upon the development and adoption of the market for TBM solutions and our leadership within that market category. We derive and expect to continue to derive for some period of time the majority of revenue and cash flows from our core TBM solutions. The TBM market is relatively new and is evolving rapidly, and overall market acceptance of the importance of TBM and our solutions is critical to our continued success. If the market for TBM solutions does not continue to grow, or grows more slowly than we expect, or if the market for TBM solutions does not develop as we anticipate, our operating results would be harmed. In addition, successful market adoption will depend in part on our ability to correctly anticipate, identify and build the key features, functions, reports, metric selection, and packaging that is most useful and attractive to the market, all while maintaining sufficient flexibility with the platform as needed to accommodate customer-specific needs.

We derive, and expect to continue to derive, substantially all of our revenue and operating cash flows from TBM solutions and related professional services. If we fail to adapt our solutions to changing market dynamics and customer preferences or to achieve increased market acceptance of our TBM solutions, our business, results of operations, financial condition, and growth prospects would be harmed.

We derive, and expect to continue to derive, substantially all of our revenue and cash flows from TBM solutions and related professional services. As such, the market acceptance of TBM solutions is critical to our success. Demand for our TBM solutions is affected by a number of factors, many of which are beyond our control, such as continued market acceptance of our solutions by customers for existing and new use cases, the timing of development and release of new applications, features, and functionality introduced by our competitors, technological change, and growth or contraction in our addressable market. Although we may expand our efforts in the marketplace beyond the TBM category, there can be no certainty that any such expansion will generate returns capable of offsetting the costs associated with any such expansion. You should consider our business and prospects based on our current solutions within the TBM category and, and in light of the various challenges we and TBM as a category face, including those discussed in this “Risk Factors” section.

 

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Our business model heavily depends on the acquisition of new customers, adoption by current customers of our solutions, renewals of their subscriptions and the purchase of additional subscriptions from us.

In order to maintain or improve our operating results, we depend on the acquisition of new customers, the adoption of additional applications by existing customers and the decision by existing and new customers to renew their subscriptions upon the expiration of their current contract term. Our contracts typically vary in length between one and three years and our customers have no obligation to renew their subscriptions after the expiration of their initial subscription periods. Our customers may elect not to renew, may seek to renew for lower subscription amounts or for shorter contract lengths and may choose to renew for the same or fewer applications and modules over time. Our renewal rates may decline or fluctuate as a result of a number of factors, including leadership changes within our customers resulting in loss of sponsorship, limited customer resources, pricing changes by us or our competitors, adoption and utilization of our solutions by our customers, customer satisfaction with our applications, the acquisition of our customers by other companies, procurement or budgetary decisions from legislative or other regulatory bodies, and deteriorating general economic conditions. To the extent our customer base continues to grow, renewals and the subscriptions to additional applications and modules by renewing customers will become an increasingly important part of our results. If our customers do not renew their subscriptions for our applications, or decrease the amount they spend with us, revenue will decline and our business will be harmed.

Because our recent growth has resulted in the rapid expansion of our business, we do not have a long history upon which to base forecasts of customer renewal rates, customer upgrade rates or future revenue. As a result, our future operating results may be significantly below the expectations of investors, which could harm the market price of our Class A common stock.

If we fail to effectively develop and expand our sales and marketing capabilities, our ability to increase our customer base and increase acceptance of our TBM solutions could be harmed.

To increase the number of customers and increase the market acceptance of our solutions, we will need to expand our sales and marketing operations, including our domestic and international sales force. We will continue to dedicate significant resources to sales and marketing programs. We believe that there is significant competition for direct sales personnel with the sales skills and technical knowledge that we require. Our ability to achieve significant revenue growth in the future will depend, in large part, on our success in recruiting, training and retaining a sufficient number of direct sales personnel. New hires require significant training and time before they achieve full productivity, particularly in new sales territories. Our recent hires and planned hires may not become as productive as quickly as we would like, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business. The effectiveness of our sales and marketing has also varied over time and, together with the effectiveness of any partners or resellers we may engage, may vary in the future. Our business will be harmed if our efforts do not generate a correspondingly significant increase in revenue. We may not achieve anticipated revenue growth from expanding our sales force if we are unable to hire, develop and retain talented sales personnel, if our new sales personnel are unable to achieve desired productivity levels in a reasonable period of time, or if our sales and marketing programs are not effective.

 

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We may experience quarterly fluctuations in our operating results due to a number of factors, which makes our future results difficult to predict and could cause our operating results to fall below expectations.

Our quarterly operating results have fluctuated in the past and we expect them to fluctuate in the future due to a variety of factors, many of which are outside of our control. As a result, our past results may not be indicative of our future performance, and comparing our operating results on a period-to-period basis may not be meaningful. In addition to the other risks described in this prospectus, factors that may affect our quarterly operating results include:

 

    changes in spending on TBM solutions by our current or prospective customers;

 

    pricing our applications effectively so that we are able to attract and retain customers without compromising our operating results;

 

    attracting new customers and increasing existing customers’ use of our solutions;

 

    unexpected sales and transaction execution delays;

 

    customer renewal rates and the amounts for which agreements are renewed;

 

    awareness of our brand;

 

    changes in the competitive dynamics of our market, including consolidation among competitors or customers and the introduction of new applications or capabilities;

 

    changes to the commission plans, quotas and other compensation-related metrics for our sales representatives;

 

    the amount and timing of payment for operating expenses, particularly research and development, sales and marketing expenses and employee benefit expenses;

 

    our ability to manage our existing business and future growth, including increases in the number of customers for our solutions and the introduction and adoption of our solutions in the United States and globally;

 

    unforeseen costs and expenses related to the expansion of our business, operations and infrastructure, including disruptions in our hosting network infrastructure and privacy and data security;

 

    the level of international sales and the pricing of sales;

 

    foreign currency exchange rate fluctuations; and

 

    general economic and political conditions in our domestic and international markets.

We may not be able to accurately forecast the amount and mix of future subscriptions, size or duration of contracts, revenue and expenses and, as a result, our operating results may fall below our estimates or the expectations of public market analysts and investors. If our revenue or operating results fall below the expectations of investors, or below any estimates we may provide, the market price of our Class A common stock could decline.

 

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We target sales efforts at enterprise customers and the length, cost and uncertainty associated with sales cycles may result in fluctuations in our operating results and our failure to achieve the expectations of investors.

We target sales efforts at enterprises and face long sales cycles, complex customer requirements, substantial upfront sales costs, and a relatively low and difficult to predict volume of sales on a quarter-by-quarter basis. This makes it difficult to predict with certainty our sales and related operating performance in any given period. Our typical sales cycle is approximately six months, but is variable and difficult to predict and can be longer. Customers often undertake a prolonged evaluation of our solutions, including assessing their own readiness, scoping the professional services involved, and comparing our solutions to products offered by our competitors and their ability to solve the problem internally. Moreover, our customers often begin to deploy our solutions on a limited basis, but nevertheless demand extensive configuration, integration services and pricing concessions, which increase our upfront investment in the sales effort with no guarantee that these customers will deploy our solutions widely enough across their organization to justify our substantial upfront investment. Adherence to our financial plan in part depends on a predictable growth rate in the acquisition of new customers that represent high annual contract value, while additional growth and enhanced predictability in part depends on an increased volume of new customers with a relatively lower annual contract value. Our financial performance and the predictability of our quarterly financial results may be harmed by intermittent failures to secure the higher value enterprise agreements, or increase the volume of transactions overall, according to our forecasts, and depends in large part on the successful execution of our direct sales team. In addition, because of the relatively small and tightly knit nature of the community of IT leaders within the enterprises that we sell into, our business is vulnerable to negative feedback or opinions even if held by a few influential leaders within this community.

Additionally, our quarterly sales cycles are generally more heavily weighted toward the end of the quarter with an increased volume of sales in the last few weeks of the quarter. This could negatively impact the timing of recognized revenue and billings, cash collections and delivery of professional services in subsequent periods. Furthermore, the concentration of contract negotiations in the last few weeks of the quarter could require us to expend more in the form of compensation for additional sales, legal and finance employees and contractors. Compression of sales activity to the end of the quarter also greatly increases the likelihood that sales cycles will extend beyond the quarter in which they are forecasted to close for some sizeable transactions, which will harm forecasting accuracy and adversely impact billings and new customer acquisition metrics for the quarter in which they are forecasted to close.

Because we recognize revenue from subscriptions ratably over the term of the agreement, near-term changes in sales may not be reflected immediately in our operating results.

We offer our applications primarily through multi-year subscription agreements, which typically vary in length between one and three years. All subscription fees that are billed in advance of service are recorded in deferred revenue. Subscription revenue is recognized ratably over the subscription term. As a result, most of the revenue that we report in each period is derived from the recognition of deferred revenue relating to subscriptions entered into during previous periods. A decline in new or renewed subscriptions in any one quarter is not likely to have a material impact on results for that quarter. However, declines would negatively affect revenue and deferred revenue balances in future periods, and the effect of significant downturns in sales and market acceptance of our applications, and potential changes in our rate of renewals, may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our total revenue through additional sales in any period, as revenue from new customers is recognized over the applicable subscription term.

 

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Because we expense commissions associated with subscriptions to our applications immediately upon the execution of a subscription agreement with a customer, our operating income in any period may not be indicative of our financial health and future performance.

We expense commissions paid to sales personnel in the period in which we enter into an agreement for the subscription to our applications. In contrast, we recognize the revenue associated with a subscription to our applications ratably over the related subscription period. Although we believe higher sales is a positive indicator of the long-term health of our business, higher sales increases our operating expenses and could decrease earnings in any particular period. Thus, we may report poor operating results due to higher sales commissions in a period in which we experience strong sales of our applications. Alternatively, we may report better operating results due to the reduction of sales commissions in a period in which we experience a slowdown in sales. Therefore, you should not necessarily rely on our operating income during any one quarter as an indication of our financial health and potential future performance.

If we fail to attract and retain additional qualified personnel we may be unable to execute our business strategy.

To execute our business strategy, we must attract and retain highly qualified personnel. In particular, we compete with many other companies for software developers with high levels of experience in designing, developing and managing cloud-based software, as well as for skilled product development, marketing, sales and operations professionals, and we may not be successful in attracting and retaining the professionals we need, in particular in the Seattle, Washington area where we are headquartered. We have experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications which may, among other things, impede our ability to execute our software development and sales strategies. Many of the companies with which we compete for experienced personnel are more well known and have greater resources than we do. In addition, in making employment decisions, particularly in the software industry, job candidates often consider the value of the stock options or other equity incentives they are to receive in connection with their employment. If the price of our stock declines, or experiences significant volatility, our ability to attract or retain qualified employees will be adversely affected. If we fail to attract new personnel or fail to retain and motivate our current personnel, our growth prospects could be harmed.

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

The market for TBM solutions is relatively new and rapidly evolving. In many cases, our primary competition is the use of legacy spreadsheet-based business processes, or occasionally we encounter either custom software developed, or general purpose business intelligence solutions repurposed, by in-house IT and finance departments of our potential customers to meet specific business needs. As we look to sell our solutions to potential customers with existing internal solutions, we must convince internal stakeholders that our TBM solutions are superior to the legacy solutions that the organization has previously adopted. If we are unable to effectively convince internal stakeholders at our prospective customers to abandon their legacy solutions, our business, results of operations, financial condition and cash flows could be materially and adversely affected.

Larger companies, such as VMware and ServiceNow, provide a suite of products and services that includes TBM capabilities. These competitors have greater name recognition, much longer operating histories, more and better-established customer relationships, larger sales forces, larger marketing and software development budgets and significantly greater resources than we do. These large vendors commonly have an enterprise-wide license agreement in place with the Fortune 2000 enterprise company customer base and are able to leverage that license to easily transact for their

 

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services. In some cases, these large vendors may be willing to provide their competing software for free as part of enterprise-wide agreements that include other products or services, which has resulted in pricing pressures and lost sales. Further, such large vendors frequently benefit from existing system integrator and other go-to-market relationships that facilitate their sales and marketing efforts, and that can be easily redirected to competition with us in the TBM market. In addition, certain of our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements, or simply accelerate product development and improvements at greater velocity.

Several specialized companies target the TBM market through solutions that are tailored to a specific TBM use case or industry. Some of our principal competitors in these situations offer their products or services at a lower price, which has resulted in pricing pressures and lost sales. Potential customers with discrete and immediate needs that may be addressed by these niche solutions may choose to deploy these solutions instead of an offering from our integrated suite of TBM solutions. If we fail to compete effectively against these more specific, niche providers of TBM solutions, our business will be harmed.

We expect competition to intensify in the future. We expect that the large software vendors who currently do not have an offering in the TBM category, some of which operate in adjacent product categories today, may in the future bring such a solution to market through product development, acquisitions or other means. Such vendors would potentially benefit from the same advantages described above regarding our existing larger competitors, but perhaps on an even greater scale. Also, a simpler solution could gain traction in the market and acceptance by medium sized businesses, which may result in downward pressure on our pricing and potentially a decrease in market share and market opportunity for us.

If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards and changing customer needs or requirements, our solutions may become less competitive.

Our success depends on our ability to adapt and enhance our solutions. To attract new customers and increase revenue from existing customers, we need to continue to enhance and improve our solutions, capabilities and enhancements to meet customer needs at prices that our customers are willing to pay. Such efforts will require adding new functionality and responding to technological advancements, which will increase our research and development costs. If we are unable to develop solutions that address customers’ needs, or enhance and improve our offerings in a timely manner, we may not be able to maintain or increase market acceptance of our solutions. Further, many of our existing and potential future competitors expend a considerably greater amount of funds on their research and development programs, and those that do not may be acquired by larger companies that would allocate greater resources to competitors’ research and development programs. If we fail to maintain adequate research and development resources or compete effectively with the research and development programs of our competitors our business could be harmed. Our ability to grow is also subject to the risk of future disruptive technologies. If new technologies emerge that are able to deliver TBM solutions at lower prices, more efficiently, more conveniently or more securely, such technologies could adversely affect our ability to compete.

We may not receive significant revenue from our current development efforts for several years, if at all.

Developing software applications is expensive and the investment in product development often involves a long return on investment cycle. We have made and expect to continue to make significant investments in development and related product opportunities. Accelerated product

 

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introductions and short product life cycles require high levels of expenditures that could adversely affect our operating results if not offset by revenue increases. We believe that we must continue to dedicate a significant amount of resources to our development efforts to maintain our competitive position. However, we may not receive significant revenue from these investments for several years, if at all.

Our planned further expansion of our business outside the United States exposes us to risks associated with international operations.

Our growth strategy involves the further expansion of our operations and customers located outside of the United States. In 2015 and for the six months ended June 30, 2016, 22% and 24%, respectively, of our revenue was derived from customers located outside North America, primarily from customers in Europe. A key element of our growth strategy is to expand our international operations and develop a worldwide customer base. While we have initiated efforts to expand our business into Asia-Pacific through a limited presence in Australia and Singapore, our investment may never be recouped. Our current international operations and future initiatives will involve a variety of risks, including:

 

    the need to make significant investments in people, solutions and infrastructure, typically well in advance of revenue generation;

 

    the need to localize and adapt our application for specific countries, including translation into foreign languages and associated expenses;

 

    potential changes in public or customer sentiment regarding cloud-based services or the ability of non-local enterprises to provide adequate data protection, particularly in the European Union;

 

    technical or latency issues in delivering our applications;

 

    dependence on certain third parties, including resellers with whom we do not have extensive experience;

 

    the lack of reference customers and other marketing assets in regional markets that are new or developing for us, as well as other adaptations in our market generation efforts that we may be slow to identify and implement;

 

    unexpected changes in regulatory requirements, taxes or trade laws;

 

    differing labor regulations, especially in the European Union, where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations;

 

    challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs;

 

    difficulties in maintaining our company culture with a dispersed and distant workforce;

 

    difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems and regulatory systems;

 

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    currency exchange rate fluctuations and the resulting effect on our revenue and expenses, and the cost and risk of entering into hedging transactions if we choose to do so in the future;

 

    limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries;

 

    limited or insufficient intellectual property protection;

 

    political instability or terrorist activities;

 

    requirements to comply with foreign privacy and information security laws and regulations and the risks and costs of non-compliance;

 

    likelihood of potential or actual violations of domestic and international anticorruption laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, or of U.S. and international export control and sanctions regulations, which likelihood may increase with an increase of sales or operations in foreign jurisdictions and operations in certain industries;

 

    requirements to comply with U.S. export control and economic sanctions laws and regulations and other restrictions on international trade;

 

    likelihood that the United States and other governments and their agencies impose sanctions and embargoes on certain countries, their governments and designated parties, which may prohibit the export of certain technology, products, and services to such persons; and

 

    adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash should we desire to do so.

Our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and operating results will be harmed.

Increased sales to customers outside the United States and/or paid for in currency other than the U.S. dollar exposes us to potential currency exchange losses.

As our international sales and operations increase, so too will the number and significance of transactions, including intercompany transactions, occurring in currencies other than the U.S. dollar. In addition, our international subsidiaries may begin to maintain or accumulate assets that are denominated in currencies other than the functional operating currencies of these entities. Accordingly, changes in the value of foreign currencies relative to the U.S. dollar can affect our revenue and operating results due to transactional and translational remeasurement that is reflected in our earnings. 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 certain 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. Additionally, our license fees are largely based on our customers’ anticipated spend managed by our solutions expressed in U.S. dollars, which fee construct may increase the exposure of our revenue to currency fluctuations.

 

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If we fail to manage our rapid growth effectively or our business does not grow as we expect, our operating results may suffer.

Our employee base and operations have grown substantially in a relatively short period of time. Our full-time employee base grew from 628 employees as of June 30, 2015 to 694 employees as of June 30, 2016. Our growth has placed, and will continue to place, a significant strain on our operational, financial and management infrastructure. We anticipate further increases in headcount will be required to support increases in our application offerings and continued expansion. To manage this growth effectively, we must continue to improve operational, financial and management systems and controls by, among other things:

 

    effectively attracting, training and integrating a large number of new employees, particularly technical personnel and members of our management and sales teams;

 

    further improving key business systems, processes and IT infrastructure to support our business needs;

 

    enhancing information and communication systems to ensure that employees are well-coordinated and can effectively communicate with each other and customers; and

 

    improving internal control over financial reporting and disclosure controls and procedures to ensure timely and accurate reporting of operational and financial results.

If we fail to effectively manage expansion or implement new systems, or if we fail to implement improvements or maintain effective internal controls and procedures, costs and expenses may increase more than expected and we may not expand our customer base, increase renewal rates, enhance existing applications, develop new applications, satisfy customers, respond to competitive pressures, or otherwise execute our business plan. If we are unable to effectively manage our growth, our operating results will be harmed.

Our growth strategy depends in part on the success of our strategic relationships with third parties and their continued performance and alignment.

To continue our growth we will need to continue to develop various third-party relationships. In particular, our growth strategy depends on continuing to develop successful go-to-market partnerships with key technology, system integrator and consultant partners both domestically and internationally to help validate our solutions and provide introductions to certain potential customers, and in some cases to resell our solutions, or provide professional services related to them. Failure to successfully develop and implement strategic third-party relationships with resellers, technology providers and service providers could significantly harm our operating results. For example, results may suffer if efforts towards developing our go-to-market relationships consume resources and incur costs, but do not result in a commensurate increase in revenue for us. We also may enter into relationships with other businesses to expand our solutions or our ability to provide our solutions in international locations, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in other companies. The cost of developing and maintaining such relationships may go unrecovered or unrewarded.

If we fail to offer high-quality professional services and support, our business and reputation may suffer. If we fail to reduce the cost of those services, our operating results may be harmed.

High-quality professional services and support, including training, implementation and consulting services, are important for the successful marketing, sale and use of our solutions and for

 

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the renewal of subscriptions by existing customers. The importance of high-quality professional services and support will increase as we expand our business and pursue new customers. If we do not provide effective ongoing support, our ability to retain and sell additional functionality and applications or modules to existing customers may suffer, and our reputation with existing or potential customers may be harmed.

At the same time, these services are provided at relatively high cost to us with resulting fees to the customer. These factors may negatively impact the future revenue growth for our solutions or lengthen the sales cycle, either of which would be detrimental to our business. We continue to pursue strategies to reduce the amount of professional services required for a customer to begin to use and gain value from our solutions, lower the overall costs of professional service fees to our customers, and improve the gross margin of our professional services business. If we are unable to successfully accomplish these objectives, our operating results, including our profit margins, may be harmed.

We rely on our management team and other key employees, and the loss of one or more key employees could harm our business.

Our success and future growth depend upon the continued services of our management team, including Sunny Gupta, one of our founders and our chief executive officer, and other key employees in the areas of engineering, marketing, sales, services and general and administrative functions. From time to time, there may be changes in our management team resulting from the hiring or departure of executives, which could disrupt our business. We also are dependent on the continued service of our existing software engineers and information technology personnel because of the complexity of our software, technologies and infrastructure. We may terminate any employee’s employment at any time, with or without cause, and any employee may resign at any time, with or without cause. We do not maintain any “key man” insurance for any employee. The loss of one or more of our management team members or key employees could harm our business.

If our network or computer systems are breached or unauthorized access to customer data is otherwise obtained, our applications may be perceived as insecure and we may lose existing customers or fail to attract new customers, our reputation may be damaged and we may incur significant liabilities.

Our operations involve the storage and transmission of our customers’ sensitive and proprietary information. Cyber-attacks and other malicious internet-based activity continue to increase generally, and cloud-based platform providers of software and services have been targeted. If any unauthorized access to or security breaches of our platform, or those of our service providers, occurs, or is believed to have occurred, such an event or perceived event could result in the loss of data, loss of intellectual property, loss of business, severe reputational or brand damage adversely affecting customer or investor confidence, regulatory investigations and orders, litigation, indemnity obligations, damages for contract breach, penalties for violation of applicable laws, regulations, or contractual obligations, and significant costs for remediation that may include liability for stolen assets or information and repair of system damage that may have been caused, incentives offered to customers or other business partners in an effort to maintain business relationships after a breach, and other liabilities. Additionally, any such event or perceived event could impact our reputation, harm customer confidence, hurt our sales and expansion into existing and new markets, or cause us to lose existing customers. We could be required to expend significant capital and other resources to alleviate problems caused by such actual or perceived breaches and to remediate our systems, we could be exposed to a risk of loss, litigation or regulatory action and possible liability, and our ability to operate our business may be impaired. Additionally, actual, potential or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants.

 

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In addition, if the security measures of our customers are compromised, even without any actual compromise of our own systems, we may face negative publicity or reputational harm if customers or anyone else incorrectly attributes the blame for such security breaches to us or our systems. If customers believe that our applications do not provide adequate security for the storage of personal or other sensitive information or its transmission over the internet, our business will be harmed. Customers’ concerns about security or privacy may deter them from using our platform for activities that involve personal or other sensitive information.

Our errors and omissions insurance covering certain security and privacy damages and claim expenses may not be sufficient to compensate for all liability. Although we maintain insurance for liabilities incurred as a result of some security and privacy damages, 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 and vulnerabilities exploited to obtain unauthorized access or to sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or vulnerabilities or implement adequate preventative measures. We may also experience security breaches that may remain undetected for an extended period.

Because data security is a critical competitive factor in our industry, we make public statements in our privacy policies, on our website, and elsewhere describing the security of our platform. Should any of these statements be untrue, become untrue, or be perceived to be untrue, even if through circumstances beyond our reasonable control, we may face claims, including claims of unfair or deceptive trade practices, brought by the U.S. Federal Trade Commission, state, local, or foreign regulators, and private litigants.

Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business and operating results.

Our continued growth depends in part on the ability of our existing and potential customers to access our applications at any time. 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 capabilities, human or technology errors, distributed 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. It may become increasingly difficult to maintain and improve our performance, especially during peak usage times and as our platform becomes more complex and our user traffic increases. If our applications are unavailable or if our users are unable to access our applications within a reasonable amount of time or at all, our business will be harmed.

Moreover, our customer agreements often include performance guarantees and service level standards that may obligate us to provide credits or termination rights in the event of a significant disruption in our platform. To the extent that our third-party service providers experience outages, or to the extent we do not effectively address capacity constraints, upgrade our systems as needed, 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.

Our use of “open source” software could negatively affect our ability to offer our applications and subject us to possible litigation.

Our applications use “open source” software that we, in some cases, have obtained from third parties. Open source software is generally freely accessible, usable and modifiable, and is made available to the general public on an “as-is” basis under the terms of a non-negotiable license. Use and distribution of open source software may entail greater risks than use of third-party commercial

 

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software. Open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the software. In addition, certain open source licenses, like the GNU Affero General Public License, or AGPL, may require us to offer for no cost the components of our software that incorporate the open source software, to make available source code for modifications or derivative works we create by incorporating or using the open source software, or to license our modifications or derivative works under the terms of the particular open source license. If we are required, under the terms of an open source license, to release the source code of our proprietary software to the public, our competitors could create similar applications with lower development effort and time, which ultimately could result in a loss of sales for us.

We may also face claims alleging noncompliance with open source license terms or infringement or misappropriation of proprietary software. These claims could result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to re-engineer our applications, any of which would have a negative effect on our business and operating results, including being enjoined from the offering of the components of our software that contained the open source software. We could also be subject to suits by parties claiming ownership of 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 and require us to devote additional research and development resources to re-engineer our applications.

Although we monitor our use of open source software to avoid subjecting our applications to unintended conditions, few courts have interpreted open source licenses, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our applications. We cannot guarantee that we have incorporated open source software in our software in a manner that will not subject us to liability, or in a manner that is consistent with our current policies and procedures.

Our business is dependent upon our brand recognition and reputation, and if we fail to maintain or enhance our brand recognition or reputation, our business could be harmed.

We believe that maintaining and enhancing our brand and our reputation are critical to our relationships with our customers and to our ability to attract new customers. We also believe that our brand and reputation will be increasingly important as competition in our market continues to develop. Our success in this area will depend on a wide range of factors, some of which are beyond our control, including the following:

 

    the efficacy of our marketing efforts;

 

    our ability to continue to offer high-quality, innovative and error- and bug-free applications;

 

    our ability to maintain the security and privacy of our customer’s sensitive and proprietary information;

 

    our ability to retain existing customers and obtain new customers;

 

    our ability to maintain high customer satisfaction;

 

    the quality and perceived value of our applications;

 

    our ability to successfully differentiate our applications from those of our competitors;

 

    actions of competitors and other third parties;

 

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    our ability to provide high quality customer support and professional services;

 

    any data breach or data loss or misuse or perceived misuse of our applications;

 

    positive or negative publicity;

 

    interruptions, delays or attacks on our platform or applications; and

 

    litigation, legislative or regulatory-related developments.

If our brand promotion activities are not successful, our operating results and growth may be harmed.

Furthermore, negative publicity, whether or not justified, relating to events or activities attributed to us, employees, partners or others associated with any of these parties, may tarnish our reputation and reduce the value of our brand. Damage to our reputation and loss of brand equity may reduce demand for our applications and have an adverse effect on our business, operating results and financial condition. Moreover, any attempts to rebuild our reputation and restore the value of our brands may be costly and time consuming, and such efforts may not ultimately be successful.

We are materially invested in the formation and growth of the TBM Council, and our efforts in that area may fail to have a positive effect on our overall growth.

We have invested a significant amount of our money and time into the formation and growth of the TBM Council. Our ability to help build that organization, maintain strong relationships with the individuals involved, and build a positive public profile of the TBM Council and our association with the council, may have an effect on our overall success. It is possible that our efforts in this area will not yield the results that we are anticipating or the benefits of such efforts will not offset the costs.

We rely upon data centers and other systems and technologies provided by third parties, and technology systems and electronic networks supplied and managed by third parties, to operate our business and interruptions or performance problems with these systems, technologies and networks may adversely affect our business and operating results.

We rely on data centers and other technologies and services provided by third parties in order to operate our business. If any of these services becomes unavailable or otherwise is unable to serve our requirements due to extended outages, interruptions, facility closure, or because it is no longer available on commercially reasonable terms, expenses could increase, our ability to manage finances could be interrupted and our operations otherwise could be disrupted or otherwise impacted until appropriate substitute services, if available, are identified, obtained, and implemented.

We do not control, or in some cases have limited control over, the operation of the data center facilities we use, and they are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct, and to adverse events caused by operator error. We may not be able to rapidly switch to new data centers or move customers from one data center to another in the event of any adverse event. Despite precautions taken at these facilities, the occurrence of a natural disaster, an act of terrorism or other act of malfeasance, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in our service and the loss of customer data.

Our ability to provide services and solutions to our subscribers also depends on our ability to communicate with our subscribers through the public internet and electronic networks that are owned and operated by third parties. In addition, in order to provide services on-demand and promptly, our

 

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computer equipment and network servers must be functional 24 hours per day, which requires access to telecommunications facilities managed by third parties and the availability of electricity, which we do not control. A severe disruption of one or more of these networks or facilities, including as a result of utility or third-party system interruptions, could impair our ability to process information and provide services to our customers.

Any unavailability of, or failure to meet our requirements by, third-party data centers or other third-party technologies or services, or any disruption of the internet or the third-party networks or facilities that we rely upon, could impede our ability to provide services to our subscribers, harm our reputation, result in a loss of subscribers, cause us to issue refunds or service credits to customers, subject us to potential liabilities, result in contract terminations, and adversely affect our renewal rates. Any of these circumstances could adversely affect our business and operating results.

Catastrophic events may disrupt our business and impair our ability to provide our solutions to our customers, resulting in costs for remediation, customer dissatisfaction, and other business or financial losses.

Our operations depend, in part, on our ability to protect our facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal acts and similar events. Despite precautions taken at our facilities, the occurrence of a natural disaster, an act of terrorism, vandalism or sabotage, spikes in usage volume or other unanticipated problems at a facility could result in lengthy interruptions in the availability of our applications. Our headquarters are located in Bellevue, Washington, which is situated near active earthquake fault lines. Even with current and planned disaster recovery arrangements, our business could be harmed. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors in turn could further reduce revenue, subject us to liability and cause us to issue credits or cause customers to fail to renew their subscriptions, any of which could harm our business.

We may not timely and effectively scale our existing technology, including our computing architecture, to meet the performance and other requirements placed on our systems, which could increase expenditures unexpectedly and create risk of outages and other performance and quality of service issues for our customers.

Our future growth and renewal rates depend on our ability to meet our customers’ expectations with respect to the speed and other performance attributes of our solutions, and to meet the expanding needs of our customers as their use of our solutions grows. The number of users, the amount and complexity of data ingested, created, transferred, processed and stored by us, the number of locations where our applications are being accessed, and the number of processes and systems managed by us on behalf of these customers, among other factors, separately and combined, can have an effect on the performance of our applications. In order to ensure that we meet the performance and other requirements of our customers, we continue to make significant investments to develop and implement new technologies in our software and infrastructure operations. These technologies, which include database, application and server advancements, revised network and hosting strategies, and automation, are often advanced, complex, and sometimes broad in scope and untested via industry-wide usage. We may not be successful in developing or implementing these technologies. To the extent that we do not develop offerings and scale our operations in a manner that maintains performance as our customers expand their use, our business and operating results may be harmed.

We may not accurately assess the capital and operational expenditures required to successfully fulfill our objectives and our financial performance may be harmed as a result. Further, we may make mistakes in the technical execution of these efforts to improve our solutions, which may affect our customers. Issues that may arise include performance (speed), data loss, and outages as well as other issues that could give rise to customer satisfaction issues, loss of business, and harm to

 

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our reputation. If any of these were to occur there would be a negative and potentially significant impact to our financial performance. Lastly, our ability to generate new applications, and improve our current solutions may be limited if and to the extent resources are necessarily allocated to address issues related to the performance of existing solutions.

Real or perceived errors, failures, or bugs in our applications could adversely affect our operating results and growth prospects.

We update our applications on a frequent basis. Despite efforts to test our updates, errors, failures or bugs may not be found in our applications until after they are deployed to our customers. We have discovered and expect we will continue to discover errors, failures and bugs in our applications and anticipate that certain of these errors, failures and bugs will only be discovered and remediated after deployment to customers. Real or perceived errors, failures or bugs in our applications could result in negative publicity, government inquiries, loss of or delay in market acceptance of our applications, loss of competitive position, or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem.

We implement bug fixes and upgrades as part of our regular system maintenance, which may lead to system downtime. Even if we are able to implement the bug fixes and upgrades in a timely manner, any history of inaccuracies in the data we collect for our customers, or the loss, damage or inadvertent release or exposure of confidential or other sensitive data could cause our reputation to be harmed and result in claims against us, and customers may elect not to purchase or renew their agreements with us or we may incur increased insurance costs. The costs associated with any material defects or errors in our applications or other performance problems may be substantial and could harm our operating results.

Because many of our customers use our applications to store and retrieve critical information, we may be subject to liability claims if our applications do not work properly. We cannot be certain that the limitations of liability set forth in our licenses and agreements would be enforceable or would otherwise protect us from liability for damages. A material liability claim against us, regardless of its merit or its outcome, could result in substantial costs, significantly harm our business reputation and divert management’s attention from our operations.

We are subject to governmental laws, regulation and other legal obligations, particularly related to privacy, data protection and information security, and any actual or perceived failure to comply with such obligations could harm our business.

Personal privacy and information security are significant issues in the United States and the other jurisdictions where we offer our applications. The legislative and regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. We collect personally identifiable information, or PII, and other data from our customers and users. Our handling of data is subject to a variety of laws and regulations, including regulation by various government agencies, including the U.S. Federal Trade Commission, or FTC, and various state, local and foreign agencies.

In the United States, the FTC and many state attorneys general are applying federal and state consumer protection laws to impose standards for the online collection, use and dissemination of data. Many foreign countries and governmental bodies, including the European Union, or EU, Canada, and other relevant jurisdictions where we conduct business, have laws and regulations concerning the collection and use of PII 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

 

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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 addresses. In the EU, where companies must meet specified privacy and security standards, Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data, commonly referenced as the Data Protection Directive, and EU member state implementations of the Data Protection Directive, require comprehensive information privacy and security protections for consumers with respect to PII collected about them. The EU has adopted a General Data Protection Regulation, to supersede the Data Protection Directive. This regulation, which will become effective in 2018, would cause EU data protection requirements to be more stringent and to provide for greater penalties for noncompliance.

An October 2015 ruling of the Court of Justice of the EU, the EU’s highest court, invalidated the U.S.-EU Safe Harbor Framework as a method of compliance with restrictions set forth in the Data Protection Directive (and member states’ implementations thereof) regarding the transfer of data outside of the European Economic Area, or EEA. As a result of this ruling, we have entered into contractual provisions with certain European customers that impose additional obligations on us with respect to our handling of PII from the EEA. Additionally, U.S. and EU authorities reached a political agreement in February 2016 regarding a new potential means for legitimizing personal data transfers from the EEA to the U.S., the EU-U.S. Privacy Shield. We plan to file for the EU-U.S. Privacy Shield, and we may make additional changes to our PII handling practices in the future. We publicly post our privacy policies and practices concerning our processing, use and disclosure of PII. Our publication of our Privacy Shield filing, our privacy policy, and other statements we publish that provide promises and assurances about privacy and security can subject us to potential state and federal action if they are found to be deceptive or misrepresentative of our practices. Additionally, we may find it necessary or desirable to join industry or other self-regulatory bodies or other privacy-or data protection-related organizations that require compliance with their rules pertaining to privacy and data protection. We also may be bound by additional, more stringent contractual obligations relating to our collection, use and disclosure of PII and other data.

On June 23, 2016, the United Kingdom held a referendum and voted in favor of leaving the European Union, which has created uncertainty with regard to the regulation of data protection in the United Kingdom. In particular, it is unclear whether the United Kingdom will enact the pending European General Data Protection Regulation, or other data protection laws or regulations, and how data transfers to and from the United Kingdom will be regulated.

Although we are working to comply with those federal, state, and foreign laws and regulations, industry standards, contractual obligations and other legal obligations that apply to us, those laws, regulations, standards and obligations are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another, other requirements or legal obligations, our practices or the features of our applications or platform. Any failure or perceived failure by us to comply with federal, state or foreign laws or regulations, industry standards, contractual obligations or other legal obligations, or any actual or suspected security incident, whether or not resulting in unauthorized access to, or acquisition, release or transfer of PII or other data, may result in governmental enforcement actions and prosecutions, private litigation, fines and penalties or adverse publicity and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business. Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable laws, regulations, policies, industry standards, contractual obligations, or other legal obligations could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business.

We also expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, the

 

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European Union and other jurisdictions, and we cannot yet determine the impact such future laws, regulations and standards may have on our business. Future laws, regulations, standards and other obligations, and changes in the interpretation of existing laws, regulations, standards and other obligations could impair our or our customers’ ability to collect, use or disclose information relating to consumers, which could decrease demand for our applications, increase our costs and impair our ability to maintain and grow our customer base and increase revenue. New laws, amendments to or re-interpretations of existing laws and regulations, industry standards, contractual obligations and other obligations may require us to incur additional costs and restrict our business operations. Such laws and regulations may require companies to implement privacy and security policies, permit users to access, correct and delete personal information stored or maintained by such companies, inform individuals of security breaches that affect their personal information, and, in some cases, obtain individuals’ consent to use PII for certain purposes. In addition, a foreign government could require that any PII collected in a country not be disseminated outside of that country, and we may face difficulty in complying with any such requirement for certain geographic regions. If we fail to comply with federal, state and international data privacy laws and regulations our ability to successfully operate our business and pursue our business goals could be harmed.

Third-party claims that we are infringing the intellectual property rights of others, whether successful or not, could subject us to costly and time-consuming litigation or require us to obtain expensive licenses, and our business could be harmed.

The technology industry is characterized by the existence of a large number of patents, copyrights, trademarks, trade secrets and other intellectual property rights. Companies in the technology industry must often defend against litigation claims based on allegations of infringement or other violations of intellectual property rights. Third parties, including our competitors, may own patents or other intellectual property rights that cover aspects of our technology or business methods and may assert patent or other intellectual property rights against us and others in the industry. Moreover, in recent years, individuals and groups that are non-practicing entities, commonly referred to as “patent trolls,” have purchased patents and other intellectual property assets for the purpose of making claims of infringement in order to extract settlements. From time to time, we may receive threatening letters, notices or “invitations to license,” or may be the subject of claims that our applications and business operations infringe or violate the intellectual property rights of others. Responding to such claims, regardless of their merit, can be time consuming, costly to defend in litigation, divert management’s attention and resources, damage our reputation and brand and cause us to incur significant expenses. Claims of intellectual property infringement might require us to stop using technology found to infringe a third party’s rights, redesign our application, which could require significant effort and expense and cause delays of releases, enter into costly settlement or license agreements or pay costly damage awards, or face a temporary or permanent injunction prohibiting us from marketing or selling our applications. If we cannot or do not license the infringed technology on reasonable terms or at all, or substitute similar technology from another source, we could be forced to limit or stop selling our applications, we may not be able to meet our obligations to customers under our customer contracts, revenue and operating results could be adversely impacted, and we may be unable to compete effectively. Additionally, our customers may not purchase our applications if they are concerned that they may infringe third-party intellectual property rights. The occurrence of any of these events may harm our business.

In our subscription agreements with our customers, we generally agree to indemnify our customers against any losses or costs incurred in connection with claims by a third party alleging that the customer’s use of our applications infringes the intellectual property rights of the third party. Our customers who are accused of intellectual property infringement may seek indemnification from us. If any claim is successful, or if we are required to indemnify or defend our customers from any of these or other claims, these matters could be disruptive to our business and management and result in additional legal expenses.

 

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The success of our business depends in part on our ability to protect and enforce our intellectual property rights.

Our success is dependent, in part, upon protecting our proprietary technology. As of June 30, 2016, we had six issued U.S. patents. We also had 15 patent applications pending for examination in the United States. Our issued patents, and any patents issued in the future, may not provide us with any competitive advantages or may be challenged by third parties, and our patent applications may never be granted. Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Even if issued, there can be no assurance that these patents will adequately protect our intellectual property, as the legal standards relating to the validity, enforceability and scope of protection of patent and other intellectual property rights are uncertain.

Any patents that are issued may subsequently be invalidated or otherwise limited, allowing other companies to develop offerings that compete with ours, which could adversely affect our competitive business position, business prospects and financial condition. In addition, issuance of a patent does not guarantee that we have a right to practice the patented invention. Patent applications in the United States are typically not published until 18 months after filing or, in some cases, not at all, and publications of discoveries in industry-related literature lag behind actual discoveries. We cannot be certain that we were the first to use the inventions claimed in our issued patents or pending patent applications or otherwise used in our software, that we were the first to file for protection in our patent applications, or that third parties do not have blocking patents that could be used to prevent us from marketing or practicing our patented software or technology. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our software is available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States (in particular, some foreign jurisdictions do not permit patent protection for software), and mechanisms for enforcement of intellectual property rights may be inadequate. Additional uncertainty may result from changes to intellectual property legislation enacted in the United States (including the recent “America Invents Act”) and other national governments and from interpretations of the intellectual property laws of the United States and other countries by applicable courts and agencies. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property.

Although we enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with our customers and the parties with whom we have strategic relationships and business alliances, no assurance can be given that these agreements will be effective in controlling access to and distribution of our applications and propriety information or prevent reverse engineering. Further, these agreements may not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our applications, and we may be unable to prevent this competition.

We may be required to spend significant resources to monitor and protect our intellectual property rights. Litigation may be necessary in the future to enforce our intellectual property rights. Such litigation 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. We may not prevail in any lawsuits that we initiate. Any litigation, whether or not resolved in our favor, could subject us to substantial costs, divert resources and the attention of management and technical personnel from our business and adversely affect our business. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation, could delay further sales or the implementation of our software and

 

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offerings, impair the functionality of our software and offerings, delay introductions of new features or enhancements, result in our substituting inferior or more costly technologies into our software and offerings, or injure our reputation.

We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, we may provoke third parties to assert counterclaims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially viable. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which may adversely affect our business, results of operations, financial condition and cash flows.

Future acquisitions could disrupt our business and may divert management’s attention and if unsuccessful, harm our business.

We may choose to expand by making acquisitions that could be material to our business. To date, we have completed one minor acquisition, in 2012, and our ability as an organization to successfully acquire and integrate technologies or businesses is unproven and limited. Acquisitions involve many risks, including the following:

 

    an acquisition may negatively affect our results of operations and financial condition because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition;

 

    we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us;

 

    an acquisition may disrupt our ongoing business, divert resources, increase expenses and distract management;

 

    an acquisition may result in a delay or reduction of customer purchases for both us and the company we acquired due to customer uncertainty about continuity and effectiveness of service from either company;

 

    we may encounter difficulties in, or may be unable to, successfully sell any acquired products;

 

    an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience or where competitors have stronger market positions;

 

    challenges inherent in effectively managing an increased number of employees in diverse locations;

 

    the potential strain on our financial and managerial controls and reporting systems and procedures;

 

    potential known and unknown liabilities associated with an acquired company;

 

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    our use of cash to pay for acquisitions would limit other potential uses for our cash;

 

    if we incur debt to fund such acquisitions, such debt may subject us to material restrictions on our ability to conduct our business as well as financial maintenance covenants;

 

    the risk of impairment charges related to potential write-downs of acquired assets or goodwill in future acquisitions;

 

    to the extent that we issue a significant amount of equity or equity-linked securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease; and

 

    managing the varying intellectual property protection strategies and other activities of an acquired company.

We may not succeed in addressing these or other risks or any other problems encountered in connection with the integration of any acquired business. The inability to integrate successfully the business, technologies, products, personnel or operations of any acquired business, or any significant delay in achieving integration, could harm our business and operating results.

Provisions of our debt instruments may restrict our ability to pursue our business strategies.

Our credit facilities require us, and any debt instruments we may enter into in the future may require us, to comply with various covenants that limit our ability to, among other things:

 

    dispose of assets;

 

    complete mergers or acquisitions;

 

    incur indebtedness;

 

    encumber assets;

 

    pay dividends or make other distributions to holders of our capital stock;

 

    make specified investments;

 

    change certain key management personnel; and

 

    engage in transactions with our affiliates.

These restrictions could inhibit our ability to pursue our business strategies. In addition, we are subject to a financial covenant based on subscription and professional services performance. If we default under our credit facilities, and such event of default was not cured or waived, the lenders could terminate commitments to lend and cause all amounts then outstanding with respect to the debt to be due and payable immediately, which in turn could result in cross defaults under any other debt instruments then outstanding. Our assets and cash flow may not be sufficient to fully repay borrowings under all of our outstanding debt instruments if some or all of these instruments are accelerated upon a default.

 

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We may incur additional indebtedness in the future. The debt instruments governing such indebtedness could contain provisions that are as, or more, restrictive than our existing debt instruments. If we are unable to repay, refinance or restructure our indebtedness when payment is due, the lenders could proceed against the collateral granted to them to secure such indebtedness or force us into bankruptcy or liquidation.

Our ability to raise capital in the future may be limited, and if we fail to raise capital when needed, we could be prevented from growing.

Our business and operations may consume resources faster than we anticipate. While we believe our cash and cash equivalents, cash flows from operations and available borrowings under our credit facilities will be sufficient to support our planned operations for at least the next 12 months, in the future, we may need to raise additional funds to invest in future growth opportunities. Additional financing may not be available on favorable terms, if at all. If adequate funds are not available on acceptable terms, we may be unable to invest in future growth opportunities, which could harm our business and operating results. As of June 30, 2016, we had incurred $20 million in debt under our credit facilities, and the debt holders have rights senior to common stockholders to make claims on our assets. In addition, our credit facilities impose and future debt instruments may impose, restrictions on our ability to dispose property, make changes in our business, engage in mergers or acquisitions, incur additional indebtedness, and make investments and distributions. Furthermore, if we issue additional equity securities, stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. As a result, stockholders bear the risk that future securities offerings reduce the market price of our Class A common stock and dilute their interest.

We may be subject to additional obligations to collect and remit sales tax and other taxes, and we may be subject to tax liability for past sales, which could harm our business.

We do not collect sales and use, value added and similar taxes in all jurisdictions in which we have sales, based on our belief that such taxes are not applicable in certain jurisdictions. State, local and foreign jurisdictions have differing rules and regulations governing sales, use, value added and other taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of such taxes to our software in various jurisdictions is unclear. Further, these jurisdictions’ rules regarding tax nexus are complex and vary significantly. As a result, we could face the possibility of tax assessments and audits. Our liability for these taxes and associated penalties and interest could exceed our original estimates, and we could be required to collect additional taxes in the future. A successful assertion that we should be collecting additional sales, use, value added or other taxes in those jurisdictions where we have not historically done so and do not accrue for such taxes could result in substantial tax liabilities and related penalties for past sales, discourage customers from purchasing our application or otherwise harm our business and operating results.

Changes in tax laws or regulations that are applied adversely to us or our customers could increase the costs of our applications and adversely impact our business.

New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could affect the tax treatment of our (and our subsidiaries’) domestic and foreign earnings. Any new taxes could adversely affect our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. Specifically, taxation of cloud-based applications is constantly evolving as many state and local

 

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jurisdictions consider the taxability of software services provided remotely. These events could require us or our customers to pay additional tax amounts on a prospective or retroactive basis, as well as require us or our customers to pay fines or penalties and interest for past amounts deemed to be due. If we raise our prices to offset the costs of these changes, existing and potential future customers may elect not to continue or purchase our platform or applications in the future. Additionally, new, changed, modified or newly interpreted or applied tax laws could increase our customers’ and our compliance, operating and other costs, as well as the costs of our software. Any or all of these events could harm our business and operating results.

We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions.

As a multinational organization, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain, and significant judgment and estimates are required in determining our provision for taxes. Our tax expense may be impacted if our intercompany transactions, which are required to be computed on an arm’s-length basis, are challenged and successfully disputed by tax authorities. Our policies governing transfer pricing may be determined to be inadequate and could result in additional tax assessments. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could harm our liquidity and operating results. In addition, the authorities in these jurisdictions could review our tax returns and impose additional tax, interest and penalties, and the authorities could claim that various withholding requirements or other taxes apply to us or our subsidiaries (including withholding and indirect taxes on software licenses and related intercompany transactions) or assert that benefits of tax treaties are not available to us or our subsidiaries, any of which could adversely affect our operating results.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

As of December 31, 2015, we had federal net operating loss carryforwards of approximately $145.8 million, which will expire between 2027 and 2034. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” (generally defined as a greater than 50-percentage-point cumulative change (by value) in the equity ownership of certain stockholders over a rolling three-year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-change taxable income or taxes may be limited. We may experience such an ownership change in connection with this offering or in the future as a result of subsequent shifts in our stock ownership, some of which are outside our control. Furthermore, our ability to utilize the net operating losses or other tax attributes 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 net operating losses, or other unforeseen reasons, our existing net operating losses could expire or otherwise be unavailable to offset future income tax liabilities. For these reasons, our ability to use our pre-change net operating loss carryforwards and other pre-change tax attributes to offset post-change taxable income or taxes may be subject to limitation, which could potentially result in increased future tax liability to us.

Future changes in the regulations and laws of the United States, or those of the international markets in which we do business, could harm our business.

We are subject to general business regulations and laws, as well as regulations and laws specifically governing the internet and software, in the United States as well as the international

 

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markets in which we do business. These regulations and laws may cover employment, taxation, privacy, data protection, pricing, content, copyrights, mobile communications, electronic contracts and other communications, consumer protection, unencumbered internet access to our services, the design and operation of websites, and the characteristics and quality of software and services. It is possible changes to these regulations and laws, as well as compliance challenges related to the complexity of multiple, conflicting and changing sets of applicable regulations and laws, may impact our sales, operations, and future growth.

Significant U.K. or European developments stemming from the U.K.’s referendum on membership in the European Union could have a material adverse effect on us.

On June 23, 2016, the United Kingdom held a referendum and voted in favor of leaving the European Union. This has created political and economic uncertainty, particularly in the United Kingdom and the European Union, and this uncertainty may last for years. Our business in the United Kingdom, the European Union, and worldwide could be affected during this period of uncertainty, and perhaps longer, by the impact of the United Kingdom’s referendum. There are many ways in which our business could be affected, only some of which we can identify as of the date of this prospectus.

The referendum, and the likely withdrawal of the United Kingdom from the European Union it triggers, has caused and, along with events that could occur in the future as a consequence of the United Kingdom’s withdrawal, including the possible breakup of the United Kingdom, may continue to cause significant volatility in global financial markets, including in global currency and debt markets. This volatility could cause a slowdown in economic activity in the United Kingdom, Europe or globally, which could adversely affect our operating results and growth prospects. In addition, our business could be negatively affected by new trade agreements or data transfer agreements between the United Kingdom and other countries, including the United States, and by the possible imposition of trade or other regulatory barriers in the United Kingdom. Furthermore, we currently operate in Europe through an Apptio subsidiary based in the United Kingdom, which currently provides us with certain operational, tax and other benefits, as well as through other subsidiaries in Europe. The United Kingdom’s withdrawal from the European Union could adversely affect our ability to realize those benefits and we may incur costs and suffer disruptions in our European operations as a result. These possible negative impacts, and others resulting from the United Kingdom’s actual or threatened withdrawal from the European Union, may adversely affect our operating results and growth prospects.

Increased sales to U.S. federal, state, local and foreign governments expose us to risks inherent in government sales and procurement.

Contracts with U.S. federal, state, local and foreign government entities are subject to various procurement regulations and other requirements relating to their formation, administration and performance. We may be subject to audits and investigations relating to our government contracts and any violations could result in various civil and criminal penalties and administrative sanctions, including termination of contract, refunding or suspending of payments, forfeiture of profits, payment of fines and suspension or debarment from future government business. Further, in order to obtain, and in some cases expedite, sales to certain government customers, we may enter into subcontractor agreements with existing approved government contractors subjecting us to further risks associated with those subcontractor agreements as well as the potential default or breach of the underlying agreements between the approved government contractors and government entity to which we are not a party.

Risks Related to Our Class A Common Stock and this Offering

The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the closing of this offering,

 

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including our executive officers, employees and directors and their affiliates, which will limit your ability to influence the outcome of important transactions, including a change in control.

Our Class B common stock has 10 votes per share, and our Class A common stock, which is the stock we are offering by means of this prospectus, has one vote per share. Upon the closing of this offering, our existing stockholders, all of whom hold shares of Class B common stock, will collectively hold approximately 98% of the voting power of our outstanding capital stock. Our executive officers and directors and their related parties, which include funds affiliated with Madrona Venture Group and Shasta Ventures, and the other holder of 5% or more of our common stock, will collectively beneficially own shares representing 66.2% of the voting power of our outstanding capital stock following this offering. Because of the ten-to-one voting ratio between Class B common stock and Class A common stock, after the closing of this offering, the holders of Class B common stock will collectively continue to control a majority of the combined voting power of our capital stock and therefore be able to control all matters submitted to our stockholders for approval until the earlier of (1) the seventh anniversary of the closing of this offering and (2) the date on which the Class B common stock ceases to represent at least 20% of our outstanding common stock, on which date all of the shares of Class B common stock will automatically convert to Class A common stock. These holders of Class B common stock may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentrated control may have the effect of delaying, preventing or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their capital stock as part of a sale of our company and might ultimately affect the market price of our Class A common stock.

Future transfers by holders of Class B common stock will generally result in those shares converting into shares of Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning or charitable purposes. The conversion of shares of Class B common stock into shares of Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term, which may include our executive officers and directors and their affiliates. For a description of the dual class structure, see the section of the prospectus captioned “Description of Capital Stock.”

Our stock price may fluctuate significantly and investors may not be able to resell their shares at or above the initial public offering price.

The trading price of Class A common stock following this offering may be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this prospectus, these factors include:

 

    actual or anticipated fluctuations in revenue and other operating results, including as a result of the addition or loss of any number of customers;

 

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

 

    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 us, changes in ratings and financial estimates and the publication of other news by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

    changes in operating performance and stock market valuations of cloud-based software or other technology companies, or those in our industry in particular;

 

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    the size of our public float;

 

    price and volume fluctuations in the trading of our Class A common stock and in the overall stock market, including as a result of trends in the economy as a whole or in the technology industry;

 

    new laws or regulations or new interpretations of existing laws or regulations applicable to our business or industry, including data privacy and data security;

 

    lawsuits threatened or filed against us for claims relating to intellectual property, employment issues or otherwise;

 

    changes in our board of directors or management;

 

    short sales, hedging and other derivative transactions involving our Class A common stock;

 

    sales of large blocks of our common stock including sales by our executive officers, directors and significant stockholders; and

 

    other events or factors, including changes in general economic, industry and market conditions and trends, as well as any natural disasters that may affect our operations.

The stock market in general, and market prices for the securities of technology companies like ours in particular, have from time to time experienced volatility that often has been unrelated to the operating performance of the underlying companies. These broad market and industry fluctuations may adversely affect the market price of our Class A common stock, regardless of our operating performance. In several recent situations when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results.

There has been no prior market for our Class A common stock and an active trading market for our Class A common stock may not develop.

Prior to this offering, there has been no public market for our Class A common stock and an active trading market for our shares may never develop or be sustained following this offering. The initial price to the public for our Class A common stock has been determined through negotiations with the underwriters, and the negotiated price may not be indicative of the market price of the Class A common stock after the offering. The lack of an active market may impair investors’ ability to sell their shares at the time they wish to sell them or at a price that they consider reasonable, may reduce the market value of their shares and may impair our ability to raise capital.

If securities or industry analysts do not publish research reports about our business, or if they issue an adverse opinion about our business, our stock price and trading volume could decline.

The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. We do not have any control over these analysts. If no or few analysts commence research coverage of us, or one or more of the analysts who cover us issues an adverse opinion about our company, our stock price would likely decline. If one or more of these analysts ceases research coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

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Future sales of our common stock could cause our stock price to fall.

Our stock price could decline as a result of sales of a large number of shares of our common stock after this offering or the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Upon the closing of this offering, 6,000,000 shares of our Class A common stock will be outstanding (6,900,000 shares of Class A common stock will be outstanding assuming exercise in full of the underwriters’ option to purchase additional shares) and 31,285,839 shares of our Class B common stock will be outstanding, based on our shares outstanding as of June 30, 2016. All shares of Class A common stock to be sold in this offering will be freely tradable without restriction or further registration under the Securities Act unless held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. The resale of the 31,285,839 shares of Class B common stock, or approximately 84% of our outstanding shares after this offering, is currently prohibited or otherwise restricted as a result of securities law provisions, market standoff agreements entered into by our stockholders with us or lock-up agreements entered into by our stockholders with the underwriters; however, subject to applicable securities law restrictions, these shares will be able to be sold in the public market beginning 180 days after the date of this prospectus. In addition, the shares subject to outstanding options and warrants, of which options and warrants to purchase 11,394,824 shares and 75,214 shares, respectively, were outstanding as of June 30, 2016, and the shares reserved for future issuance under our stock option and equity incentive plans will become available for sale immediately upon the exercise of such options and the expiration of any applicable market stand-off or lock-up agreements, and Rule 144 and Rule 701 under the Securities Act. For more information see the section of this prospectus captioned “Shares Eligible for Future Sale.”

Upon the closing of this offering, the holders of 27,976,982 shares (including the shares underlying warrants described in the section of this prospectus captioned “Shares Eligible for Future Sale – Warrants”), or approximately 75% of our common stock, will have rights, subject to some conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register the offer and sale of all shares of common stock that we may issue under our equity compensation plans. Once we register the offer and sale of shares for the holders of registration rights and shares to be issued under our equity incentive plans, they can be freely sold in the public market upon issuance, subject to the lock-up agreements and the restrictions of Rule 144 under the Securities Act in the case of our affiliates, described in the section of this prospectus captioned “Shares Eligible For Future Sale.”

In addition, in the future, we may issue additional shares of Class A common stock or other equity or debt securities convertible into Class A common stock in connection with a financing, acquisition, commercial relationship, litigation settlement, employee arrangements or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and could cause our stock price to decline.

Our management team has broad discretion to use the net proceeds from this offering and its investment of these proceeds may not yield a favorable return. They may invest the proceeds of this offering in ways with which investors disagree.

We expect to use the net proceeds from this offering for working capital and other general corporate purposes. We may also use a portion of the net proceeds to expand our current business through acquisitions of or investments in other complementary businesses, technologies, or other assets. However, we currently have no agreements or commitments with respect to any such acquisitions or investments at this time.

 

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In addition, within the scope of our plan, and in light of the various risks to our business that are set forth in this “Risk Factors” section, our management will have broad discretion over the use of proceeds from this offering, and we could spend the proceeds from this offering in ways our stockholders may not agree with or that do not yield a favorable return, if at all. If we do not invest or apply the proceeds of this offering in ways that improve our operating results, we may fail to achieve expected financial results, which could cause our stock price to decline.

Anti-takeover provisions in our charter documents and under Delaware or Washington law could make an acquisition of us difficult, limit attempts by our stockholders to replace or remove our current management and adversely affect our stock price.

Provisions of our certificate of incorporation and bylaws may delay or discourage transactions involving an actual or potential change in our control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these provisions could adversely affect the price of our stock. Among other things, the certificate of incorporation and bylaws will:

 

    permit the board of directors to issue up to 5,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate;

 

    provide that the authorized number of directors may be changed only by resolution of the board of directors;

 

    provide that all vacancies, including newly-created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;

 

    divide the board of directors into three classes;

 

    provide that a director may only be removed from the board of directors by the stockholders for cause;

 

    require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be taken by written consent;

 

    provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner, and meet specific requirements as to the form and content of a stockholder’s notice;

 

    prevent cumulative voting rights (therefore allowing the holders of a plurality of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose);

 

    require that, to the fullest extent permitted by law, a stockholder reimburse us for all fees, costs and expenses incurred by us in connection with a proceeding initiated by such stockholder in which such stockholder does not obtain a judgment on the merits that substantially achieves the full remedy sought;

 

    provide that special meetings of our stockholders may be called only by the chairman of the board, our chief executive officer (or president, in the absence of a chief executive officer) or by the board of directors;

 

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    provide that stockholders will be permitted to amend the bylaws only upon receiving at least two-thirds of the total votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class; and

 

    authorize two classes of common stock, as discussed above.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Likewise, because our principal executive offices are located in Washington, the anti-takeover provisions of the Washington Business Corporation Act may apply to us under certain circumstances now or in the future. These provisions prohibit a “target corporation” from engaging in any of a broad range of business combinations with any stockholder constituting an “acquiring person” for a period of five years following the date on which the stockholder became an “acquiring person.” See the section of this prospectus captioned “Description of Capital Stock—Anti-Takeover Effects of Delaware and Washington Law and Our Certificate of Incorporation and Bylaws” for additional information.

Our certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our certificate of incorporation provides that, unless we otherwise consent in writing, the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws, any action to interpret, apply, enforce, or determine the validity of our certificate of incorporation or bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.

We are an “emerging growth company,” and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our Class A common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups, or JOBS, Act enacted in April 2012, and, for as long as we continue to be an “emerging growth company,” we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an “emerging growth company” for up to

 

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five years following the closing of this offering, although, if we have more than $1.0 billion in annual revenue, if the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of any year, or we issue more than $1.0 billion of non-convertible debt over a three-year period before the end of that five-year period, we would cease to be an “emerging growth company” as of the following December 31. We cannot predict if investors will find our Class A common stock less attractive if we choose to rely on these exemptions. If some investors find our Class A common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.

As an “emerging growth company” the JOBS Act, allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have elected to use this extended transition period under the JOBS Act. As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make our common stock less attractive to investors.

We will incur increased costs by being a public company.

As a public company, and particularly after we cease to be an “emerging growth company,” we will incur greater legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We also anticipate that we will incur costs associated with relatively recently adopted corporate governance requirements, including requirements of the SEC and The NASDAQ Global Market. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

When our independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting, the cost of our compliance with Section 404 will correspondingly increase. Moreover, if we are not able to comply with the requirements of Section 404 applicable to us in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on management’s beliefs and assumptions and on information currently available to management. Some of the statements in the sections of this prospectus captioned “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and elsewhere in this prospectus contain forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words.

These statements involve risks, uncertainties, assumptions and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Forward-looking statements in this prospectus include, but are not limited to, statements about:

 

    our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit or gross margin, operating expenses, ability to generate cash flow and ability to achieve and maintain future profitability;

 

    the impact of competition in our industry and innovation by our competitors;

 

    the anticipated trends, growth rates and challenges in our business and in the TBM market;

 

    maintaining and expanding our customer base and our relationships with go-to-market partners;

 

    our liquidity and working capital requirements;

 

    our anticipated growth and growth strategies and our ability to effectively manage that growth and effect these strategies;

 

    our ability to sell our solutions and expand internationally;

 

    our involvement with, and the activities of, the TBM Council;

 

    the reliability of the third-party infrastructure on which our solutions depend;

 

    our ability to hire and retain necessary qualified employees to expand our operations;

 

    our ability to adequately protect our intellectual property;

 

    the effect on our business of litigation to which we are or may become a party;

 

    our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally;

 

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    the increased expenses and administrative workload associated with being a public company;

 

    our ability to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud;

 

    our use of the net proceeds from this offering; and

 

    the estimates and estimate methodologies used in preparing our consolidated financial statements and determining option exercise prices.

In addition, you should refer to the section of this prospectus captioned “Risk Factors” for a discussion of important factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if the forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations, market position, market opportunity and market size, is based on information from various sources, including independent industry publications like those generated by Gartner, Inc. In presenting this information, we have also made assumptions based on such data and other similar sources and on our knowledge of, and our experience to date in, the markets for our service and related solutions. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe the market position, opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

The Gartner reports described herein, or the Gartner Reports, represent research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc., or Gartner. Each Gartner Report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Reports are subject to change without notice.

In certain instances where the Gartner Reports are identified as the sources of market and industry data contained in this prospectus, the applicable report is identified by superscript notations. The sources of these data are provided below:

 

  (1) Gartner, Forecast: Enterprise IT Spending by Vertical Industry Market, Worldwide, 2014-2020, 2Q16 Update, July 25, 2016.

 

  (2) Gartner, IT Key Metrics Data 2016; Key Industry Measures: Professional Services Analysis: Current Year, December 14, 2015.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of the shares of Class A common stock in this offering will be approximately $86.0 million, or approximately $99.4 million if the underwriters exercise their option to purchase additional shares in full, based upon the initial price to public of $16.00 per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to create a public market for our Class A common stock, facilitate our future access to the public capital markets and improve brand awareness, as well as to obtain additional capital. We intend to use the net proceeds to us from this offering to repay $20.2 million principal and prepayment fees for amounts borrowed under our credit facilities, and the remainder for working capital and general corporate purposes. Other than the repayment of indebtedness we have not quantified or allocated any specific portion of the net proceeds or range of net proceeds to any particular purpose. Additionally, we may choose to expand our current business through acquisitions of, or investments in, other complementary businesses, technologies, or other assets. However, we currently have no agreements or commitments with respect to any such acquisitions or investments.

We cannot specify with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering. In addition, the amount, allocation and timing of our actual expenditures will depend upon numerous factors. Pending other uses, we intend to invest the proceeds in interest-bearing, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government, or hold as cash. We cannot predict whether the proceeds invested will yield a favorable return. Our management will have broad discretion in the application of the net proceeds we receive from our initial public offering, and investors will be relying on the judgment of our management regarding the application of the net proceeds.

The $10.0 million principal amount of term borrowings under our senior credit facility to be repaid from the net proceeds of this offering accrues interest at a floating rate equal to the prime rate plus 1.25% and is scheduled to mature on April 20, 2020. The $10.0 million principal amount of term borrowings under our subordinated loan and security agreement to be repaid from the net proceeds of this offering accrues interest at 9.5% and is scheduled to mature on April 20, 2019. We used the proceeds of such borrowings for working capital. In addition, we intend to pay a prepayment penalty and a final payment fee in the aggregate amount of $200,000 from the net proceeds of this offering incurred in connection with the foregoing repayment under our subordinated loan and security agreement.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock or any other securities. We anticipate that we will retain all available funds and any future earnings, if any, for use in the operation of our business and do not anticipate paying cash dividends in the foreseeable future. In addition, our credit facilities materially restrict, and future debt instruments we issue may materially restrict, our ability to pay dividends on our Class A common stock or Class B common stock. Payment of future cash dividends, if any, will be at the discretion of the board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements of current or then-existing debt instruments and other factors the board of directors deems relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2016:

 

    on an actual basis;

 

    on a pro forma basis, to reflect: (1) the automatic conversion of all outstanding shares of our convertible preferred stock as of June 30, 2016 into an aggregate of 18,239,475 shares of Class B common stock, which conversion will occur immediately prior to the closing of this offering, as if such conversion had occurred on June 30, 2016; (2) the conversion of warrants to purchase 27,321 shares of convertible preferred stock into warrants to purchase 27,321 shares of Class B common stock; and (3) the filing of our amended and restated certificate of incorporation immediately prior to the closing of this offering; and

 

    on a pro forma as adjusted basis, giving effect to (a) the pro forma adjustments set forth above, (b) the sale and issuance by us of 6,000,000 shares of Class A common stock in this offering at the initial price to public of $16.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and (c) the application of such proceeds as described in the section of this prospectus captioned “Use of Proceeds.”

Investors should read the information in this table together with the financial statements and related notes to those statements, as well as the sections of this prospectus captioned “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    As of June 30, 2016  
        Actual         Pro Forma     Pro Forma
As Adjusted
 
    (in thousands, except share and per share amounts)  

Cash and cash equivalents

  $ 42,052      $ 42,052      $ 107,832   
 

 

 

   

 

 

   

 

 

 

Long-term debt, current and non-current, net of debt issuance costs

  $ 19,432      $ 19,432      $   

Preferred stock warrant liability

    406                 

Convertible preferred stock, $0.0001 par value per share; issuable in series, 18,430,604 shares authorized, 18,239,475 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    133,809                 

Stockholders’ (deficit) equity:

     

Preferred stock, $0.0001 par value per share, no shares authorized, issued or outstanding, actual; 5,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

                    

Common stock, $0.0001 par value per share, 44,100,000 shares authorized, 13,046,364 shares issued and outstanding, actual; no shares authorized, issued or outstanding pro forma and pro forma as adjusted

    1                 

Class A common stock, $0.0001 par value per share, no shares authorized, issued or outstanding, actual; 451,000,000 shares authorized, no shares issued or outstanding, pro forma; 451,000,000 shares authorized, 6,000,000 shares issued and outstanding, pro forma as adjusted

                  1   

Class B common stock, $0.0001 par value per share, no shares authorized, issued or outstanding, actual; 44,000,000 shares authorized, 31,285,839 shares issued and outstanding, pro forma and pro forma as adjusted

           3        3   

Additional paid-in capital

    31,720        165,933        251,912   

Accumulated other comprehensive loss

                    

Accumulated deficit

    (183,652     (183,652     (184,420
 

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

    (151,931     (17,716     67,496   
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 1,716      $ 1,716      $ 67,496   
 

 

 

   

 

 

   

 

 

 

 

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The number of shares of common stock to be outstanding following this offering is based on 31,285,839 shares of common stock outstanding as of June 30, 2016, giving effect to the conversion of all outstanding shares of convertible preferred stock into an aggregate of 18,239,475 shares of Class B common stock immediately prior to the closing of this offering. The outstanding share information in the table above excludes as of June 30, 2016:

 

    11,394,824 shares of Class B common stock issuable upon exercise of options outstanding as of June 30, 2016, at a weighted-average exercise price of $9.28 per share;

 

    551,548 shares of Class B common stock reserved for future issuance under our 2007 Stock Plan as of June 30, 2016. Our 2007 Stock Plan has been terminated and no further awards will be granted under it;

 

    222,920 shares of Class B common stock reserved for future issuance under our 2011 Executive Equity Incentive Plan as of June 30, 2016. Our 2011 Executive Equity Incentive Plan has been terminated and no further awards will be granted under it;

 

    an aggregate of 4,550,000 shares of Class A common stock reserved for future issuance under our 2016 Equity Incentive Plan and 2016 Employee Stock Purchase Plan, each of which became effective on the business day immediately prior to the date of effectiveness of the registration statement of which this prospectus forms a part; and

 

    75,214 shares of Class B common stock issuable upon the exercise of warrants outstanding as of June 30, 2016, at a weighted-average exercise price of $9.52 per share.

 

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DILUTION

Investors purchasing Class A common stock in this offering will experience immediate and substantial dilution in the pro forma net tangible book value of their shares of Class A common stock. Dilution in pro forma net tangible book value represents the difference between the price to public per share of our Class A common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after the offering. Pro forma net tangible book value per share represents our total tangible assets less total liabilities, divided by the number of outstanding shares of Class A common stock and Class B common stock.

After giving effect to (1) the automatic conversion of our outstanding convertible preferred stock into an aggregate of 18,239,475 shares of Class B common stock immediately prior to the closing of this offering, (2) the issuance of 6,000,000 shares of Class A common stock in this offering and (3) receipt of the net proceeds from our sale of 6,000,000 shares of Class A common stock in this offering at the initial price to public of $16.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2016 would have been approximately $65.8 million, or $1.76 per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $2.41 per share to existing stockholders and an immediate dilution of $14.24 per share to new investors purchasing Class A common stock in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

Initial price to public per share

     $ 16.00   

Pro forma net tangible book value per share before this offering

   $ (0.65  

Increase in net tangible book value per share attributable to investors participating in this offering

     2.41     
  

 

 

   

Pro forma as adjusted net tangible book value per share, as adjusted to give effect to this offering

       1.76   
    

 

 

 

Pro forma as adjusted dilution per share to investors participating in this offering

     $ 14.24   

If the underwriters exercise their option in full to purchase 900,000 additional shares of Class A common stock in this offering, the pro forma as adjusted net tangible book value per share after the offering would be $2.07 per share, the increase in the pro forma net tangible book value per share to existing stockholders would be $2.72 per share and the pro forma dilution to new investors purchasing Class A common stock in this offering would be $13.93 per share.

The following table summarizes, on a pro forma basis as of June 30, 2016, the differences between the number of shares of common stock purchased from us, the total consideration and the weighted-average price per share paid by existing stockholders and by investors participating in this offering at the initial price to public of $16.00 per share, before deducting underwriting discounts and commissions and estimated offering expenses payable by us:

 

    

 

Shares Purchased

   

 

Total Consideration

    Weighted-
Average
Price
Per Share
 
     Number      Percent     Amount
(In thousands)
     Percent    

Existing stockholders before this offering

     31,285,839         84   $ 143,347         60   $ 4.58   

Investors participating in this offering

     6,000,000         16        96,000         40        16.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     37,285,839         100   $ 239,347         100     6.42   
  

 

 

    

 

 

   

 

 

    

 

 

   

The outstanding share information in the table above excludes as of June 30, 2016:

 

    11,394,824 shares of Class B common stock issuable upon exercise of options outstanding as of June 30, 2016, at a weighted-average exercise price of $9.28 per share;

 

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    551,548 shares of Class B common stock reserved for future issuance under our 2007 Stock Plan as of June 30, 2016. Our 2007 Stock Plan has been terminated and no further awards will be granted under it;

 

    222,920 shares of Class B common stock reserved for future issuance under our 2011 Executive Equity Incentive Plan as of June 30, 2016. Our 2011 Executive Equity Incentive Plan has been terminated and no further awards will be granted under it;

 

    an aggregate of 4,550,000 shares of Class A common stock reserved for future issuance under our 2016 Equity Incentive Plan and 2016 Employee Stock Purchase Plan, each of which became effective on the business day immediately prior to the date of effectiveness of the registration statement of which this prospectus forms a part; and

 

    75,214 shares of Class B common stock issuable upon the exercise of warrants outstanding as of June 30, 2016, at a weighted-average exercise price of $9.52 per share, after conversion of the convertible preferred stock.

Share reserves for the equity incentive plans will also be subject to automatic annual increases in accordance with the terms of the plans. To the extent that new options are issued under the equity benefit plans or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

We derived the following selected consolidated statements of operations data for the years ended December 31, 2014 and 2015 and the selected consolidated balance sheet data as of December 31, 2014 and 2015 from audited consolidated financial statements appearing elsewhere in this prospectus. We derived the following selected consolidated statement of operations data for the year ended December 31, 2013, and the selected consolidated balance sheet data as of December 31, 2013, from audited consolidated financial statements not included in this prospectus. We derived the following selected consolidated statements of operations data for the six months ended June 30, 2015 and 2016 and the summary consolidated balance sheet data as of June 30, 2016 from unaudited consolidated financial statements appearing elsewhere in this prospectus. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair presentation of the financial statements. Historical results are not necessarily indicative of the results that may be expected in the future and the results for the six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the full year or any other period. The selected financial data set forth below should be read together with the financial statements and the related notes to those statements, as well as the sections of this prospectus captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    Year Ended December 31,     Six Months Ended
June 30,
 
            2013                     2014                     2015                     2015                     2016          
    (in thousands, except per share amounts)  

Consolidated Statements of Operations Data

         

Revenue:

         

Subscription

  $ 54,206      $ 78,719      $ 99,924      $ 47,242      $ 61,681   

Professional services

    19,562        27,896        29,327        14,913        13,941   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    73,768        106,615        129,251        62,155        75,622   

Cost of revenue:

         

Subscription(1)

    8,325        14,686        23,457        11,142        13,039   

Professional services(1)

    19,034        25,731        25,720        13,036        12,712   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue(1)

    27,359        40,417        49,177        24,178        25,751   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    46,409        66,198        80,074        37,977        49,871   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Research and development(1)

    17,804        23,099        30,553        14,674        17,057   

Sales and marketing(1)

    43,415        60,775        71,337        33,274        35,956   

General and administrative(1)

    8,597        14,245        17,763        7,698        10,684   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    69,816        98,119        119,653        55,646        63,697   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (23,407     (31,921     (39,579     (17,669     (13,826

Other income (expense):

         

Interest (expense) income and other, net

    (51     2        (18     19        (434

Foreign exchange loss

    (163     (697     (1,301     (607     (407
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (23,621     (32,616     (40,898     (18,257     (14,667

Provision for income taxes

    (114     (256     (109     (149     (214
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (23,735   $ (32,872   $ (41,007   $ (18,406   $ (14,881
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

  $ (2.11   $ (2.72   $ (3.24   $ (1.47   $ (1.14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted

    11,256        12,080        12,653        12,485        13,016   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted(2)

      $ (1.33     $ (0.48
     

 

 

     

 

 

 

Weighted-average shares used to compute pro forma net loss per share attributable to common stockholders, basic and diluted(2)

        30,893          31,256   
     

 

 

     

 

 

 

 

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(1) Includes stock-based compensation expense as follows:

 

     Year Ended December 31,      Six Months Ended
June 30,
 
             2013                      2014                      2015                      2015                      2016          
     (in thousands)  

Cost of revenue:

           

Subscription

    $ 75        $ 220        $ 482        $ 196        $ 332   

Professional services

     314         609         738         395         367   

Research and development

     836         1,465         2,283         1,160         1,267   

Sales and marketing

     1,047         2,006         2,477         1,210         1,441   

General and administrative

     789         1,466         1,835         894         1,008   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

    $         3,061        $         5,766        $         7,815        $         3,855        $         4,415   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) See Note 8 of the notes to our consolidated financial statements included in this prospectus for an explanation of the method used to calculate basic and diluted net loss per share and pro forma net loss per share attributable to common stockholders and the weighted-average number of shares used in the computation of the per share amounts.

 

     As of December 31,     As of
June 30, 2016
 
     2013     2014     2015    
     (in thousands)  

Consolidated Balance Sheet Data

        

Cash and cash equivalents

   $         35,816      $         19,686      $         17,256      $         42,052   

Working capital, excluding deferred revenue

     77,198        66,574        61,544        71,965   

Total assets

     110,509        108,462        99,151        107,485   

Deferred revenue, current and non-current

     46,259        63,289        83,225        82,184   

Long-term debt, current and non-current, net of debt issuance costs

                          19,432   

Preferred stock warrant liability

     241        357        414        406   

Convertible preferred stock

     133,809        133,809        133,809        133,809   

Accumulated deficit

     (94,892     (127,764     (168,771     (183,652

Total stockholders’ deficit

     (86,147     (111,827     (142,261     (151,931

Non-GAAP Financial Measures

In addition to our results determined in accordance with U.S. generally accepted accounting principles, or GAAP, we believe the following non-GAAP measure is useful in evaluating our business performance. We regularly review the liquidity measure set forth below.

 

     Year Ended December 31,     Six Months Ended
June 30,
 
             2013                     2014                     2015                     2015                     2016          
     (in thousands)  

Other Non-GAAP Financial Data:

          

Free cash flow(1)

   $ (15,480   $ (24,276   $ (18,234   $ (8,071   $ (3,729

 

(1) We define free cash flow as net cash used in operating activities, plus purchases of property and equipment.

We believe free cash flow facilitates period-to-period comparisons of liquidity. We consider free cash flow to be an important measure because it measures the amount of cash we generate from our operations after our capital expenditures and reflects changes in working capital. We use free cash flow in conjunction with traditional GAAP measures as part of our overall assessment of our liquidity, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our liquidity.

 

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Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our free cash flow should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.

We compensate for these limitations by providing investors and other users of our financial information reconciliations of free cash flow to the related GAAP financial measure, net cash used in operating activities. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view free cash flow in conjunction with the related GAAP financial measure.

The following table provides a reconciliation of net cash used in operating activities to free cash flow.

     Year Ended December 31,     Six Months Ended
June 30,
 
             2013                     2014                     2015                     2015                     2016          
     (in thousands)  

Net cash used in operating activities

   $ (11,264   $ (17,957   $ (10,591   $ (3,312   $ (1,409

Plus: purchases of property and equipment

     (4,216     (6,319     (7,643     (4,759     (2,320
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ (15,480   $ (24,276   $ (18,234   $ (8,071   $ (3,729
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere, particularly in the section of this prospectus captioned “Risk Factors.”

Overview

We are the leading provider of Technology Business Management, or TBM, solutions. Our cloud-based platform and SaaS applications enable IT leaders to analyze, optimize and plan technology investments, and benchmark their financial and operational performance against peers. We empower IT leaders to transform IT into a service provider, navigate the cloud transition, and shift technology resources to drive more business innovation.

We were founded in 2007 to deliver cloud-based TBM solutions to global enterprises. Our cycle of frequent updates has facilitated rapid innovation and the introduction of new applications throughout our history. We began offering our first TBM application via our extensible platform in 2008. Since then, we have continued to invest in product innovation and have consistently introduced new applications and capabilities to the market. Our customer base has grown from over 250 as of June 30, 2015 to over 325 as of June 30, 2016.

Because we offer our applications on a subscription basis, typically on contracts with one- to three-year terms, we have visibility into a substantial portion of future revenue. Subscription fees are based on two primary factors: (1) the customer’s annual costs being managed by the applications; and (2) the applications or capabilities for which the customer has subscribed. For some applications, pricing is also impacted by the number of users. We recognize revenue from subscription fees ratably over the term of the contract. We currently derive a significant portion of subscription revenue from subscriptions to our Cost Transparency application. We sell our offerings primarily through a direct sales force and we engage in a variety of marketing activities, including traditional and online activities as well as participation in, and support of, the TBM Council, which are designed to provide sales lead generation, sales support and market awareness. Customers may subscribe for one or more of our applications, and within those applications they may choose to subscribe for all or a portion of the respective application’s capabilities, which are segmented into modules. For those customers that do not initially implement all of our applications, we seek to sell additional applications and modules over time. We believe that there is a significant opportunity to continue to expand the number of applications deployed by existing customers. We also derive revenue from professional services. Professional services revenue includes revenue from application configuration, integration, change management, education and training services, and conference registration and sponsorship fees. This revenue is largely driven by the number and mix of implementations that we perform in a quarter.

We generate the majority of our revenue in North America; however, we are focused on growing our international business. Revenue generated from customers outside of North America accounted for 19%, 22% and 24% of total revenue in 2014, 2015 and the six months ended June 30, 2016, respectively. For additional information regarding revenue generated from each geographic segment, please see Note 10 of the notes to our consolidated financial statements included in this prospectus.

 

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We have grown significantly in a relatively short period of time. Our diverse customer base includes companies across industries and sizes, and our direct sales force has historically targeted organizations with annual IT spend of $100 million or more. Beginning in 2014, we expanded the focus of our sales force to include a broader set of target customers, often referred to as the Global 10,000, which includes many companies with annual IT spend of less than $100 million. We expect these customers will account for an increasing amount of our revenue over time. A substantial majority of our revenue growth in 2014, 2015 and the first six months of 2016 has come from new customers. Our current financial focus is on growing our revenue and expanding our customer base. While we are incurring losses today, we strive to invest in a disciplined manner across all of our functional areas to sustain continued near-term revenue growth and support our long-term initiatives. Our operating expenses have increased significantly in absolute dollars in recent periods, primarily due to employee growth. We had 628 and 694 employees as of June 30, 2015 and 2016, respectively.

We intend to continue investing for long-term growth. We plan to continue to expand our sales and marketing organizations to sell our offerings globally. In addition, we have invested, and expect to continue to invest, in our product development efforts to deliver additional compelling applications and to address customers’ evolving needs. We are also investing in personnel to service our growing customer base. These investments will increase operating expenses on an absolute dollar basis for the foreseeable future. Many of these investments will occur in advance of our experiencing any direct benefit from them and will make it difficult to determine if we are allocating our resources efficiently. However, we expect research and development, sales and marketing, and general and administrative expenses to decrease as a percentage of total revenue over the long term as revenue grows, and we anticipate that we will gain economies of scale as our customer base grows.

Since our inception, we have invested in professional services to help ensure that customers successfully deploy and adopt our applications. Additionally, we continue to expand our professional services partner ecosystem to further support our customers. We believe that our investment in professional services, as well as partners building consulting practices around Apptio, will drive additional customer subscriptions and continued growth in revenue. In addition, over the long term, we expect professional services revenue to decrease as a percentage of total revenue as our customer base continues to grow and as the effort required to deploy our solutions decreases, through product enhancements and our efforts to drive increased customer adoption of our standardized IT operating model, the Apptio TBM Unified Model, or ATUM.

As of June 30, 2016, the average annual subscription contract value from all active customers was approximately $400,000. Average annual subscription contract value has been affected by the fact that, prior to 2014, our sales force focused on selling our entire technology platform to customers, generally with very large IT spend, which resulted in fewer, but larger, deals as compared to today. Add-on sales to existing customers were not a primary focus. Beginning in 2014, our sales force began to focus on selling discrete applications rather than our entire platform to a broader range of customers in the Global 10,000. Under this approach, we often sell one or two applications initially and subsequently target sales opportunities for additional applications. As a result, although some period-to-period variability may be introduced with one or more large contracts, we expect average annual contract value of newly acquired customers to decrease for the foreseeable future.

We had total revenue of $106.6 million and $129.3 million in 2014 and 2015, respectively, reflecting a year-over-year increase of 21%. Subscription revenue was $78.7 million and $99.9 million in 2014 and 2015, respectively, reflecting a year-over-year increase of 27%. For the six months ended June 30, 2015 and 2016, total revenue was $62.2 million and $75.6 million, respectively, reflecting a period-over-period increase of 22%. Subscription revenue was $47.2 million and $61.7 million for the six months ended June 30, 2015 and 2016, respectively, reflecting a period-over-period increase of 31%. We have incurred significant net losses since our inception, including net losses of $32.9 million and $41.0 million in 2014 and 2015, respectively. For the six months ended June 30, 2015 and 2016,

 

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net losses were $18.4 million and $14.9 million, respectively. We had an accumulated deficit of $183.7 million as of June 30, 2016. We expect to incur losses for the foreseeable future and may not be able to achieve or sustain profitability.

Our Business Model

Our business model focuses on maximizing the lifetime value of customer relationships. We make significant investments in acquiring new customers and believe that we will be able to achieve a substantial positive return on these investments by retaining customers, increasing the number of applications and modules deployed by customers over time, and increasing the spend managed by our applications. In connection with the acquisition of new customers, we incur significant upfront costs, including sales and marketing costs associated with acquiring new customers, such as sales commission expenses, which are expensed upfront, and marketing costs, which are expensed as incurred. We recognize subscription revenue ratably over the term of the subscription period, which commences when all of the revenue recognition criteria have been met.

Our objective is for each customer relationship to be profitable over its lifetime, however, the costs we incur with respect to any customer relationship may exceed revenue in earlier periods because we recognize those costs faster than we recognize the associated revenue. Over time, we expect a large portion of our customers to renew their subscriptions, purchase additional applications and expand their IT spend managed by our applications. We also expect the proportion of annual revenue from existing customers to grow relative to annual revenue from new customers. Our sales and marketing expense for renewals and additional sales to existing customers are significantly less than those for sales to new customers while the cost of revenue remains relatively constant. As a result, we believe the mix shift over time between new and existing customers will have a positive impact on our operating margins. Specifically, as the percentage of our annual revenue from existing customers grows relative to the annual revenue from new customers, we would expect the percentage of revenue spent on sales and marketing to decline.

To provide a better understanding of the economics of customer relationships under our current sales strategy, we are providing an analysis of the customers we acquired in 2014, which we refer to as the 2014 Cohort. The 2014 Cohort includes every customer we acquired in 2014 with an initial annual subscription contract value of not more than $500,000. The 2014 Cohort consists of 67 of the 78 new customers we acquired in 2014. While we expect to have customers with initial annual subscription contract value above $500,000 in the future, and we expect such customers will continue to contribute meaningfully to our revenue, we excluded customers with annual subscription contract value above $500,000 because they are well above our historical average, and because sales of not more than $500,000 are representative of the typical annual subscription contract value we expect under our current sales strategy.

We measure the success of our current sales strategy in part by our ability to retain and upsell our customers over time. As seen in the chart below, as of December 31, 2015, the aggregate annual subscription contract value for the 2014 Cohort grew by approximately 20% on a net basis. We calculate the aggregate net annual subscription contract value by dividing the annual subscription contract value for the 2014 Cohort measured as of December 31, 2015 by the annual subscription contract value for the 2014 Cohort measured as of January 1, 2015. We retained substantially all customers in the 2014 Cohort and grew the aggregate annual subscription contract value by selling additional applications, selling premium support offerings, and expanding customers’ aggregate IT spend managed by our applications. The aggregate annual subscription contract value for the 11 customers we excluded from the 2014 Cohort because their initial annual contract value was more than $500,000 grew more than 5% on a net basis through December 31, 2015. The aggregate annual subscription contract value for all customers we acquired in 2014, regardless of their initial annual contract value, grew more than 10% on a net basis through December 31, 2015.

 

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2014 Cohort Aggregate Net Annual Subscription Contract Value

 

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We believe that the economics exhibited to date by the 2014 Cohort are illustrative of the value of our customer base. However, as we increase our customer base we may: spend more in sales and marketing costs to acquire customers, see a shift in our anticipated mix of annual subscription contract values, see a change in renewal rates, or experience lesser or slower sales of additional applications or expansions of customer’s IT spend managed through our applications, any of which could have a significant negative impact on our net revenues and operating results.

Key Factors Affecting Our Performance

Number of Customers

Since we launched our first application, we have made the expansion of our customer base a priority. We believe that our ability to expand our customer base is an indicator of our market penetration, the growth of our business and our potential future business opportunities. We define the number of customers at the end of any particular period as the number of customers with signed agreements for subscriptions with service periods that run through the current or future periods. Multiple companies or divisions within a single consolidated enterprise that each have a separate paid subscription for our applications are each treated as a separate customer. In cases where our customers have subscriptions to our platform obtained through resellers or other distributors, each end customer is counted separately. As of June 30, 2016, we had over 325 customers.

Net Subscription Dollar Retention Rate

We believe that our net subscription dollar retention rate provides insight into our ability to retain and increase revenue from our customers, as well as their potential long-term value to us. Accordingly, we compare the aggregate annual contract value of our customer base at the end of the prior year, which we refer to as the base annual contract value, to the aggregate annual contract value from the same group of customers at the end of the current year, which we refer to as the retained

 

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annual contract value. We calculate our net subscription dollar retention rate on an annual basis by dividing the retained annual contract value by the base annual contract value. In the event a customer renews a subscription for a period that begins and ends in the same year, the value of that partial-year subscription is included in our calculation of retained annual contract value. Our net subscription dollar retention rate was approximately 100% for each of 2014 and 2015.

Investment in Growth

We have invested, and intend to continue to invest, in our sales and marketing organization to drive additional revenue and support the growth of our customer base. Any investments we make in our sales and marketing organization will occur in advance of experiencing any benefits from such investments, so it may be difficult for us to determine if we are efficiently allocating our resources in these areas. We have invested, and intend to continue to invest, in expanding our operations, increasing our headcount and developing technology to support our growth. As a result, we expect total operating expenses to increase for the foreseeable future.

Investment in Infrastructure

We have made, and intend to continue to make, substantial investments in infrastructure that will impact cost of revenue, operating expenses and capital expenditures. We intend to invest to support growth at our leased data centers and with public cloud infrastructure providers to deliver enhanced levels of service to our customers. We intend to continue to invest in enhancements to our cloud architecture, which are designed to provide our customers with enhanced security, scalability and availability. We intend to continue to evaluate the expansion of our data center locations to address additional geographic markets. In addition, we intend to expand existing and establish new facilities in the future to accommodate our projected headcount growth at various locations around the world. We expect to incur substantial costs in connection with such expansion efforts, including leasehold improvements, equipment costs, and, if headcount increases faster than we expect, potentially lease termination payments to enter into new leases for larger space.

Focus on Free Cash Flow

We define free cash flow as cash used in operating activities plus purchases of property and equipment. We consider free cash flow to be an important measure that we are focused on to run our business. For more information about free cash flow, see the section of this prospectus captioned “Selected Consolidated Financial Data—Non-GAAP Financial Measures.”

Components of Our Results of Operations

Revenue

We derive revenue from two sources: (1) subscription revenue, which is comprised of subscription fees from customers accessing our platform, fees for additional support beyond the standard support that is included in the basic subscription fees, and fees for subscription-based online training; and (2) professional services, which consist of fees associated with the implementation and configuration of our applications, as well as fees for in-person training and conference registration and sponsorship fees for the TBM Council, the operations of which we consolidate in our financial statements given the nature of our relationship.

Subscription revenue is driven primarily by the acquisition of new customers and renewals by existing customers, the amount of annual spend our customers are licensed to manage with our applications and the number of applications or capabilities for which the customer has subscribed.

 

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Support revenue is derived from customers purchasing additional support beyond the standard support that is included in the basic subscription fees. Our contracts typically vary in length between one and three years. All subscription and support fees that are billed in advance of service are recorded in deferred revenue. Subscription and support-based revenue is recognized ratably over the subscription term. As a result, most of the revenue that we report in each period is derived from the recognition of deferred revenue relating to subscriptions entered into during previous periods. Pricing includes multiple environments, hosting and support services, data backup and disaster recovery services, as well as future upgrades, when and if available, offered during the subscription period. We typically invoice our customers for subscription fees in annual increments upon execution of the initial contract or subsequent renewal but contract lengths and billing frequencies may vary. Therefore, the annualized value of the arrangements that we enter into with our customers may not be fully reflected in deferred revenue at any single point in time. Accordingly, we do not believe that the change in deferred revenue for any period is an accurate indicator of future revenue for a given period of time. Our contracts are generally non-cancelable during the subscription term, though a customer can terminate for breach if we materially fail to perform.

A typical new customer implementation takes three to six months depending on the customer’s complexity and timeliness. All professional services fees that are billed in advance of service are recorded in deferred revenue. Most of our professional services engagements are priced on a time-and-materials basis, with the balance priced on a fixed-fee basis. In addition, sometimes partners will perform implementation services directly to our customers for which we do not receive professional services revenue. For time-and-materials arrangements, we recognize revenue as hours are worked at the stated hourly rate. For fixed-fee arrangements, we recognize professional services revenue using the percentage of completion method measured on an hours incurred basis. Professional services yield lower gross margins than subscriptions due to the labor-intensive nature of professional services.

On occasion, we sell our applications through third-party resellers. These arrangements typically call for the reseller to retain a portion of the subscription fee paid by the customer as compensation. Since we are typically responsible for the acceptability of the services purchased by the customer, we are the primary obligor in the transaction and, therefore, record revenue on a gross basis based on the amount billed to the customer. Reseller fees are recognized as sales and marketing expense as incurred.

Cost of Revenue and Gross Margin

Cost of subscription revenue consists primarily of employee-related costs, including payroll, benefits and stock-based compensation expense for our technology operations and customer support teams, fees paid to our managed hosting providers and other third-party service providers, amortization of capitalized software development costs and acquired technology, and allocated overhead costs, which include rent, facilities and costs related to internal IT. We expect cost of subscription revenue to continue to increase in absolute dollars for the foreseeable future as our customer base grows.

Subscription gross margin, or subscription revenue less cost of subscription revenue expressed as a percentage of subscription revenue, can and does fluctuate based on a number of factors, including the timing and extent of the fees that we pay to our hosting providers and other third-party service providers and the timing and extent of the investments that we make in additional data center infrastructure and capabilities. Due to investments we made in additional data centers and public cloud hosting capabilities prior to December 31, 2015, we expect subscription gross margin to increase modestly over the long term, although it may fluctuate from period to period depending on the interplay of the factors discussed above. Because we have data centers in each of our three primary geographies, we expect to be able to more efficiently add capacity within these data centers to support our anticipated customer growth.

 

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Cost of professional services revenue consists primarily of personnel costs of our professional services organization, including salaries, employee benefits, travel expenses, bonuses and stock-based compensation expense, as well as allocated overhead costs. In addition, cost of professional services excludes costs associated with TBM Council conferences, which we record as sales and marketing expenses. We expect cost of professional services revenue to continue to increase in absolute dollars for the foreseeable future as we further expand our professional services organization to serve our growing customer base.

Professional services gross margin, or professional services revenue less cost of professional services revenue expressed as a percentage of professional services revenue, can and does fluctuate based on a number of factors, including the timing and extent of our investments in our professional services organization. The primary focus of our professional services business will continue to be providing high-quality customer deployments that allow customers to realize rapid value from our solutions and become long-term, loyal customers. In the future, we may choose to invest in our professional services organization at a pace faster than professional services revenue growth, in which case we may experience a decline in professional services gross margin. We also expect professional services gross margin to be positively affected in periods, particularly the fourth quarter, in which we recognize revenue related to TBM Council events. We expect professional services gross margin to remain relatively consistent over the long term, although it may fluctuate from period to period depending on the interplay of the factors discussed above.

We expect total gross margin to increase modestly over the long term as our subscription revenue increases as a percentage of total revenue, as we realize operational efficiencies in our data centers and public cloud hosting environments, and as we continue to leverage our partners to help us provide professional services, although total gross margin may fluctuate from period to period depending on the interplay of the factors discussed above.

Operating Expenses

Research and Development.  Research and development expenses consist primarily of personnel costs, employee benefits, stock-based compensation expense and other headcount-related costs associated with product development, depreciation of equipment used in research and development, and allocated overhead costs. For development costs related to our software and internal use software, qualifying internally developed software costs incurred during the application development stage are capitalized. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. We expect research and development expenses to continue to increase in absolute dollars for the foreseeable future as we continue to increase the functionality and otherwise enhance our platform and develop new applications. However, we expect research and development expenses to decrease modestly as a percentage of total revenue over the long term as our customer base and revenue grows, although research and development expenses may fluctuate as a percentage of total revenue from period to period due to the seasonality of revenue and the timing and extent of these expenses.

Sales and Marketing.  Sales and marketing expenses consist primarily of personnel costs for our sales and marketing employees, including sales commissions and incentives, employee benefits and stock-based compensation expense, marketing programs for lead generation, the costs associated with TBM Council events and allocated overhead costs. We immediately expense sales commissions related to acquiring new customers and subsequent renewals from existing customers. We expect sales and marketing expenses to continue to increase and continue to be our largest component of operating expenses for the foreseeable future as we continue to expand our direct sales teams, increase our marketing activities, grow our international operations, build brand awareness and sponsor additional marketing events. However, we expect sales and marketing expenses to decrease

 

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as a percentage of total revenue over the long term, although sales and marketing expenses may fluctuate as a percentage of total revenue from period to period due to the seasonality of revenue and the timing and extent of these expenses.

General and Administrative.  General and administrative expenses consist primarily of personnel costs and related expenses, including payroll, employee benefits and stock-based compensation expense for executive, finance, legal, human resources, and administrative personnel, professional fees for external legal, accounting and other consulting services and allocated overhead costs. We expect general and administrative expenses will continue to increase in absolute dollars for the foreseeable future as we continue to grow and incur the costs of compliance associated with being a publicly traded company, including increased legal, audit and consulting fees. Although general and administrative expenses may fluctuate as a percentage of total revenue from period to period due to the seasonality of revenue and the timing and extent of these expenses, in the near term, we expect general and administrative expenses to increase as a percentage of total revenue; however, we expect general and administrative expenses to decrease modestly as a percentage of total revenue over the long term as we focus on processes, systems and controls to enable our internal support functions to scale with the growth of our business.

Other Income (Expense)

Interest Income (Expense) and Other, net.  Interest income (expense) and other, net consists primarily of interest on our capital leases and debt and fair value adjustments for our preferred stock warrant liability. Interest income is derived from our available-for-sale investments.

Foreign Exchange Loss.  Foreign exchange loss consists primarily of foreign currency transaction gains and losses related to the impact of transactions denominated in a foreign currency other than the functional currency (U.S. dollars). As we have expanded our international operations, our exposure to fluctuations in foreign currencies has increased, and we expect this trend to continue.

Provision for Income Taxes.  Provision for income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business. As we have expanded our international operations, we have incurred increased foreign tax expense, and we expect this trend to continue. We have a full valuation allowance for net deferred tax assets, including net operating loss carryforwards, and tax credits related primarily to research and development. We expect to maintain this full valuation allowance for the foreseeable future.

 

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Results of Operations

The following tables set forth certain consolidated financial data in dollar amounts and as a percentage of total revenue.

 

    Year Ended December 31,     Six Months Ended
June 30,
 
    2014     2015     2015     2016  
    (in thousands)  

Revenue:

                   

Subscription

  $         78,719         $         99,924         $         47,242         $         61,681      

Professional services

    27,896           29,327           14,913           13,941      
 

 

 

      

 

 

      

 

 

      

 

 

    

Total revenue

    106,615           129,251           62,155           75,622      

Cost of revenue:

                   

Subscription

    14,686           23,457           11,142           13,039      

Professional services

    25,731           25,720           13,036           12,712      
 

 

 

      

 

 

      

 

 

      

 

 

    

Total cost of revenue

    40,417           49,177           24,178           25,751      
 

 

 

      

 

 

      

 

 

      

 

 

    

Gross profit

    66,198           80,074           37,977           49,871      
 

 

 

      

 

 

      

 

 

      

 

 

    

Operating expenses:

                   

Research and development

    23,099           30,553           14,674           17,057      

Sales and marketing

    60,775           71,337           33,274           35,956      

General and administrative

    14,245           17,763           7,698           10,684      
 

 

 

      

 

 

      

 

 

      

 

 

    

Total operating expenses

    98,119           119,653           55,646           63,697      
 

 

 

      

 

 

      

 

 

      

 

 

    

Loss from operations

    (31,921        (39,579        (17,669        (13,826   

Other income (expense):

                   

Interest income (expense) and other, net

    2           (18        19           (434   

Foreign exchange loss

    (697        (1,301        (607        (407   
 

 

 

      

 

 

      

 

 

      

 

 

    

Loss before provision for income taxes

    (32,616        (40,898        (18,257        (14,667   

Provision for income taxes

    (256        (109        (149        (214   
 

 

 

      

 

 

      

 

 

      

 

 

    

Net loss

  $ (32,872      $ (41,007      $ (18,406      $ (14,881   
 

 

 

      

 

 

      

 

 

      

 

 

    

 

    Year Ended December 31,      Six Months Ended
June 30,
 
    2014     2015      2015     2016  
    (as a percentage of total revenue)  

Revenue:

                

Subscription

    74       77        76       82  

Professional services

    26          23           24          18     
 

 

 

     

 

 

      

 

 

     

 

 

   

Total revenue

                100                      100                       100                      100     

Cost of revenue:

                

Subscription

    14          18           18          17     

Professional services

    24          20           21          17     
 

 

 

     

 

 

      

 

 

     

 

 

   

Total cost of revenue

    38          38           39          34     
 

 

 

     

 

 

      

 

 

     

 

 

   

Gross profit

    62          62           61          66     

 

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    Year Ended December 31,      Six Months Ended
June 30,
 
    2014     2015      2015     2016  
    (as a percentage of total revenue)  

Operating expenses:

                

Research and development

    22          24           24          22     

Sales and marketing

    57          55           54          48     

General and administrative

    13          14           12          14     
 

 

 

     

 

 

      

 

 

     

 

 

   

Total operating expenses

    92          93           90          84     
 

 

 

     

 

 

      

 

 

     

 

 

   

Loss from operations

    (30       (31        (29       (18  

Other income (expense):

                

Interest income (expense) and other, net

                                (1  

Foreign exchange loss

    (1       (1        (1       (1  
 

 

 

     

 

 

      

 

 

     

 

 

   

Loss before provision for income taxes

    (31       (32        (30       (20  
 

 

 

     

 

 

      

 

 

     

 

 

   

Provision for income taxes

                                    

Net loss

    (31 )%        (32 )%         (30 )%        (20 )%   
 

 

 

     

 

 

      

 

 

     

 

 

   

 

     Year Ended December 31,      Six Months Ended
June 30,
 
     2014      2015      2015      2016  
     (dollars in thousands)  

Revenue by geography:

                   

North America

   $ 86,565         $ 101,192         $ 48,778         $ 57,400     

Europe

     16,077           22,296           10,377           15,193     

APAC

     3,973           5,763           3,000           3,029     
  

 

 

      

 

 

      

 

 

      

 

 

   
   $     106,615         $     129,251         $     62,155         $     75,622     
  

 

 

      

 

 

      

 

 

      

 

 

   
     Year Ended December 31,      Six Months Ended
June 30,
 
     2014      2015      2015      2016  
     (as a percentage of total revenue)  

Revenue by geography:

                   

North America

                     81                        78                        78                    76  

Europe

     15           17           17           20     

APAC

     4           5           5           4     
  

 

 

      

 

 

      

 

 

      

 

 

   
     100        100        100        100  
  

 

 

      

 

 

      

 

 

      

 

 

   

Six Months Ended June 30, 2015 Compared to the Six Months Ended June 30, 2016

Revenue

 

     Six Months Ended
June 30,
     Change  
     2015      2016      Amount      %  
     (dollars in thousands)  

Subscription

   $ 47,242          $ 61,681          $ 14,439            31  

Professional services

     14,913            13,941            (972         (7  
  

 

 

       

 

 

       

 

 

         

Total revenue

   $     62,155          $     75,622          $     13,467                        22     
  

 

 

       

 

 

       

 

 

         

 

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Subscription revenue increased for the six months ended June 30, 2016 primarily due to the impact of new customer acquisition. Our customer count increased 24% from June 30, 2015 to June 30, 2016. Professional services revenue decreased for the six months ended June 30, 2016 primarily due to a decrease in implementation times and a lessening need for our customers to purchase follow-on services after the initial deployment. This decrease is attributable to product enhancements and an increase in the number of packaged service offerings as a percentage of total.

Cost of Revenue and Gross Margin

 

     Six Months Ended
June 30,
     Change  
     2015      2016      Amount      %  
     (dollars in thousands)  

Cost of revenue:

                   

Subscription

   $ 11,142         $ 13,039         $ 1,897           17  

Professional services

     13,036           12,712           (324        (2  
  

 

 

      

 

 

      

 

 

        

Total cost of revenue

   $     24,178         $     25,751         $     1,573                       7     
  

 

 

      

 

 

      

 

 

        

Gross margin:

                   

Subscription

     76        79            

Professional services

     13           9               

Total gross margin

     61           66               

The overall increase in cost of subscription revenue was primarily attributable to increased personnel-related costs of $2.4 million driven by headcount growth, which resulted in increased employee compensation, benefits and travel costs of $2.3 million, and additional stock-based compensation of $0.1 million. In addition, data center fees increased by $0.1 million as we increased data center capacity to support our growth, and allocated overhead expenses increased by $0.3 million. These increases were offset by decreased consulting fees of $0.4 million. Additionally, professional services personnel are, on occasion, utilized for services associated with general subscription support. As a result, we reallocate the related personnel costs from cost of professional services to cost of subscription. This cost allocation decreased by $0.2 million as a result of planned improvements in our implementation service cycle, which reduced the need to augment our subscription support personnel. In 2016, we began allocating the cost of hosting internal-use instances of our SaaS applications to the departments using them. This resulted in a reduction of $0.5 million in subscription cost of revenue for the six months ended June 30, 2016. We have evaluated the cost of hosting internal-use instances for the years ended December 31, 2014 and 2015, and for the six months ended June 30, 2015, and determined that the impact was immaterial for reclassification of those financial statements. At June 30, 2016 and 2015, we delivered our service from six data centers located in the United States, Europe and Australia.

The overall decrease in cost of professional services revenue was primarily attributable to a decrease in personnel-related costs consisting of employee compensation, benefits and travel costs of $0.5 million driven by a reduction in headcount due to planned improvements in our implementation service cycle. Outside services decreased $0.1 million, due to a reduction in the use of third parties to supplement internal staff in providing implementation services in 2016.

Subscription gross margin increased as a result of an increase in revenue from growth in our customer base, and expanded utilization of existing hosting infrastructure.

Professional services gross margin declined because planned improvements in our implementation services cycle resulted in a decrease in the number of billable hours. The

 

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corresponding decrease in revenue was greater than the corresponding decrease in professional services costs.

Operating Expenses

Research and Development

 

       Six Months Ended
June 30,
    Change  
           2015                 2016                 Amount                    %          
     (dollars in thousands)  

Research and development

   $ 14,674      $ 17,057      $ 2,383         16

Percentage of total revenue

     24     22     

Research and development expenses increased primarily due to increased personnel-related costs of $1.8 million, consisting of increased employee compensation and benefits costs driven by headcount growth. Total headcount in research and development increased 10% from June 30, 2015 to June 30, 2016 as we continued to upgrade and enhance our platform and applications and develop new technologies. Additionally, allocated overhead and internal hosting costs increased by $0.4 million.

Sales and Marketing

 

       Six Months Ended
June 30,
    Change  
           2015                 2016                 Amount                    %          
     (dollars in thousands)  

Sales and marketing

   $ 33,274      $ 35,956      $ 2,682         8

Percentage of total revenue

     54     48     

Sales and marketing expenses increased due to the expansion of our sales force and increased allocated overhead costs. Total headcount in sales and marketing increased 6% from June 30, 2015 to June 30, 2016, contributing to a $2.1 million increase in personnel-related costs, consisting of increased employee compensation, benefits, commissions and increased travel costs associated with our direct sales force of $1.9 million, and additional stock-based compensation of $0.2 million. Allocated overhead costs increased by $0.6 million as a result of additional IT resources and internal hosting costs. These increases were offset by a decrease of $0.1 million for partner commissions.

General and Administrative

 

       Six Months Ended
June 30,
    Change  
           2015                 2016                 Amount                    %          
     (dollars in thousands)  

General and administrative

   $ 7,698      $ 10,684      $ 2,986         39

Percentage of total revenue

     12     14     

General and administrative expenses increased primarily due to a 38% increase in headcount from June 30, 2015 to June 30, 2016 to support our overall growth. Personnel-related expenses increased by $2.7 million, net of allocations, consisting of increased employee compensation, benefits and travel costs.

 

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Other Income (Expense)

 

       Six Months Ended
June 30,
    Change  
           2015                 2016                 Amount                   %          
     (dollars in thousands)  

Interest income (expense) and other, net

   $ 19      $ (434   $ (453     (2,384 )% 

Foreign exchange loss

     (607     (407     200        (33

The increase in interest expense and other, net was primarily attributable to an increase in interest expense associated with the term loan borrowings in the six months ended June 30, 2016. This increase was offset by a decrease in interest expense associated with fair value adjustments related to our mandatorily redeemable preferred stock warrants. The decrease in foreign exchange loss was primarily due to the impact of foreign currency transaction gains and losses.

Provision for income taxes

 

       Six Months Ended
June 30,
    Change  
           2015                 2016                 Amount                   %          
     (dollars in thousands)  

Provision for income taxes

   $ (149   $ (214   $ (65     44

The increase in provision for income taxes was due to an increase in foreign taxes related to our growing foreign operations.

Year Ended December 31, 2014 Compared to the Year Ended December 31, 2015

Revenue

 

    Year Ended December 31,     Change  
    2014     2015     Amount     %  
    (dollars in thousands)  

Subscription

  $ 78,719         $ 99,924         $ 21,205           27  

Professional services

    27,896           29,327           1,431           5     
 

 

 

      

 

 

      

 

 

        

Total revenue

  $     106,615         $     129,251         $     22,636                       21     
 

 

 

      

 

 

      

 

 

        

Subscription revenue increased in 2015 primarily due to the impact of new customer acquisition. Our customer base increased 29% from December 31, 2014 to December 31, 2015. Professional services revenue increased in 2015 primarily due to an increase in implementation fees associated with the growth in our customer base.

Cost of Revenue and Gross Margin

 

     Year Ended December 31,      Change  
     2014      2015      Amount     %  
     (dollars in thousands)  

Cost of revenue:

                   

Subscription

   $ 14,686         $ 23,457         $ 8,771                       60  

Professional services

     25,731           25,720           (11        0     
  

 

 

      

 

 

      

 

 

        

Total cost of revenue

   $     40,417         $     49,177         $     8,760           22     
  

 

 

      

 

 

      

 

 

        

Gross margin:

                   

Subscription

     81        77            

Professional services

     8           12               

Total gross margin

     62           62               

 

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The overall increase in cost of subscription revenue was primarily attributable to increased personnel-related costs of $4.9 million driven by headcount growth, which was comprised of increased employee compensation, benefits and travel costs of $4.6 million, and additional stock-based compensation of $0.3 million. In addition, data center fees increased by $0.8 million as we increased data center capacity to support our growth, consulting fees increased by $0.7 million as we enhanced our disaster recovery functionality in each of our data centers, and allocated overhead expenses increased by $0.7 million. Additionally, professional services personnel are, on occasion, utilized for services associated with general subscription support. As a result, we reallocate the related personnel costs from cost of professional services to cost of subscription. This cost allocation increased by $0.3 million due to growth in our customer base and an increase in the number of customers migrating to new versions of our applications. At December 31, 2015, we delivered our service from two data centers in the United States and four data centers internationally, compared to two data centers in the United States and one data center internationally at December 31, 2014. Depreciation and amortization expense also increased by $0.4 million as we expanded our hosting infrastructure to support our customer growth.

Cost of professional services revenue decreased slightly year-over-year due to a decrease in outside services of $1.7 million, as a result of a reduction in our use of third parties to supplement internal staff in providing implementation services in 2015, offset by an increase in personnel-related costs of $1.7 million, driven by headcount growth, consisting of increased employee compensation, benefits and travel costs of $1.5 million and additional stock-based compensation of $0.2 million.

Subscription gross margin decreased as a result of an increase in the number of data centers employed in anticipation of increased capacity requirements from customer base growth. These capacity increases are occurring in advance of generating significant revenue from new customers. Additionally, we increased the use of consulting services in 2015 to assist with the enhancement of disaster recovery functionality in each of our data centers.

Professional services gross margin improved as a result of changes in the way we deploy our applications to our customers, product enhancements that allow deployments to be more efficient, and increased customer adoption of our standardized cost model, ATUM.

Total headcount associated with cost of revenue increased 12% from December 31, 2014 to December 31, 2015 as we invested in additional resources to continue to support our solutions and further develop our professional services group.

Operating Expenses

Research and Development

 

       Year Ended December 31,       Change  
           2014                 2015                 Amount                    %          
     (dollars in thousands)  

Research and development

   $ 23,099      $ 30,553      $ 7,454         32

Percentage of total revenue

     22     24     

Research and development expenses increased primarily due to increased personnel-related costs of $5.7 million, consisting of increased employee compensation and benefits costs of $4.9 million and an increase in stock-based compensation of $0.8 million. Additionally, allocated overhead costs increased by $1.0 million. Total headcount in research and development increased 14% from December 31, 2014 to December 31, 2015 as we continued to upgrade and enhance our platform and applications and develop new technologies.

 

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Sales and Marketing

 

       Year Ended December 31,       Change  
           2014                 2015                 Amount                    %          
     (dollars in thousands)  

Sales and marketing

   $ 60,775      $ 71,337      $ 10,562         17

Percentage of total revenue

     57     55     

Sales and marketing expenses increased due to the expansion of our sales force, increases in marketing programs to address additional opportunities in new and existing markets, and increased allocated overhead costs. Total headcount in sales and marketing increased 13% from December 31, 2014 to December 31, 2015, contributing to an $8.1 million increase in personnel-related costs. This increase consists of increased employee compensation, benefits and increased travel costs of $7.6 million attributable to the increase in headcount and commission expense from increased sales, and additional stock-based compensation of $0.5 million. Marketing and event costs increased by $1.2 million due to our continued efforts to generate sales leads and build brand awareness, and allocated overhead costs increased by $1.2 million as a result of higher building rent and additional IT resources.

General and Administrative

 

       Year Ended December 31,       Change  
           2014                 2015                 Amount                    %          
     (dollars in thousands)  

General and administrative

   $ 14,245      $ 17,763      $ 3,518         25

Percentage of total revenue

     13     14     

General and administrative expenses increased primarily due to a 27% increase in headcount from December 31, 2014 to December 31, 2015. Personnel-related expenses increased by $3.7 million, consisting of increased employee compensation, benefits and travel costs of $3.3 million, and additional stock-based compensation of $0.4 million as we added employees to support the growth of our business. These increases were offset by a $0.2 million decrease in professional services fees.

Other Income (Expense)

 

       Year Ended December 31,       Change  
     2014     2015     Amount     %  
     (dollars in thousands)  

Interest income (expense) and other, net

   $ 2      $ (18   $ (20     (1,000 )% 

Foreign exchange loss

     (697     (1,301     (604     87

The change in interest income (expense) and other, net was primarily attributable to a decrease in interest and other income due primarily to lower investment balances, combined with a decrease in interest expense from fair value adjustments related to our preferred stock warrants. The increase in foreign exchange loss was primarily due to strengthening of the U.S. dollar combined with an increase in foreign currency denominated sales.

Provision for income taxes

 

       Year Ended December 31,        Change  
     2014      2015      Amount      %  
     (dollars in thousands)  

Provision for income taxes

   $ (256)       $ (109)       $ 147         57%   

The decrease in provision for income taxes was due to a decrease in foreign taxes related to our foreign operations.

 

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Quarterly Results of Operations

The following tables set forth selected unaudited quarterly consolidated statements of operations data for each of the quarters indicated, as well as the percentage of total revenue that each line item represented for each quarter. We prepared the quarterly consolidated statements of operations on a basis consistent with the audited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the financial information reflects all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results for any future period.

 

                                                                                                                                                                                                       
    Three Months Ended  
    September 30,
2014
    December 31,
2014
    March 31,
2015
    June 30,
2015
    September 30,
2015
    December 31,
2015
    March 31,
2016
    June 30,
2016
 
    (in thousands)  

Revenue:

               

Subscription

  $ 20,549      $ 20,953      $ 23,087      $ 24,155      $ 25,594      $ 27,088      $ 30,277      $ 31,404   

Professional services

    6,967        7,802        7,384        7,529        6,660        7,754        6,566        7,375   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    27,516        28,755        30,471        31,684        32,254        34,842        36,843        38,779   

Cost of revenue:

               

Subscription(1)

    4,021        5,154        5,547        5,595        6,173        6,142        6,480        6,559   

Professional services(1)

    6,593        6,573        6,602        6,434        6,684        6,000        6,116        6,596   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    10,614        11,727        12,149        12,029        12,857        12,142        12,596        13,155   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    16,902        17,028        18,322        19,655        19,397        22,700        24,247        25,624   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

               

Research and development(1)

    5,949        6,300        7,258        7,416        7,928        7,951        8,431        8,626   

Sales and marketing(1)

    12,997        18,398        15,727        17,547        15,855        22,208        16,287        19,669   

General and administrative(1)

    3,743        3,860        3,837        3,861        5,023        5,042        5,180        5,504   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    22,689        28,558        26,822        28,824        28,806        35,201        29,898        33,799   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (5,787     (11,530     (8,500     (9,169     (9,409     (12,501     (5,651     (8,175

Other income (expense):

               

Interest (expense) income and other, net

    (17     45        16        3        (18     (19     (57     (377

Foreign exchange (loss) gain

    (106     (493     (643     36        (351     (343     (112     (295
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (5,910     (11,978     (9,127     (9,130     (9,778     (12,863     (5,820     (8,847

Provision for income taxes

    (72     (65     (68     (81     (87     127        (76     (138
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (5,982   $ (12,043   $ (9,195   $ (9,211   $ (9,865   $ (12,736   $ (5,896   $ (8,985
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Stock-based compensation included in the consolidated statement of operations data was as follows:

 

                                                                                                                                                                                                       
    Three Months Ended  
    September 30,
2014
    December 31,
2014
    March 31,
2015
    June 30,
2015
    September 30,
2015
    December 31,
2015
    March 31,
2016
    June 30,
2016
 
   

(in thousands)

 

Cost of revenue:

               

Subscription

  $ 77      $ 82      $ 87      $ 109      $ 145      $ 141      $ 141      $ 191   

Professional services

    160        187        190        205        179        164        154        213   

Research and development

    416        459        569        591        577        546        553        714   

Sales and marketing

    606        489        567        643        623        644        635        806   

General and administrative

    387        503        463        431        498        443        422        586   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation

  $ 1,646      $ 1,720      $ 1,876      $ 1,979      $ 2,022      $ 1,938      $ 1,905      $ 2,510   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
                                                                                                                                                                                                       
     Three Months Ended  
     September 30,
2014
    December 31,
2014
    March 31,
2015
    June 30,
2015
    September 30,
2015
    December 31,
2015
    March 31,
2016
    June 30,
2016
 
    

(as a percentage of total revenue)

 

Revenue:

                

Subscription

     75     73     76     76     79     78     82     81

Professional services

     25        27        24        24        21        22        18        19   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100        100        100        100        100        100        100        100   

Cost of revenue:

                

Subscription

     15        18        18        18        19        18        18        17   

Professional services

     24        23        22        20        21        17        17        17   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     39        41        40        38        40        35        35        34   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     61        59        60        62        60        65        65        66   

Operating expenses:

                

Research and development

     22        22        24        23        25        23        23        22   

Sales and marketing

     47        64        52        55        49        64        44        51   

General and administrative

     14        13        13        12        15        14        14        14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     83        99        89        90        89        101        81        87   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (22     (40     (29     (28     (29     (36     (16     (21

Other income (expense):

                

Interest income (expense) and other, net

                                                      (1

Foreign exchange loss

            (2     (2            (1     (1            (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (22     (42     (31     (28     (30     (37     (16     (23

Provision for income taxes

                                                        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (22 )%      (42 )%      (31 )%      (28 )%      (30 )%      (37 )%      (16 )%      (23 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue has increased in each of the periods presented above primarily due to the increase in customer count. Operating expenses generally have increased sequentially in every quarter primarily due to increases in headcount and other related expenses to support growth. We anticipate operating expenses will continue to increase in absolute dollars in future periods as we invest in the long-term growth of our business.

We may experience variances in total customers over a particular quarter for a variety of business reasons, and the extent to which we gain or lose customers over a particular quarter will not necessarily correlate to the changes in revenue in that quarter or in future periods. As a result of the foregoing factors, a slowdown in our ability to enter into customer agreements or to renew customer agreements may not be apparent in revenue for the quarter, as the revenue recognized in any quarter is primarily from customer agreements entered into in prior quarters.

Seasonality

We have historically experienced seasonality in terms of when we enter into agreements with customers. We typically enter into a significantly higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in the fourth quarter and, to a lesser extent, the second quarter. The increase in customer agreements for the fourth quarter is attributable to large enterprise account buying patterns typical in the software industry. Fourth quarter professional services revenue is also typically positively impacted by recognition of TBM Council conference registration and sponsorship fees.

Furthermore, we usually enter into a significant portion of agreements with customers during the last month, and often the last two weeks, of each quarter. This seasonality is reflected to a much lesser extent, and sometimes is not immediately apparent, in revenue, due to the fact that we recognize subscription revenue over the term of the subscription agreement, which is generally one to three years. Although these seasonal factors are common in the technology industry, historical patterns should not be considered a reliable indicator of future sales activity or performance.

 

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Backlog

Backlog represents future amounts to be invoiced under subscription agreements. As of December 31, 2014 and 2015 and June 30, 2016 we had backlog of approximately $48.8 million, $79.8 million and $78.1 million, respectively.

We often sign multiple-year subscription agreements for our applications. The timing of invoices to customers is a negotiated term and thus varies among our subscription agreements. For multiple-year agreements, it is common to invoice an initial annual amount at contract signing followed by subsequent annual invoices. At any point in the contract term, there can be amounts that we have not yet been contractually able to invoice. Until such time as we have the contractual right to invoice, they are not recorded in deferred revenue or elsewhere in our consolidated financial statements, and are considered by us to be backlog.

We expect that the amount of backlog relative to the total value of our contracts will change from year-to-year for several reasons, including the amount invoiced early in the contract term, the specific timing and duration of large customer subscription agreements, varying invoicing cycles of subscription agreements, the specific timing of customer renewals, changes in customer financial circumstances, and foreign currency fluctuations.

Backlog may also vary based on changes in the average non-cancellable term of subscription agreements. The change in backlog that results from changes in the average non-cancellable term of subscription agreements may not be an indicator of the likelihood of renewal or expected future revenue. Accordingly, we believe that fluctuations in backlog are not a reliable indicator of future revenue, and we do not utilize backlog as a key management metric internally.

Liquidity and Capital Resources

As of June 30, 2016, we had $42.1 million of cash and investments, and $25.0 million in available borrowings under our credit facilities. We believe that existing cash and investments, any positive cash flows from operations and available borrowings under our credit facilities will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Since inception, we have financed operations primarily through the sale of equity securities and sales of subscriptions and professional services. Our principal uses of cash are funding operations and capital expenditures.

Sources of Funds

In June 2015, we entered into an amended and restated loan and security agreement, the senior credit facility, to allow for the incurrence of up to $10 million in term loan borrowings and up to $15 million in a revolving accounts receivable line of credit. In January 2016, we incurred $10 million principal amount of term borrowings under the senior credit facility. In April 2016, the senior credit facility was amended and we entered into a new subordinated loan and security agreement which provides for an additional $20 million of term loan borrowings. Upon closing, we incurred $10 million in term loan borrowings under the subordinated loan and security agreement.

From time to time, we may explore additional financing sources and means to lower our cost of capital, which could include equity, equity-linked and debt financing. We cannot assure you that any additional financing will be available to us on acceptable terms, or at all.

Credit Facilities

The senior credit facility, which was amended in April 2016, provides $10 million aggregate principal amount of term loan borrowings and up to $15 million aggregate principal amount of revolver

 

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borrowings. Interest on the term loan borrowings accrues at a floating rate equal to the prime rate plus 1.25%. In January 2016 we borrowed the full $10 million term loan. The April 2016 amendment extended the maturity dates of the term loan and the revolver, as well as the interest only period on the term loan, by 12 months. The term loan now matures on April 20, 2020. Through April 30, 2017, we are required to pay only interest on outstanding term loan borrowings on a monthly basis. Following the expiration of the interest only payment period, we are required to pay principal and interest in 36 equal monthly payments. We can also incur revolver borrowings based on a borrowing base tied to the amount of eligible accounts receivable, not to exceed $15 million. Interest on the revolver borrowings accrues at a floating rate equal to the prime rate and is payable monthly. The revolver matures on June 16, 2017.

In April 2016, in addition to amending the senior credit facility, we entered into a new subordinated loan and security agreement pursuant to which we incurred $10 million in term loan borrowings and we may, at our option, through April 20, 2017 incur an additional $10 million of term loan borrowings. Interest on the subordinated term loans is fixed at 9.5% per year and matures on April 20, 2019. Through the maturity of the subordinated term loans, we are required to pay only interest on outstanding subordinated term loans on a monthly basis. The full principal amount is due at maturity.

The senior credit facility and subordinated loan agreement contain customary conditions to borrowing, events of default and covenants, including covenants that restrict our ability to dispose of assets, merge with or acquire other entities, incur indebtedness, incur encumbrances, make distributions to holders of our capital stock, make investments or engage in transactions with affiliates. If cash, cash equivalents and investments held with the lender are below $25 million as of the last day of the applicable monthly measuring period, we will be required to comply with a financial covenant based on subscription and professional services performance. This financial covenant is measured both monthly and quarterly, generally on a trailing six month basis. We were in compliance with all covenants as of June 30, 2016. Our obligations under the senior credit facility and subordinated loan agreement are secured by substantially all of our assets other than intellectual property. We intend to use a portion of the net proceeds from this offering to repay $20.2 million principal and pre-payment fees for amounts borrowed under our credit facilities.

In 2008, we issued a warrant to purchase 27,321 shares of Series A convertible preferred stock in connection with entering into a prior credit facility with our lender. The warrant has a ten-year term and an exercise price of $1.37255 per share. In connection with entering into the senior credit facility in June 2015, we issued a warrant to purchase 10,722 shares of common stock. The warrant has a ten-year term and an exercise price of $13.99 per share. In addition, as a result of the borrowings under the term loan under the senior credit facility in January 2016, the number of shares issuable upon exercise of the warrant that we issued to the lenders was automatically adjusted such that the holder of the warrant shall have the right to purchase an additional 10,722 shares of common stock at the same $13.99 exercise price. As a result, the warrants held by the lenders under the senior credit facility provide for the right to purchase up to an aggregate of 21,444 shares of stock. Such warrants will become exercisable for shares of our Class B common stock in connection with this offering.

In April 2016, in connection with amending the senior credit facility, we issued to the lender a warrant to purchase 5,241 shares of Class B common stock. The warrant has a ten-year term and an exercise price of $14.31 per share. In addition, in connection with entering into the subordinated loan agreement, we issued warrants to purchase an aggregate of 21,208 shares of Class B common stock. The warrants have an exercise price of $14.31 per share and a ten-year term. Pursuant to the terms of the warrants, if we incur any additional borrowings under the subordinated term loan, the number of shares issuable upon exercise of the warrants will automatically be adjusted such that the holders shall have the right to purchase up to an aggregate of 42,215 shares at the same $14.31 exercise price.

 

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Use of Funds

Our principal uses of cash are funding operations and other working capital requirements. Cash used in operations for 2015 was $10.6 million and cash used in operations for the six months ended June 30, 2016 was $1.4 million. Over the past several years, revenue has increased significantly from year to year and, as a result, cash flows from customer collections have increased. However, operating expenses have also increased as we have invested in growing our business. Our operating cash requirements may increase in the future as we continue to invest in the strategic growth of our company.

To the extent existing cash and investments and cash from operations are not sufficient to fund future activities, we may need to raise additional funds. We may seek to raise additional funds through equity, equity-linked or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness may have rights that are senior to holders of our equity securities and could contain covenants that restrict operations. Any additional equity financing may be dilutive to stockholders. Although we are not currently a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, complementary businesses, services or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity financing, incur indebtedness, or use cash resources. We have no present understandings, commitments or agreements to enter into any such acquisitions.

Historical Cash Flow Trends

The following table shows cash flows for 2014 and 2015 and the six months ended June 30, 2015 and 2016:

 

      Years Ended December 31,         Six Months Ended  
June 30,
 
          2014                 2015                 2015                 2016        
    (in thousands)              

Net cash used in operating activities

  $ (17,957   $ (10,591   $ (3,312   $ (1,409

Net cash provided by investing activities

    521        6,743        4,568        6,373   

Net cash provided by financing activities

    1,396        1,455        1,626        20,034   

Operating Activities

Net cash used in operating activities consists primarily of net loss adjusted for certain non-cash items, including stock-based compensation, change in fair value of preferred stock warrant liability, depreciation and amortization and other non-cash charges, net.

Net cash used in operating activities during the six months ended June 30, 2016 reflected our net loss of $14.9 million, offset by non-cash expenses that included $4.4 million of stock-based compensation and $3.0 million of depreciation and amortization. Working capital sources of cash included a decrease of $8.5 million in accounts receivable, primarily due to collections on transactions originating in the fourth quarter of 2015. These sources of cash were offset by a $0.8 million, net decrease in accounts payable, accrued expenses and deferred rent, a $1.0 million decrease in deferred revenue and a $0.8 million increase in prepaid expenses and other current assets.

Net cash used in operating activities during the six months ended June 30, 2015 reflected our net loss of $18.4 million, offset by non-cash expenses that included $3.9 million of stock-based compensation and $3.2 million of depreciation and amortization. Working capital sources of cash included a decrease of $15.8 million in accounts receivable, primarily due to collections on transactions

 

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originating in the fourth quarter of 2014. These sources of cash were offset by a $5.1 million decrease in deferred revenue, a $1.2 million, net decrease in accounts payable, accrued expenses and deferred rent, and a $1.5 million increase in prepaid expenses and other current assets.

Net cash used in operating activities during 2015 primarily reflected our net loss of $41.0 million, offset by non-cash expenses that included $7.8 million of stock-based compensation and $6.5 million of depreciation and amortization. Working capital sources of cash included a $19.9 million increase in deferred revenue, primarily resulting from the growth in the number of customers invoiced during the period, and a $3.1 million increase in accounts payable, accrued expenses and deferred rent. These sources of cash were offset by a $6.2 million increase in accounts receivable as a result of increased billings to customers consistent with the overall growth of the business and a $1.0 million increase in prepaid expenses.

Net cash used in operating activities during 2014 primarily reflected our net loss of $32.9 million, offset by non-cash expenses that included $5.8 million in stock-based compensation and $5.2 million of depreciation and amortization. Working capital sources of cash included a $17.0 million increase in deferred revenue primarily resulting from the growth in the number of customers invoiced during the period and a $3.7 million increase in accounts payable, accrued expenses and deferred rent. These sources of cash were offset by a $15.2 million increase in accounts receivable as a result of increased billings to customers consistent with the overall growth of the business and a $2.0 million increase in prepaid expenses and other current assets. The change in net cash used in operating activities from 2013 to 2014 is primarily due to increases in payments for employee payroll as we continued to invest in and grow our business.

Investing Activities

Our investing activities have consisted primarily of purchases, sales and maturities of available-for-sale securities, property and equipment purchases for computer-related equipment, leasehold improvements to leased office facilities and capitalization of software development costs. Capitalized software development costs are related to new applications or improvements to existing software platform that expands the functionality for customers.

Net cash provided by investing activities during the six months ended June 30, 2016 consisted primarily of $6.2 million of cash maturities from available-for-sale securities and $2.5 million from the release of restricted cash, offset by $2.3 million of purchased property and equipment and capitalized software development costs.

Net cash provided by investing activities during the six months ended June 30, 2015 consisted primarily of $11.1 million of cash maturities from available-for-sale securities, offset by $4.8 million of purchased property and equipment and capitalized software development costs and $2.0 million in purchases of available-for-sale securities.

Net cash provided by investing activities during 2015 was $6.7 million, consisting primarily of $16.8 million of cash maturities from available-for-sale securities, offset by $7.6 million of purchased property and equipment and capitalized software development costs, and $2.7 million in purchases of available-for-sale securities.

Net cash provided by investing activities during 2014 was $0.5 million, consisting primarily of $28.4 million of cash maturities from available-for-sale securities. These sources of cash were partially offset by a $20.7 million in purchases of available-for-sale securities and $6.3 million of purchased property and equipment.

 

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Financing Activities

Our financing activities have consisted primarily of issuances of convertible preferred stock and debt borrowings to fund operations and, to a lesser extent, proceeds from the exercise of options. Cash flows used in financing activities consist primarily of payment of initial public offering costs, loan fees and repayment of capital leases.

Net cash provided by financing activities for the six months ended June 30, 2016 consisted primarily of $20.0 million in principal proceeds from term loan borrowings and $0.5 million from proceeds received from option exercises, offset by the payment of deferred initial public offering costs and loan fees of $0.5 million.

Net cash provided by financing activities for the six months ended June 30, 2015 consisted primarily of $1.7 million from proceeds received from option exercises.

Net cash provided by financing activities for 2015 consisted primarily of $2.7 million of proceeds received from option exercises, offset by the payment of deferred initial public offering costs of $1.1 million.

Net cash provided by financing activities for 2014 was $1.4 million, consisting primarily of proceeds received from option exercises.

Contractual Obligations and Commitments

Contractual obligations are cash that we are obligated to pay as part of certain contracts that we have entered into during the normal course of business. Below is a table that shows the projected outlays as of December 31, 2015:

 

    Payments Due by Period:  
    Total     Less than
1 Year
    1-3 Years     3-5 Years     More Than
5 Years
 
    (in thousands)  

Capital leases(1)

  $ 148      $ 47      $ 73      $ 28      $   

Operating leases(2)

    25,614        4,171        7,712        7,005        6,726   

Purchase obligations(3)

    1,221        985        236                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 26,983      $ 5,203      $ 8,021      $ 7,033      $ 6,726   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes interest totaling $11,000.
(2) Includes non-cancellable obligations for our amended headquarters lease signed in 2014 and other leases for office and facility space. As of December 31, 2015, we had leases that expire at various dates through 2023.
(3) Purchase obligations relate primarily to non-cancellable agreements for software and marketing services.

Below is a table that shows the projected outlays as of June 30, 2016:

 

    Payments Due by Period:  
    Total     Less than
1 Year
    1-3 Years     3-5 Years     More Than
5 Years
 
    (in thousands)  

Credit facilities(1)

  $ 20,000      $ 556      $ 16,667      $ 2,777      $   

Capital leases(2)

    121        46        58        17          

Operating leases(3)

    26,020        4,423        8,496        7,357        5,744   

Purchase obligations(4)

    548        440        108                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 46,689      $ 5,465      $ 25,329      $ 10,151      $ 5,744   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

In January 2016, we borrowed $10 million in term loan borrowings under our senior credit facility. We are required to pay only interest on outstanding borrowings through April 2017. Following the interest only period,

 

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  we are required to make monthly payments of $278,000 through the maturity date of April 20, 2020. In April 2016, we borrowed an additional $10 million in term loan borrowings under the subordinated loan and security agreement, which is interest only until the maturity date of April 20, 2019. We intend to use a portion of the net proceeds from this offering to repay $10.2 million principal and pre-payment fees for amounts borrowed under our subordinated loan and security agreement and $10.0 million principal amount borrowed under our senior credit facility.
(2) Includes interest totaling $7,000.
(3) Includes non-cancellable obligations for our amended headquarters lease signed in 2014 and other leases for office and facility space. As of June 30, 2016, we had leases that expire at various dates through 2023.
(4) Purchase obligations relate primarily to non-cancellable agreements for software and marketing services.

Off-Balance Sheet Arrangements

During 2014 and 2015 and the six months ended June 30, 2016 we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements.

Qualitative and Quantitative Disclosures about Market Risk

Foreign Currency Exchange Risk

Due to our international operations, we have foreign currency risks related to revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the British Pound Sterling, Euro and Australian dollar. Our sales contracts are primarily denominated in the local currency of the customer making the purchase. In addition, a portion of operating expenses are incurred outside the United States and are denominated in foreign currencies. Additionally, subscription fees are largely based on customers’ anticipated spend as expressed in U.S. dollars as managed by our system, which fee construct may increase the exposure of revenue to currency fluctuations. Decreases in the relative value of the U.S. dollar to other currencies may negatively affect revenue and other operating results as expressed in U.S. dollars. We do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar to other currencies would have a material effect on operating results.

We have experienced and will continue to experience fluctuations in net loss as a result of transaction gains or losses related to remeasuring certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. We have not engaged in the hedging of foreign currency transactions to date. We are evaluating the costs and benefits of initiating such a program and may in the future hedge selected significant transactions denominated in currencies other than the U.S. dollar as we expand international operations.

Interest Rate Sensitivity

We hold cash and cash equivalents for working capital purposes. We do not have material exposure to market risk with respect to investments, as any investments we enter into are primarily highly liquid investments. We have a senior credit facility, consisting of $25 million of term borrowings and an accounts receivable line of credit, which was undrawn as of December 31, 2015. In January, 2016, we incurred $10 million principal amount of term borrowings under the senior credit facility. Interest accrues on term loan borrowings at a floating rate equal to the prime rate plus 1.25%. Interest accrues on the accounts receivable line of credit at a floating rate equal to the prime rate. In addition, in April 2016, we incurred an additional $10 million principal amount of term borrowings under our new subordinated loan and security agreement. Interest is fixed at 9.5% per year. We intend to use a portion of the net proceeds from this offering to repay $10.2 million principal and pre-payment fees for amounts borrowed under our subordinated loan and security agreement and $10.0 million principal

 

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amount borrowed under our senior credit facility. A 10% increase or decrease in interest rates would not result in a material change in either our obligations under the credit facility, even at the borrowing limit, or in the returns on our cash.

Emerging Growth Company Status

As an “emerging growth company,” or EGC, the Jump-start Our Business Start-ups, or JOBS Act, allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. As an “emerging growth company,” the JOBS Act allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have elected to use this extended transition period under the JOBS Act. As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make our common stock less attractive to investors.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the financial statements. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and estimates include those related to:

 

    revenue recognition;

 

    stock-based compensation;

 

    common stock valuations;

 

    income taxes; and

 

    capitalized internal use software.

Revenue Recognition

We commence revenue recognition when all of the following conditions are met:

 

    there is persuasive evidence of an arrangement;

 

    the service has been provided to the customer;

 

    the collection of related fees is reasonably assured; and

 

    the amount of fees to be paid by the customer is fixed or determinable.

Signed agreements are used as evidence of an arrangement. If a signed contract by the customer does not exist, we have historically used either a purchase order or a signed order form as evidence of an

 

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arrangement. In cases where both a signed contract and either a purchase order or signed order form exist, we consider the signed contract to be the final persuasive evidence of an arrangement.

Subscription revenue is recognized ratably over the contract term beginning on the commencement date of each subscription term, which is generally the date we make the subscribed applications available to customers. Once the subscribed application is available to customers, amounts that we have the contractual right to invoice are recorded in accounts receivable and in deferred revenue. Professional services are priced either on a fixed-fee or a time-and-materials basis. Professional services revenue is recognized as the services are delivered. In instances where final acceptance of non-standard service deliverables are required before revenue is recognized, revenue and the associated costs are deferred until all acceptance criteria have been met.

We assess collectability based on a number of factors such as past collection history with the customer and creditworthiness of the customer. If we determine collectability is not reasonably assured, we defer the revenue recognition until collectability becomes reasonably assured. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Our arrangements do not include general rights of return.

We derive revenue from two sources: (1) subscription revenue, which is comprised of subscription fees from customers utilizing our applications, fees for additional support beyond the standard support that is included in the basic subscription fees, which we refer to as premium support offerings, and fees for subscription based online training offerings; and (2) professional services, which consist of fees associated with the implementation and configuration of our applications, as well as fees for in-person training and TBM Council conference registration and sponsorship fees. Implementation and configuration services primarily consist of consultative services, such as data mapping and establishing best practices. Implementation and configuration services do not result in any significant customization or modification of the software platform or user interface. We present revenue from each of these sources separately in our consolidated financial statements.

We enter into arrangements with multiple deliverables that primarily include subscription and professional services, but may also include premium support, online training and in-person training. The professional services are not considered essential to the functionality of the software. To qualify as a separate unit of accounting, the delivered item must have value to the customer on a stand-alone basis. We believe subscription offerings and professional service offerings have stand-alone value. Subscriptions have stand-alone value because such services are often sold separately from other professional services. Professional services have stand-alone value because those services may be sold separately by other vendors and there are trained third-party consultants capable of performing the professional services. Deliverables that are accounted for separately consist of software subscription, professional services, training, premium support and online training.

When arrangements involve multiple elements that qualify as separate units of accounting, we allocate revenue to each deliverable in a multiple-deliverable arrangement based upon its relative selling price. The estimated selling price for each element is based upon the following hierarchy in order of priority: vender-specific objective evidence, or VSOE, of selling price, if available, third-party evidence, or TPE, of selling price, if VSOE of selling price is not available, or best estimate of selling price, or BESP, if neither VSOE of selling price, nor TPE of selling price is available.

We determine VSOE of selling price based on historical stand-alone sales to customers. In determining VSOE, we require that a substantial majority of the selling prices for our subscription or professional services fall within a reasonably narrow pricing range of the applicable median selling price. We have not yet been able to establish VSOE for our subscription and professional services

 

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because we have not historically priced our service offerings within a sufficiently narrow range. When VSOE cannot be established, we apply judgment with respect to whether we can establish a selling price based on TPE. TPE is determined based on third-party prices for similar deliverables when sold separately. Generally, our pricing strategy differs from that of our peers and our services and solutions contain a significant level of differentiation such that the comparable pricing of other offerings with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor services’ selling prices are on a stand-alone basis. As a result, we use BESP as the selling price for our services.

We estimate BESP for subscriptions, premium support and online training based on the historical amounts for such deliverables on a stand-alone basis. The BESP for professional services is based on the historical average rate per hour charged, and BESP for in-person training is based on historical amounts on a per-seat basis.

We recognize revenue for subscription fees from customers utilizing our applications ratably over the subscription term, which are typically one to three years. Our subscription arrangements generally do not allow the customer the contractual right to take possession of the software; as such, the arrangements are considered to be service contracts. In those limited situations where the customer takes possession of the software, we follow the guidance in Accounting Standards Codification, or ASC, 985, Software Revenue Recognition. Fees for premium support offerings and subscription-based online training are generally one-year agreements billed upfront, and are recognized ratably over the term of the support or training agreement. Our premium support offerings include all of our standard incident support services, with enhanced response times, dedicated support resources, access to architecture and configuration experts and other services not included with standard support. Our subscription-based online training provides self-directed training for customers via access to recorded training sessions.

Professional services revenue consists of fees associated with application configuration, integration, change management, education and training services, and conference registration and sponsorship fees. Professional services engagements are priced either on a time-and-materials basis or on a fixed-fee basis. The duration of our professional services engagements varies based on the scope of services requested, but typically ranges between three and six months. For time-and-materials arrangements, we recognize revenue as hours are worked. For fixed-fee arrangements, we recognize professional services revenue as delivered using the percentage of completion, or POC method, measured on an hours incurred basis. Under the POC method of accounting, revenue and expenses are recognized as work is performed based on the relationship between actual hours incurred and total estimated hours at the completion of the project. Changes to the original estimates may be required during the life of the project. Estimates of both hours and costs to complete a project are reviewed periodically and the effect of any change in the estimated hours to complete a project is reflected as an adjustment to revenue in the period the change becomes known.

In the event current estimated costs to complete a project exceed the revenue allocated to the project, a loss equal to the amount of estimated excess costs will be recognized in the period the change becomes known. The use of the POC method of accounting involves considerable use of estimates in determining revenue, costs and profits and in assigning the amounts to accounting periods. Associated out-of-pocket travel expenses related to the delivery of professional services are typically reimbursed by the customer. Out-of-pocket expense reimbursements are recognized as revenue and cost of service expense as incurred.

Fees for in-person training are billed in advance of the training and are recognized in the period the training occurs. Conference registration and sponsorship fees are for TBM Council conferences and related TBM Council activities. Registration fees for TBM Council conferences are

 

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billed in advance of the conference and are recognized in the period the conference occurs. TBM Council sponsorship fees are paid in advance and are recognized in the period the sponsorship activities occur, or ratably over the contractual period if the sponsorship entails ongoing activities beyond a single event.

On occasion, we sell subscriptions through third-party resellers. These arrangements typically call for the reseller to retain a portion of the price to the customer as compensation. Since we are typically responsible for the acceptability of the services purchased by the customer, we are the primary obligor in the transaction and, therefore, record revenue on a gross-basis based on the amount billed to the customer. Reseller fees are recognized as sales and marketing expense as incurred.

Deferred revenue represents the unearned revenue on cash receipts or accounts receivable for the sale of subscriptions and for professional services for which services have not yet been provided. The substantial majority of deferred revenue relates to subscription revenue.

Stock-based Compensation

We measure and recognize compensation expense for all stock-based awards granted to our employees and other service providers, based on the estimated fair value of the award on the date of grant, and expense is recognized on a straight-line basis over the vesting period of the award based on the estimated portion of the award that is expected to vest.

We use the Black-Scholes option pricing model to measure the fair value of stock-based awards when they are granted. We make several estimates in determining stock-based compensation and these estimates generally require significant analysis and judgment to develop. These assumptions and estimates are as follows:

 

    Fair Value of Common Stock.   As our stock is not publicly traded, we must estimate the fair value of common stock, as discussed in “Valuation of Common Stock” below.

 

    Expected Term.   The expected term of options represents the period that stock-based awards are expected to be outstanding. We estimate the expected term using the simplified method due to the lack of historical exercise activity for our company.

 

    Risk-Free Interest Rate.   The risk-free interest rate is based on the implied yield available at the time of the option grant in U.S. Treasury securities at maturity with a term equivalent to the expected term of the option.

 

    Expected Volatility.   Expected volatility is based on an average volatility of stock prices for a group of publicly traded peer companies. In considering peer companies, we assess characteristics such as industry, state of development, size and financial leverage.

 

    Dividend Yield.   We have never declared or paid any cash dividends and do not plan to pay cash dividends in the foreseeable future, and, therefore, use an expected dividend yield of zero.

If any assumptions used in the Black-Scholes option pricing model change significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously.

In addition to the assumptions used in the Black-Scholes option pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation expense for awards. Our forfeiture

 

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rate is derived from historical employee termination behavior. If the actual number of forfeitures differs from these estimates, additional adjustments to compensation expense will be required.

Valuation of Common Stock

Given the absence of an active market for our common stock, our board of directors was required to estimate the fair value of our common stock at the time of each option grant based upon several factors, including its consideration of input from management and contemporaneous third-party valuations.

The exercise price for all stock options granted was at the estimated fair value of the underlying common stock, as estimated on the date of grant by our board of directors in accordance with the guidelines outlined in the American Institute of Certified Public Accountants, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Each fair value estimate was based on a variety of factors, which included the following:

 

    contemporaneous valuations performed by unrelated third-party valuation firms;

 

    the prices, rights, preferences and privileges of our preferred stock relative to those of our common stock;

 

    the lack of marketability of our common stock;

 

    our actual operating and financial performance;

 

    current business conditions and projections;

 

    hiring of key personnel and the experience of our management;

 

    our history and the timing of the introduction of new applications and capabilities;

 

    our stage of development;

 

    the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our business given prevailing market conditions;

 

    the market performance of comparable publicly traded companies; and

 

    U.S. and global capital market conditions.

In valuing our common stock, our board of directors determined the equity value of our business generally using various valuation methods, including combinations of methods, as deemed appropriate under the circumstances applicable at the valuation date.

The market approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business. To determine our peer group of companies, we considered public enterprise cloud-based application providers and selected those that are similar to us in size, stage of life cycle, and financial leverage. From the comparable companies, a representative market value multiple is determined which is applied to the subject company’s operating results to estimate the value of the subject company. The market value multiple was determined based on consideration of revenue multiples and earnings before interest, taxes, depreciation, and amortization, or EBITDA, to each of the comparable companies’ last 12-month revenue and the

 

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forecasted future 12-month revenue. In addition, the market approach considers merger and acquisition transactions involving companies similar to the subject company’s business being valued. Multiples of revenue or EBITDA are calculated for these transactions and then applied to the business being valued, after reduction by an appropriate discount. Based on the above, the estimated value is then discounted by a non-marketability factor (discount for lack of marketability, or DLOM) due to the fact that stockholders of private companies do not have access to trading markets similar to those enjoyed by stockholders of public companies, which impacts liquidity.

The income approach estimates value based on the expectation of future cash flows that a company will generate—such as cash earnings, cost savings, tax deductions, and the proceeds from disposition. These future cash flows are discounted to their present values using a discount rate derived from an analysis of the cost of capital of comparable publicly traded companies in our industry or similar lines of business as of each valuation date and is adjusted to reflect the risks inherent in our cash flows. In addition, we also considered an appropriate discount adjustment to recognize the lack of marketability due to being a private company.

The prior sale of company stock approach estimates value by considering any prior arm’s length sales of the company’s equity. When considering prior sales of the company’s equity, the valuation considers the size of the equity sale, the relationship of the parties involved in the transaction, the timing of the equity sale, and the financial condition of the company at the time of the sale.

Once an equity value is determined, our board of directors utilized one of the following methods to allocate the equity value to each of our classes of stock: (1) the option pricing method, or OPM; (2) a probability weighted expected return method, or PWERM; (3) the current value method, or CVM; or (4) the Hybrid Method, which is a hybrid between the OPM, PWERM and/or CVM methods.

The OPM treats common stock and preferred stock as call options on a business, with exercise prices based on the liquidation preference of the preferred stock. Therefore, the common stock only has value if the funds available for distribution to the holders of common stock exceeds the value of the liquidation preference of the preferred stock at the time of a liquidity event, such as a merger, sale, or initial public offering, assuming the business has funds available to make a liquidation preference meaningful and collectible by stockholders. The common stock is modeled as a call option with a claim on the business at an exercise price equal to the remaining value immediately after the preferred stock is liquidated. The OPM uses the Black-Scholes option pricing model to price the call option.

The PWERM approach employs various market approach calculations depending upon the likelihood of various liquidation scenarios. For each of the various scenarios, an equity value is estimated and the rights and preferences for each shareholder class are considered to allocate the equity value to common shares. The common share value is then multiplied by a discount factor reflecting the calculated discount rate and the timing of the event. Lastly, the common share value is multiplied by an estimated probability for each scenario. The probability and timing of each scenario are based upon discussions between our board of directors and our management team. Under the PWERM, the value of our common stock is based upon possible future events for our company.

The CVM approach allocates the enterprise value derived from one or more of the approaches described above to the various series of a company’s preferred stock based on their respective liquidation preferences or conversion values, in accordance with the terms of the prevailing Articles/Certificate of Incorporation, assuming that each class of stock takes the course of action that maximizes its return. The fundamental assumption of this method is that the manner in which each class of preferred stockholders will exercise its rights and achieve its return is determined based on the

 

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enterprise value as of the valuation date and not at some future date. Accordingly, depending upon the equity value and the nature and amount of the various liquidation preferences, preferred stockholders will participate in equity value allocation either as holders of preferred stock or, if conversion would provide them with better economic results, as holders of common stock. We utilized CVM to account for certain secondary transactions involving our common stock. Specifically, we considered pricing, investor participation, visibility of information between the parties and the purpose and size of the transaction.

Following this offering, we will rely on the closing price of our common stock as reported by The NASDAQ Global Market on the date of grant to determine the fair value of our common stock.

Income Taxes

Our provision for income taxes, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated future taxes to be paid. Significant judgments and estimates based on interpretations of existing tax laws or regulations in the U.S. and the numerous foreign jurisdictions where we are subject to income tax are required in determining our provision for income taxes. Changes in tax laws, statutory tax rates, and estimates of our future taxable income could impact the deferred tax assets and liabilities provided for in the consolidated financial statements and would require an adjustment to the provision for income taxes.

Deferred tax assets are regularly assessed to determine the likelihood they will be realized from future taxable income. A valuation allowance is established when we believe it is not more likely than not all or some of a deferred tax asset will be realized. In evaluating our ability to recover deferred tax assets within the jurisdiction in which they arise we consider all available positive and negative evidence. Factors reviewed include the cumulative pre-tax book income for the past three years, scheduled reversals of deferred tax liabilities, our history of earnings and reliable forecasting, projections of pre-tax book income over the foreseeable future, and the impact of any feasible and prudent tax planning strategies.

We recognize the impact of a tax position in our consolidated financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Tax authorities may examine our returns in the jurisdictions in which we do business and we regularly assess the tax risk of our return filing positions. Due to the complexity of some of the uncertainties, the ultimate resolution may result in payments that are materially different from our current estimate of the tax liability. These differences, as well as any interest and penalties, will be reflected in the provision for income taxes in the period in which they are determined.

Capitalized Internal Use Software

We capitalize certain costs incurred for the development of computer software for internal use. These costs generally relate to the development of our technology platform and applications. We capitalize these costs during the development of the project, when it is determined that it is probable that the project will be completed, and the software will be used as intended. Costs related to preliminary project activities, post-implementation activities, training and maintenance are expensed as incurred. Internal-use software is amortized on a straight-line basis over our estimated useful life, generally three years, and the amortization expense is recorded as a component of cost of subscriptions for projects associated with delivery of our technology platform and applications, or through operating expenses for projects associated with internal operations. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

 

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Recently Adopted Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2015-03, Interest – Imputation of Interest, requiring entities to present debt issuance costs related to a debt liability as a reduction of the carrying amount of the liability. In August 2015, the FASB issued ASU 2015-15, Interest – Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, to provide additional guidance pertaining to debt issuance costs related to line-of-credit arrangements. The guidance is effective for public entities for fiscal years and interim periods beginning after December 15, 2015. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted. We early adopted this standard in the first quarter of 2016. The adoption of this guidance did not have a material impact on our financial statements.

In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The new standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new standard does not change the accounting for a customer’s accounting for service contracts. The new standard is effective for public entities for interim and annual reporting periods beginning after December 15, 2015. For all other entities, the new standard is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. We early adopted this standard in the first quarter of 2016. The adoption of this new standard did not have a material impact on our financial statements.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires deferred tax assets and liabilities, along with related valuation allowances, to be classified as non-current on the balance sheet. For public entities, the new standard is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. For all other entities, the new standard is effective for fiscal years beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. We early adopted this new standard retrospectively in the fourth quarter of 2015. The adoption of this new standard did not have a material impact on our financial statements.

New Accounting Pronouncements Not Yet Adopted

In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. For public entities, ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those annual periods beginning after December 15, 2018. We are currently evaluating the impact this guidance will have on our financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The objective of the update is to improve financial reporting by increasing transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. For public entities, the new standard is effective for interim

 

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and annual reporting periods beginning after December 15, 2018. For all other entities, the new standard is effective for annual reporting periods beginning after December 15, 2019, and for interim periods within those annual periods beginning after December 15, 2020. Early application of the amendments is permitted for all entities. We are currently evaluating the impact this guidance will have on our financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers that supersedes most current revenue recognition guidance. This guidance requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, this guidance expands related disclosure requirements. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective date, which delayed the effective date of ASU No. 2014-09 by one year and is allowing earlier adoption; however, entities reporting under GAAP are not permitted to adopt the standard earlier than the original effective date for public entities. For public entities, the new standard is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017. For all other entities, the new standard is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods beginning after December 15, 2019. The new standard will require full or modified retrospective application. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The effective date for ASU 2016-08 is the same as the effective date for ASU 2014-09. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the implementation guidance on identifying performance obligations and licensing. The effective date for ASU 2016-10 is the same as the effective date for ASU 2014-09. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which clarifies the implementation guidance on collectability, noncash consideration, presentation of sales tax and transition. We are currently evaluating the impact this guidance will have on our financial statements as well as the expected adoption method and timing.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), related to the disclosures around going concern. The new standard provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for all entities for fiscal years beginning after December 15, 2016, with early adoption permitted. The adoption of this standard is not expected to have a material impact on our financial statements.

 

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BUSINESS

Overview

We are the leading provider of Technology Business Management, or TBM, solutions. We pioneered the TBM software category to provide the strategic business management system for the CIO because IT needed a data-driven system comparable to those leveraged by other enterprise functions such as sales, human resources and finance. Our cloud-based platform and SaaS applications enable IT leaders to analyze, optimize and plan technology investments, and to benchmark their financial and operational performance against peers. We empower IT leaders to transform IT into a service provider, to navigate the cloud transition, and to shift technology resources to drive more business innovation.

Our TBM solutions consist of a powerful, cloud-based platform and a suite of SaaS applications: Cost Transparency, IT Benchmarking, Business Insights, Bill of IT and IT Planning. Our data and analytics platform leverages proprietary modeling capabilities, powerful self-service analytics and planning workflows to enable customers to make actionable, data-driven strategic and operational decisions. Our platform automatically aggregates, cleanses and establishes relationships across large amounts of customer data from disparate sources and maps the data into our standard IT operating model. Our solutions are the business system of record for our customers’ IT organizations.

Technology has become a strategic imperative for enterprises regardless of size and industry, driven by the digitalization of business processes. To gain and maintain a competitive advantage, IT leaders must focus more time and resources on transforming their IT business while optimizing their existing infrastructure and applications. IT organizations manage large budgets and are faced with a rapidly changing, vastly more complicated and increasingly diverse technology and vendor ecosystem. In the absence of a TBM solution, some IT leaders attempt to manage their investments manually using spreadsheets or general purpose business intelligence tools, while others do not even try. These approaches are expensive, error-prone, inefficient, slow and often fail to deliver actionable information. As a result, IT leaders are often unable to make agile, data-driven decisions.

Enterprise IT is undergoing a fundamental transition as cloud computing and technology-as-a-service delivery models offer compelling benefits and economics. IT organizations must transition from traditional internally delivered IT infrastructure and applications to a more hybrid and service-oriented approach. This hybrid delivery and service model allows modern IT organizations to optimize service options and deliver IT as a service to meet business needs, but evaluating, deciding and managing between alternatives is complex. IT organizations are in the early stages of a long-term transformation to delivering IT as a service through the use of public and private clouds as well as third party service providers. Our SaaS applications enable IT leaders to make data-driven decisions, such as which workloads to move into the cloud or leave on-premise.

Our growing customer base, which includes over 40% of the FORTUNE 100, spans a broad spectrum of industries, including financial services, professional services, technology, energy, consumer goods, manufacturing, healthcare, media, retail and transportation, as well as federal and state government agencies. Our customers include leading businesses from a broad spectrum of industries, such as Allianz Life Insurance of North America, AOL, Cox Automotive, eBay, First American Title Insurance Company, Freddie Mac, KeyBank, Microsoft and Molina Healthcare. We currently have several customers utilizing our solutions in legal, facilities and other shared services functions and foresee great potential of further adoption in these segments. We offer our solutions on a subscription basis, with subscription fees based on spend managed by our applications and the number of applications or capabilities for which the customer has subscribed. Our customers’ annual IT spend ranges from less than $10 million to billions of dollars.

 

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We formed the Technology Business Management Council, or TBM Council, as a separate non-profit entity in 2012 to foster the growth of the TBM category. The TBM Council has become the leading community for CIOs, IT professionals and IT finance professionals dedicated to advancing the discipline of managing the business of IT, with over 2,900 members. The TBM Council promotes interaction, learning, and the development and improvement of standards and best practices to members, many of which dovetail with our solutions. Our relationship with the TBM Council helps us introduce a growing body of CIOs and other leaders to the advantages of TBM and to our solutions, creating a network effect as members exchange information, ideas and experiences with TBM. Our relationship with the TBM Council also enabled development of Apptio TBM Unified Model, or ATUM, our standardized cost and operational model for the business of IT, which is the first of its kind in our industry. We consider this relationship an important growth catalyst for the TBM category and our business.

We had total revenue of $106.6 million and $129.3 million in 2014 and 2015, respectively, reflecting a year-over-year increase of 21%. For the six months ended June 30, 2015 and 2016, we had total revenue of $62.2 million and $75.6 million, respectively, reflecting a period-over-period increase of 22%. For 2014, 2015, and the six months ended June 30, 2015 and 2016, our net losses were $32.9 million, $41.0 million, $18.4 million and $14.9 million, respectively, as we focused on growing our business.

Industry Background

Technology continues to transform business, impacting both internal and customer facing functions. With technology a strategic priority, organizations of all sizes must understand, communicate and optimize their technology investments to more closely align with key business objectives. This transformation is defined and impacted by a number of factors.

IT Performance is Critical to Business Success. Almost every business depends on IT. Digitalization of business processes has spread across industries, such as online banking and electronic trading in the financial industry, omnichannel commerce in the retail industry, and digital marketing and customer service across many industries. To gain and maintain a competitive advantage, IT leaders must focus more time and resources on transforming their IT business, and less time managing legacy infrastructure and applications. According to a December 2015 Gartner report, organizations on average in 2015 spent approximately 70% of IT budgets on running the business, 19% on growing the business and 11% on transforming the business.1 This means over two-thirds of IT resources are spent on simply maintaining what already exists, and less than one-third are spent on initiatives that drive better business outcomes. Unlike other business functions, from marketing to sales to manufacturing, IT has historically lacked a business management solution to manage the critical technology function. As a result, IT leaders are often unable to make agile, data-driven decisions and lack the solutions necessary to help them shift their focus to creating business value.

IT Complexity is Increasing Significantly. Rapid innovation in technology, particularly the emergence of cloud computing, is simultaneously increasing the complexity of technology decision making and fundamentally transforming the way IT services are delivered. IT professionals must not only measure and manage traditional infrastructure such as servers, storage and software applications, but also a wide array of modern options such as cloud, virtualized environments, and IT purchased directly by business units without the involvement of IT professionals. IT leaders are faced with the need to evaluate hybrid approaches to IT, using a mixture of public cloud, private cloud and owned infrastructure solutions in order to best suit their application, workload and business needs.

 

1  See Gartner note (2) in the section of this prospectus captioned “Special Note Regarding Forward Looking Statements.”

 

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Simultaneously, enterprises must manage significantly more IT providers, sometimes numbering in the hundreds. To succeed in this complex and rapidly changing environment, enterprises must have better visibility into IT infrastructure and labor utilization, IT spend and resulting business performance, and a way to analyze their alternatives.

Demand for IT as a Service. When making decisions regarding investments in and consumption of technology, businesspeople want choice, on-demand availability, a clear view of total and unit costs of the alternatives and the means to correlate costs to expected value. The ease of use, transparent pricing reliability and availability of both enterprise and consumer cloud-based software is accelerating demand for technology that is being delivered as a service with those factors in mind.

IT Complexity Requires an Effective Management System. The IT function has historically lacked the insight into costs, capacity and utilization necessary to make data-driven decisions provided by a business management system. The emergence of the cloud and public cloud providers with a variety of capabilities and different pricing models adds to this complexity. While it is possible to gain limited insight through consulting engagements or laborious, inefficient internally developed processes, the time, costs and resources associated with such efforts mean that such initiatives often cannot be undertaken more than once a year and, by the time IT and business leaders are asked to make a decision, the information that formed the basis of the decision is often dated. Alternatively, some attempt to employ general purpose business intelligence tools that have not been built to provide the necessary insights. IT operations software focuses on automating business processes, not on managing IT as a business function. Without a business management system to map IT costs and performance to business results, IT organizations struggle to analyze and correlate disparate financial and operational data in the context of the business operations. Business and IT leaders desire the ability to make fast decisions, drive innovation and adopt new technology to drive better business results, while also demanding better control, cost management, and asset utilization. In order to be aligned on objectives, business and IT leaders need data and analytical solutions to drive optimal business results. The benefits the cloud provides in agility and cost are driving greater urgency by IT leaders to adopt solutions enabling them to understand their existing infrastructure and make decisions on how their infrastructure needs evolve as part of an ongoing transition.

Given these factors, we believe that there is significant pent up demand for a single system of record to manage the business of IT in a similar manner to the system of record used by leaders of other business functions, such as finance, sales or human resources.

Our Opportunity

We believe the total addressable market for TBM solutions is large and largely unpenetrated. The total addressable market for our solutions is driven by global IT spend, which Gartner, an independent technology industry and market research firm, expects to be $2.7 trillion in 2016, which is the sum of all enterprise IT spending by vertical industry market worldwide.2 Subscription fees for our applications are based primarily on the customer’s annual costs being managed by our applications and the number of applications or capabilities for which the customer has subscribed. We typically sell a subset of the five applications we offer so that customers can realize a rapid time to value from a targeted implementation, and seek to sell additional applications over time. Assuming full deployment of all of our current applications, subscription fees typically range from 0.1% to 0.5% of a customer’s annual IT spend. With a reasonable expectation of our ability to penetrate the market, we believe that the current total addressable market for our existing TBM solutions is approximately $6 billion.

 

(2)  See Gartner note (1) in the section of this prospectus captioned “Special Note Regarding Forward Looking Statements.”

 

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We also believe that, with the development of additional capabilities and applications, our platform can be extended to other areas of customers’ businesses. In fact, our solutions are currently deployed by several customers to address a variety of non-IT, enterprise business management use cases in shared services such as legal, human resources and facilities and for analyzing operational metrics such as unit costs of various offerings or transactions, and we believe that enterprise business management use cases such as these represent future market opportunities. If we are successful in our strategy of developing and selling additional applications beyond our current offerings, we believe that our market opportunity will expand.

Our Technology Business Management Solutions

We provide the business system of record for our customers’ IT organizations, which enables them to analyze, optimize and plan investments, and benchmark their financial and operational performance against peers. Our TBM solutions consist of a powerful, cloud-based platform and a suite of SaaS applications that empower IT leaders to understand, communicate and transform IT to drive greater value from technology investments as illustrated by the following figure.