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Notes to Unaudited Condensed Consolidated Financial Statements
(unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The condensed consolidated financial statements include the accounts of the Upland Software, Inc. and its wholly owned subsidiaries (collectively referred to as “Upland”, the “Company”, “we” or “us”). All intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. There have been no significant changes in the Company’s accounting policies since December 31, 2020, except as discussed below with respect to the Company’s adoption of ASU 2016-13.
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. In the opinion of management of the Company, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, in all material respects, and include all adjustments of a normal recurring nature necessary for a fair presentation. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any other period.
The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2019 Annual Report on Form 10-K filed with the SEC on March 2, 2020.
Use of Estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses. Significant items subject to such estimates include those related to revenue recognition, deferred commissions, allowance for credit losses, stock-based compensation, contingent consideration, acquired intangible assets, the useful lives of intangible assets and property and equipment, and income taxes. In accordance with GAAP, management bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Management regularly evaluates its estimates and assumptions using historical experience and other factors; however, actual results could differ from those estimates.
Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. Upland is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of May 8, 2020, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents and accounts receivable. The Company’s cash and cash equivalents are placed with high-quality financial institutions, which, at times, may exceed federally insured limits. The Company has not experienced any losses in these accounts, and the Company does not believe it is exposed to any significant credit risk related to cash and cash equivalents. The Company provides credit, in the normal course of business, to a number of its customers. To manage accounts receivable credit risk, the Company performs periodic credit evaluations of its customers and maintains current expected credit losses which considers such factors as historical loss information, geographic location of customers, current market conditions, and reasonable and supportable forecasts. Changes in the allowance for credit losses were not material for the three months ended March 31, 2020.
No individual customer represented more than 10% of total revenues for the three or three months ended March 31, 2020, or more than 10% of accounts receivable as of March 31, 2020 or December 31, 2019.
Derivatives
The Company entered into a floating-to-fixed interest rate swap agreements to limit exposure to interest rate risk related to our debt. These interest rate swaps effectively convert the entire balance of the Company's $540 million term loans from variable interest payments to fixed interest rate payments, based on an annualized fixed rate of 5.4%, for the 7 year term of the debt. ASC 815 requires entities to recognize derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. The Company assessed the effectiveness of the hedging relationship under the hypothetical derivative method and noted that all of the critical terms of the hypothetical derivative and hedging instrument were the same. The hedging relationship continues to limit the Company’s exposure to the variability in interest rates under the Company’s term loans and related cash outflows. As such, the Company has deemed this hedging relationship as highly effective in offsetting cash flows attributable to hedged risk (variability in forecasted monthly interest payments) for the term of the term loans and interest rate swap agreements. All derivative financial instruments are recorded at fair value as a net asset or liability in the accompanying condensed consolidated balance sheets. As of March 31, 2020 the fair value of the interest rate swaps included in Other long term-liabilities in the Company's condensed consolidated balance sheets was $29.0 million. As of December 31, 2019 the fair value of the interest rate swaps included in Other assets in the Company's condensed consolidated balance sheets was $2.4 million.
The change in the fair value of the hedging instruments is recorded in Other comprehensive income. Amounts deferred in Other comprehensive income will be reclassified to Interest expense in the accompanying condensed consolidated statements of operations in the period in which the hedged item affects earnings.
Fair Value of Financial Instruments
The Company accounts for financial instruments in accordance with the authoritative guidance on fair value measurements and disclosures for financial assets and liabilities. This guidance defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. The guidance also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.
These tiers include Level 1, defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.
The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable and long–term debt. The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value, primarily due to short maturities. The carrying values of the Company’s debt instruments approximated their fair value based on rates currently available to the Company.
Recent Accounting Pronouncements
Recently issued accounting pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company does not anticipate the adoption of this standard to have a material impact on its consolidated financial statements.
Recently adopted accounting pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, to eliminate, add and modify certain disclosure requirements for fair value measurements. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance is effective for annual and interim periods beginning after December 15, 2019, but entities are permitted to early adopt either the entire standard or only
the provisions that eliminate or modify the requirements. The Company adopted this guidance in the first quarter of 2020 with no material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company adopted this guidance in the first quarter of 2020 and as a result of the adoption recorded a cumulative-effect adjustment to decrease the beginning balance of Accumulated deficit in the amount of $0.1 million, which represents the accelerated recognition of credit losses related to our trade receivables under the expected credit loss model of calculating our current expected credit losses compared to the previous incurred loss model.
2. Acquisitions
The Company performs quantitative and qualitative analyses to determine the significance of each acquisition to the financial statements the Company. Based on these analyses the below acquisitions were deemed to be insignificant on an individual and cumulative basis.
2020 Acquisitions
Acquisitions completed during the three months ended March 31, 2020 include the following:
•Localytics - On February 6, 2020, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Char Software, Inc (dba Localytics), a Delaware corporation (“Localytics”), a provider of mobile app personalization and analytics solutions. Revenues recorded since the acquisition date through March 31, 2020 were approximately $2.5 million.
2019 Acquisitions
Acquisitions completed during the year ended December 31, 2019 include the following:
•Postup - On April 18, 2019, the Company completed its purchase of the shares comprising the entire issued share capital of Postup Holdings, LLC, a Texas limited liability company (“Postup”), and Postup Digital, LLC, a Texas limited liability company, an Austin-based company providing email and audience development solutions for publishing & media brands.
•Kapost - On May 24, 2019, the Company completed of its purchase of the shares comprising the entire issued share capital of Daily Inches, Inc., d/b/a Kapost, a Delaware corporation (“Kapost”), a leading content operations platform provider for sales and marketing.
•Cimpl - On August 21, 2019, the Company completed its purchase of the shares comprising the entire issued share capital of Cimpl, Inc., a Canadian corporation (“Cimpl”), a leading cloud-based telecom expense management platform.
•InGenius - On October 1, 2019, the Company completed its purchase of the shares comprising the entire issued share capital of InGenius Software Inc., a Canadian corporation (“InGenius”), a Computer Telephony Integration (CTI) solution for enterprise contact centers.
•Altify - On October 4, 2019, the Company’s wholly owned subsidiary, Upland Software UK, a limited company incorporated under the laws of England and Wales, entered into an agreement to purchase the shares comprising the entire issued share capital of Altify Ireland Limited, a private company limited by shares organized and existing under the laws of Ireland (“Altify”), a customer revenue optimization (CRO) cloud solution for sales and the extended revenue teams.
Consideration
The following table summarizes the consideration transferred for the acquisitions described above (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Localytics
|
|
Altify
|
|
InGenius
|
|
Cimpl
|
|
Kapost
|
|
Postup
|
Cash
|
$
|
67,655
|
|
|
$
|
84,000
|
|
|
|
$
|
26,428
|
|
|
$
|
23,071
|
|
|
$
|
45,000
|
|
|
$
|
34,825
|
|
Holdback (1)
|
345
|
|
|
—
|
|
|
|
3,000
|
|
|
2,600
|
|
|
5,000
|
|
|
175
|
|
Contingent consideration (2)
|
1,000
|
|
|
—
|
|
|
|
4,865
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital adjustment
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
(601)
|
|
|
—
|
|
Total consideration
|
$
|
69,000
|
|
|
$
|
84,000
|
|
|
|
$
|
34,293
|
|
|
$
|
25,671
|
|
|
$
|
49,399
|
|
|
$
|
35,000
|
|
(1)Represents cash holdbacks subject to indemnification claims that are payable 12 months following closing for Localytics, InGenius, Cimpl, Kapost and Postup.
(2)Represents the acquisition date fair value of anticipated earn-out payments, which are based on the estimated probability of attainment of the underlying future performance-based conditions at the time of acquisition. The maximum potential payout for the InGenius and Localytics earn-outs are $15.0 million and $1.0 million, respectively. Refer to Note 3 for further discussion regarding the calculation of fair value of acquisition related earn-outs.
Fair Value of Assets Acquired and Liabilities Assumed
The Company recorded the purchase of the acquisitions described above using the acquisition method of accounting and, accordingly, recognized the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The purchase accounting for the 2019 acquisition of Altify and the 2020 acquisition of Localytics are preliminary as the Company has not obtained and evaluated all of the detailed information necessary to finalize the opening balance sheet amounts in all respects, specifically the tax impact not being finalized as of March 31, 2020. In addition, the valuation of intangible assets for Localytics was not finalized as of March 31, 2020. Management has recorded the purchase price allocations based upon acquired company information that is currently available. Management expects to complete its purchase price allocations for these acquisitions in the second half of 2020.
The following condensed table presents the preliminary and finalized acquisition-date fair value of the assets acquired and liabilities assumed for the acquisitions in during the year ended December 31, 2019 and through the three months ended March 31, 2020, as well as assets and liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary
|
|
|
|
Final
|
|
|
|
|
|
|
|
Localytics
|
|
Altify
|
|
InGenius
|
|
Cimpl
|
|
Kapost
|
|
Postup
|
Year Acquired
|
2020
|
|
2019
|
|
2019
|
|
2019
|
|
2019
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
—
|
|
|
$
|
730
|
|
|
|
$
|
11
|
|
|
$
|
142
|
|
|
$
|
—
|
|
|
$
|
19
|
|
Accounts receivable
|
3,648
|
|
|
6,629
|
|
|
|
1,456
|
|
|
1,041
|
|
|
3,901
|
|
|
1,054
|
|
Other current assets
|
6,325
|
|
|
889
|
|
|
|
317
|
|
|
278
|
|
|
1,066
|
|
|
1,373
|
|
Tax credits receivable
|
—
|
|
|
916
|
|
|
|
1,489
|
|
|
1,383
|
|
|
|
—
|
|
|
|
—
|
|
Operating lease right-of-use asset
|
7,605
|
|
|
1,085
|
|
|
|
1,099
|
|
|
230
|
|
|
2,136
|
|
|
—
|
|
Property and equipment
|
409
|
|
|
139
|
|
|
|
364
|
|
|
233
|
|
|
686
|
|
|
743
|
|
Customer relationships
|
30,500
|
|
|
50,954
|
|
|
|
11,208
|
|
|
12,430
|
|
|
23,735
|
|
|
10,667
|
|
Trade name
|
300
|
|
|
1,112
|
|
|
|
424
|
|
|
216
|
|
|
787
|
|
|
468
|
|
Technology
|
6,600
|
|
|
7,648
|
|
|
|
4,576
|
|
|
3,240
|
|
|
5,756
|
|
|
2,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
39,646
|
|
|
34,426
|
|
|
|
24,141
|
|
|
12,928
|
|
|
20,953
|
|
|
21,973
|
|
Other assets
|
6
|
|
|
378
|
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
—
|
|
Total assets acquired
|
95,039
|
|
|
104,906
|
|
|
|
45,085
|
|
|
32,127
|
|
|
59,020
|
|
|
39,240
|
|
Accounts payable
|
(2,382)
|
|
|
(1,499)
|
|
|
|
(128)
|
|
|
(305)
|
|
|
(50)
|
|
|
(447)
|
|
Accrued expense and other
|
(6,752)
|
|
|
(3,901)
|
|
|
|
(2,807)
|
|
|
(1,206)
|
|
|
(3,724)
|
|
|
(530)
|
|
Deferred tax liabilities
|
(4,258)
|
|
|
(7,083)
|
|
|
|
(4,897)
|
|
|
(4,595)
|
|
|
(1,954)
|
|
|
(3,248)
|
|
Deferred revenue
|
(4,812)
|
|
|
(7,907)
|
|
|
|
(2,960)
|
|
|
(350)
|
|
|
(3,893)
|
|
|
(15)
|
|
Operating lease liabilities
|
(7,835)
|
|
|
(516)
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
(26,039)
|
|
|
(20,906)
|
|
|
|
(10,792)
|
|
|
(6,456)
|
|
|
(9,621)
|
|
|
(4,240)
|
|
Total consideration
|
$
|
69,000
|
|
|
$
|
84,000
|
|
|
|
$
|
34,293
|
|
|
$
|
25,671
|
|
|
$
|
49,399
|
|
|
$
|
35,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company uses third party valuation consultants to determine the fair values of assets acquired and liabilities assumed. Tangible assets are valued at their respective carrying amounts, which approximates their estimated fair value. The valuation of identifiable intangible assets reflects management’s estimates based on, among other factors, use of established valuation methods. Customer relationships are valued using the multi-period excess earnings method. Developed technology and trade names are valued using the relief-from-royalty method.
The following table summarizes the weighted-average useful lives, by major finite-lived intangible asset class, for intangibles acquired during the three months ended March 31, 2020 and the year ended December 31, 2019 (in years):
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Customer relationships
|
8.0
|
|
9.8
|
Trade name
|
2.0
|
|
9.2
|
Developed technology
|
5.0
|
|
7.9
|
|
|
|
|
Total weighted-average useful life
|
7.4
|
|
9.5
|
During the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill based on changes to management's estimates and assumptions. The change in the preliminary acquisition-date fair value of assets and liabilities for Altify during the three months ended March 31, 2020 was related primarily to a $1.0 million decrease in deferred tax liabilities.
The goodwill of $154.1 million for the above acquisitions is primarily attributable to the synergies expected to arise after the acquisition. Goodwill deductible for tax purposes at the time of acquisition was $6.2 million.
Total transaction related expenses incurred with respect to acquisition activity during the three months ended March 31, 2020 and March 31, 2019 were $3.3 million and $0.4 million, respectively. Transaction related expenses, excluding transformation costs, include expenses such as banker fees, legal and professional fees, insurance costs, and deal bonuses.
Other Acquisitions and Divestitures
From time to time we may purchase or sell customer relationships that meet certain criteria. During the three months ended March 31, 2020 and year ended December 31, 2019 we completed customer relationship acquisitions totaling $0.2 million and $1.6 million, respectively.
In the fourth quarter of 2019, Upland divested of certain minor non-strategic customer contracts and related website management and analytics assets. As a result, during the year ended December 31, 2019 the Company recognized a $2.0 million non-cash expense on divestiture which is included in the Other income (expense), net line item in the Company’s condensed consolidated statement of operations, for the year ended December 31, 2019. The assets divested consisted primarily of $2.2 million in deferred commission costs, $1.1 million in intangible assets (customer relationship and related technology), $0.2 million in allocated goodwill, and $1.0 million of liabilities primarily consisting of deferred revenue.
3. Fair Value Measurements
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. GAAP sets forth a three–tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three tiers are Level 1, defined as observable inputs, such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, which therefore requires an entity to develop its own assumptions.
As of March 31, 2020 and December 31, 2019, the Company has contingent accrued earnout business acquisition consideration liabilities for which fair values are measured as Level 3 instruments. These contingent consideration liabilities were recorded at fair value on the acquisition date and are remeasured periodically based on the then assessed fair value and adjusted if necessary. The increases or decreases in the fair value of contingent consideration payable can result from changes in anticipated revenue levels or changes in assumed discount periods and rates. As the fair value measure is based on significant inputs that are not observable in the market, they are categorized as Level 3. Any gain (loss) related to subsequent changes in the fair value of contingent consideration is recorded in acquisition-related expense or other income (expense) in the Company's condensed consolidated statement of operations based on management's assessment of the nature of the liability. Earnout consideration liabilities are included in Due to sellers in the Company's condensed consolidated balance sheets.
In connection with entering into, and expanding, the Company's current credit facility, as discussed further in Note 6. Debt, the Company entered into interest rate swaps for the full 7 year term of the Company's term loans, effectively fixing our interest rate at 5.4% for the full value $540 million of the term loans. The fair value of the Company's swaps are measured at the end of each interim reporting period based on the then assessed fair value and adjusted if necessary. As the fair value measure is based on the market approach, they are categorized as Level 2. As of March 31, 2020 and December 31, 2019 the fair value of
the interest rate swaps are included in Other long term-liabilities and Other assets, respectively, on the Company's condensed consolidated balance sheets.
Liabilities measured at fair value on a recurring basis are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2020
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Earnout consideration liability
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,565
|
|
|
$
|
4,565
|
|
Interest rate swap liability
|
$
|
—
|
|
|
$
|
28,977
|
|
|
$
|
—
|
|
|
$
|
28,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2019
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Interest rate swap asset
|
$
|
—
|
|
|
$
|
2,424
|
|
|
$
|
—
|
|
|
$
|
2,424
|
|
Liabilities
|
|
|
|
|
|
|
|
Earnout consideration liability
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,394
|
|
|
$
|
4,394
|
|
The increase in cash earnouts from December 31, 2019 to March 31, 2020 is related primarily to the change in fair value of earnouts related to InGenius.
The following table presents additional information about earnout consideration liabilities measured at fair value on a recurring basis and for which the Company has utilized significant unobservable (Level 3) inputs to determine fair value (in thousands):
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
(unaudited)
|
|
|
Balance at December 31, 2019
|
$
|
4,394
|
|
|
|
|
|
|
|
Remeasurement adjustments:
|
|
|
|
Gain included in earnings
|
171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions and settlements:
|
|
|
|
|
|
|
|
Acquisitions
|
1,000
|
|
|
|
|
|
|
|
Settlements (1)
|
(1,000)
|
|
|
|
Balance at March 31, 2020
|
$
|
4,565
|
|
|
|
(1) Includes a $1.0 million payment for the outstanding balance of earnout liabilities related to the acquisition of Localytics as describe in Note 2. Acquisitions.
The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration liabilities designated as Level 3 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at March 31, 2020
|
|
Valuation Technique
|
|
Significant Unobservable Inputs
|
Contingent acquisition consideration:
(InGenius)
|
$
|
4,565
|
|
|
Binary option model
|
|
Expected future annual revenue streams and probability of achievement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2019
|
|
Valuation Technique
|
|
Significant Unobservable Inputs
|
Contingent acquisition consideration:
(InGenius)
|
$
|
4,394
|
|
|
Binary option model
|
|
Expected future annual revenue streams and probability of achievement
|
Fair value of the InGenius earnout is calculated as the lessor of 1) new annualized recurring revenue ("ARR") added during the earnout valuation period multiplied by a contracted earnout multiplier; or 2) $15.0 million. On a quarterly basis management estimates the new ARR expected to be added during the earnout valuation period as of the reporting date.
Sensitivity to Changes in Significant Unobservable Inputs
As presented in the table above, the significant unobservable inputs used in the fair value measurement of contingent consideration related to business acquisitions are forecasts of expected future annual revenues as developed by the Company's management and the probability of achievement of those revenue forecast. Significant increases (decreases) in these unobservable inputs in isolation would likely result in a significantly (lower) higher fair value measurement.
Debt
The Company believes the carrying value of its long-term debt at March 31, 2020 approximates its fair value based on the variable interest rate feature or based upon interest rates currently available to the Company.
The estimated fair value and carrying value of the Company's debt, before debt discount, at March 31, 2020 and December 31, 2019 are $537.3 million and $538.7 million, respectively, based on valuation methodologies using interest rates currently available to the Company, which are Level 2 inputs.
4. Goodwill and Other Intangible Assets
Changes in the Company’s goodwill balance for the three months ended March 31, 2020 are summarized in the table below (in thousands):
|
|
|
|
|
|
Balance at December 31, 2019
|
$
|
346,134
|
|
Acquired in business combinations
|
39,646
|
|
|
|
Adjustment related to prior year business combinations
|
(996)
|
|
|
|
Foreign currency translation adjustment
|
(7,039)
|
|
Balance at March 31, 2020
|
$
|
377,745
|
|
Net intangible assets include the estimated acquisition-date fair values of customer relationships, marketing-related assets, and developed technology that the Company recorded as part of its business acquisitions.
The following is a summary of the Company’s intangible assets, net (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful
Life (Years)
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
March 31, 2020:
|
|
|
|
|
|
|
|
Customer relationships
|
1-10
|
|
$
|
307,854
|
|
|
$
|
61,530
|
|
|
$
|
246,324
|
|
Trade name
|
1.5-10
|
|
8,953
|
|
|
4,042
|
|
|
4,911
|
|
Developed technology
|
4-9
|
|
76,577
|
|
|
25,342
|
|
|
51,235
|
|
Non-compete agreements
|
3
|
|
1,148
|
|
|
670
|
|
|
478
|
|
Total intangible assets
|
|
|
$
|
394,532
|
|
|
$
|
91,584
|
|
|
$
|
302,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful
Life (Years)
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
December 31, 2019:
|
|
|
|
|
|
|
|
Customer relationships
|
1-10
|
|
$
|
283,005
|
|
|
$
|
53,984
|
|
|
$
|
229,021
|
|
Trade name
|
1.5-10
|
|
8,827
|
|
|
3,884
|
|
|
4,943
|
|
Developed technology
|
4-9
|
|
71,522
|
|
|
23,333
|
|
|
48,189
|
|
Non-compete agreements
|
3
|
|
1,148
|
|
|
574
|
|
|
574
|
|
Total intangible assets
|
|
|
$
|
364,502
|
|
|
$
|
81,775
|
|
|
$
|
282,727
|
|
The Company periodically reviews the estimated useful lives of its identifiable intangible assets, taking into consideration any events or circumstances that might result in either a diminished fair value or revised useful life. During the three months ended March 31, 2020, the Company considered the current market and economic condition arising from the COVID-19 pandemic to be a potential indicator of impairment of the Company’s intangible assets and goodwill. Based on management’s qualitative review no impairment of intangible assets or goodwill was identified. During the fourth quarter of 2019, management made the decision to sunset and divest certain minor non-strategic customer contracts and related website management and analytics assets. The remaining useful life of certain customer relationship assets included in the sunset asset group were reduced by 1 year to 2.5 years which represents the term left on the current active contracts. Total amortization expense during the three months ended March 31, 2020 and March 31, 2019 was $11.2 million and $6.8 million, respectively.
The Company has historically performed its annual goodwill and indefinite-lived intangible asset impairment test as of October 31st. During the first quarter of 2020 the Company decided to change the date of its annual impairment test to the first day of its fourth fiscal quarter, October 1st. This change was made to improve alignment with our quarterly financial reporting process and our annual planning and budgeting process. In connection with the change in the date of our annual goodwill and indefinite-lived intangible asset impairment test the Company will also perform a qualitative assessment as of October 31, 2020 to ensure the change does not result in the delay, acceleration or avoidance of an impairment charge.
Estimated annual amortization expense for the next five years and thereafter is as follows (in thousands):
|
|
|
|
|
|
|
Amortization
Expense
|
Year ending December 31:
|
|
Remainder of 2020
|
$
|
33,275
|
|
2021
|
42,822
|
|
2022
|
40,290
|
|
2023
|
38,244
|
|
2024
|
35,603
|
|
2025 and thereafter
|
112,714
|
|
Total
|
$
|
302,948
|
|
5. Income Taxes
The Company’s income tax benefit from (provision for) the three months ended March 31, 2020 and March 31, 2019 reflects its estimate of the effective tax rates expected to be applicable for the full years, adjusted for any discrete events that are recorded in the period in which they occur. The estimates are re-evaluated each quarter based on the estimated tax expense for the full year.
The tax benefit of $4.3 million recorded for the three months ended March 31, 2020 is primarily related to the deferred tax benefit attributable to the release of valuation allowance related to the acquisition of deferred tax liabilities associated with the Localytics business combination, as discussed in Note 2. Acquisitions, and foreign income taxes associated with our combined non-U.S. operations. These tax benefits are offset by changes in deferred tax liabilities associated with amortization of United States tax deductible goodwill and state taxes in certain states in which the Company does not file on a consolidated basis or have net operating loss carryforwards.
The tax benefit of $0.6 million recorded for the three months ended March 31, 2019 is primarily related to foreign income taxes associated with our combined non-U.S. operations, changes in deferred tax liabilities associated with amortization of
United States tax deductible goodwill and state taxes in certain states in which the Company does not file on a consolidated basis or have net operating loss carryforwards.
The Company has historically incurred operating losses in the United States and, given its cumulative losses and limited history of profits, has recorded a valuation allowance against its United States net deferred tax assets, exclusive of tax deductible goodwill, at March 31, 2020 and March 31, 2019, respectively. As of March 31, 2020, Upland had $321 million of total net operating loss carryforwards of which approximately $197 million will be available for utilization prior to expiration. These balances include the net operating losses disclosed as of December 31, 2019 and the estimated net operating losses acquired in the current year via acquisitions based on information available as of March 31, 2020. The net operating loss carryforwards available for utilization prior to expiration consist of approximately $166 million and $31 million of U.S. federal and foreign net operating loss carryforwards, respectively.
The Company has reflected any uncertain tax positions primarily within its long-term taxes payable and a portion within deferred tax assets. The Company and its subsidiaries file tax returns in the U.S. federal jurisdiction and in several state and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years ending before December 31, 2016 and is no longer subject to state and local or foreign income tax examinations by tax authorities for years ending before December 31, 2015. The Company is not currently under audit for federal, state or any foreign jurisdictions. U.S. operating losses generated in years prior to 2016 remain open to adjustment until the statute of limitations closes for the tax year in which the net operating losses are utilized.
6. Debt
Long-term debt consisted of the following at March 31, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Senior secured loans (includes unamortized discount of $13,096 and $13,576 based on an imputed interest rate of 5.9% and 5.8%, at March 31, 2020 and December 31, 2019, respectively)
|
$
|
524,204
|
|
|
$
|
525,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
(3,191)
|
|
|
(3,193)
|
|
Total long-term debt
|
$
|
521,013
|
|
|
$
|
521,881
|
|
Credit Facility
On August 6, 2019, the Company entered into a credit agreement (the “Credit Facility”) which provides for (i) a fully-drawn $350 million, 7 year, senior secured term loan B facility (the “Term Loan”) and (ii) a new $60 million, 5 year, revolving credit facility (the “Revolver”) that was fully available as of March 31, 2020. The Credit Facility replaced the Company's previous credit agreement. All outstanding balances under our previous credit facility were paid off using proceeds from our new Credit Facility.
On November 26, 2019 (the “Closing Date”), the Company entered into a First Incremental Assumption Agreement (the “Incremental Assumption Agreement”) which provides for a term loan facility to be established under the Credit Facility in an aggregate principal amount of $190.0 million (the “2019 Incremental Term Loan”) which is in addition to the existing $350.0 million term loans outstanding under the Credit Agreement and the $60.0 million revolving credit facility under the Credit Agreement.
Payment terms
The Term Loans (including the 2019 Incremental Term Loan) are repayable on a quarterly basis beginning on December 31, 2019 by an amount equal to 0.25% (1.00% per annum) of the aggregate principal amount of such loan. Any amount remaining unpaid is due and payable in full on August 6, 2026 (the “Term Loan Maturity Date”).
At the option of the Company, the Term Loans (including the 2019 Incremental Term Loan) accrue interest at a per annum rate based on (i) the Base Rate plus a margin of 2.75% or (ii) the rate (not less than 0.00%) for Eurodollar deposits quoted on the LIBOR01 or LIBOR02 pages on the Reuters Screen, or as otherwise determined in accordance with the Credit Agreement (based on a period equal to 1, 2, 3 or 6 months or, if available and agreed to by all relevant Lenders and the Agent, 12 months or such period of less than 1 month) plus a margin of 3.75%. The Base Rate for any day is a rate per annum equal to the greatest of (i) the prime rate in effect on such day, (ii) the federal funds effective rate (not less than 0.00%) in effect on such day plus ½ of 1.00%, and (ii) the Eurodollar rate for a one month interest period beginning on such day plus 1.00%.
Accrued interest on the loans will be paid quarterly or, with respect to loans that are accruing interest based on the Eurodollar rate, at the end of the applicable interest rate period.
Lenders under the Credit Facility are entitled to a premium in the event of certain prepayments or repricings of the Term Loan made within six months of the Closing Date in an amount equal to 1.00% times the aggregate principal amount of the initial Term Loan prepaid in connection with a repricing transaction or the aggregate principal amount of the initial Term Loan outstanding on such date that is subject to an effective pricing reduction pursuant to a repricing transaction, as applicable.
Interest rate swaps
On August 6, 2019, the Company also entered into an interest rate hedge instrument for the full 7 year term, effectively fixing our interest rate at 5.4% for the Term Loan. In addition, on November 26, 2019, the Company entered into interest rate swap agreements to hedge the interest rate risk associated with the Company’s floating rate obligations under the 2019 Incremental Term Loan. These interest rate swaps fix the Company's interest rate (including the hedge premium) at 5.4% for the term of the Credit Agreement. The interest rate associated with our new $60 million, 5 year, the Revolver remains floating.
The interest rate swap has been designated as a cash flow hedge and is valued using a market approach, which is a Level 2 valuation technique. At March 31, 2020, the fair value of the interest rate swap was $29.0 million liability as a result of a decline in short term interest rates. In the next twelve months, the Company estimates that $4.7 million will be reclassified from Accumulated other comprehensive income (loss) and recorded as an increase to Interest expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
|
|
|
|
|
(Loss) gain recognized in Other comprehensive income on derivative financial instruments
|
$
|
(31,401)
|
|
|
|
|
|
|
|
(Loss) gain reclassified from Other comprehensive income to Interest expense
|
$
|
66
|
|
|
|
|
|
|
|
Total Interest expense in which the effects of cash flow hedges are recorded
|
$
|
(7,397)
|
|
|
|
|
|
|
|
Revolver
Loans under the Revolver are available up to $60 million. The Revolver provides a sub-facility whereby the Company may request letters of credit (the “Letters of Credit”) in an aggregate amount not to exceed, at any one time outstanding, $10.0 million for the Company. The aggregate amount of outstanding Letters of Credit are reserved against the credit availability under the Maximum Revolver Amount. The Company incurs a 0.50% per annum unused line fee on the unborrowed balance of the Revolver which is paid quarterly.
Loans under the Revolver may be borrowed, repaid and reborrowed until August 6, 2024 (the “Maturity Date”), at which time all amounts borrowed under the Revolver must be repaid. As of March 31, 2020, the Company had no borrowings outstanding under the Revolver or related sub facility.
Covenants
The Credit Agreement contains customary affirmative and negative covenants. The negative covenants limit the ability of the Loan Parties to, among other things (in each case subject to customary exceptions for a credit facility of this size and type):
•Incur additional indebtedness or guarantee indebtedness of others;
•Create liens on their assets;
•Make investments, including certain acquisitions;
•Enter into mergers or consolidations;
•Dispose of assets;
•Pay dividends and make other distributions on the Company’s capital stock, and redeem and repurchase the Company’s capital stock;
•Enter into transactions with affiliates; and
•Prepay indebtedness or make changes to certain agreements.
The Credit Facility has no financial covenants as long as less than 35% of the Revolver is drawn as of the last day of any fiscal quarter. If 35% of the Revolver is drawn as of the last day of a given fiscal quarter the Company will be required to maintain a Total Leverage Ratio (the ratio of funded indebtedness as of such date less the amount of unrestricted cash and cash equivalents of the Company and its guarantors in an amount not to exceed $50.0 million, to adjusted EBITDA (calculated on a pro forma basis including giving effect to any acquisition)), measured on a quarter-end basis for each four consecutive fiscal quarters then ended, of not greater than 6.00 to 1.00.
In addition, the Credit Facility contains customary events of default subject to customary cure periods for certain defaults that include, among others, non-payment defaults, inaccuracy of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness, change in control, bankruptcy and insolvency defaults and material judgment defaults. The occurrence of an event of default could result in the acceleration of Term Loans and Revolver and a right by the agent and lenders to exercise remedies. At the election of the lenders, a default interest rate shall apply on all obligations during an event
of default, at a rate per annum equal to 2.00% above the applicable interest rate. The Term Loan and Revolver are secured by substantially all of the Company's assets. As of March 31, 2020 the Company was in compliance with all covenants under the Credit Facility.
Cash interest costs averaged 5.4% and 6.0% for the three months ended March 31, 2020 and for the year ended December 31, 2019, respectively. In addition, as of March 31, 2020 and December 31, 2019 the Company had $13.1 million and $13.6 million, respectively, of unamortized deferred financing costs associated with the Credit Facility. These financing costs will be amortized to non-cash interest expense over the remaining term of the Credit Facility. As a result of the paydown of our previous credit facility, the Company was required to write off debt issuance cost of $2.3 million during the year ended December 31, 2019 as Loss on debt extinguishment, related to the unamortized debt discount on our previous term loan.
7. Net Loss Per Share
The following table sets forth the computations of loss per share (in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net Loss
|
$
|
(20,081)
|
|
|
$
|
(7,830)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted–average common shares outstanding, basic and diluted
|
24,906,932
|
|
|
20,442,626
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
$
|
(0.81)
|
|
|
$
|
(0.38)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to the net losses for the three months ended March 31, 2020 and March 31, 2019, respectively, basic and diluted loss per share were the same, as the effect of all potentially dilutive securities would have been anti–dilutive. The following table sets forth the anti–dilutive common share equivalents as of March 31, 2020 and March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Stock options
|
320,913
|
|
|
390,754
|
|
Restricted stock awards
|
318,045
|
|
|
939,809
|
|
Restricted stock units
|
1,848,066
|
|
|
380,950
|
|
Performance restricted stock units
|
66,297
|
|
|
—
|
|
Total anti–dilutive common share equivalents
|
2,553,321
|
|
|
1,711,513
|
|
8. Commitments and Contingencies
Purchase Commitments
The Company has purchase commitments related to hosting services, third-party technology used in the Company's solutions and for other services the Company purchases as part of normal operations. In certain cases these arrangements require a minimum annual purchase commitment. As of March 31, 2020, the remaining aggregate minimum purchase commitment under these arrangements was approximately $10.8 million through 2024. Obligations under contracts that we can cancel without a significant penalty are not included.
In addition, the Company purchased software development services pursuant to a technology services agreement with DevFactory FZ-LLC for the three months ended March 31, 2020 and March 31, 2019 totaling $1.9 million and $1.2 million, respectively. The remaining purchase obligation after March 31, 2020 through December 31, 2020 is $5.5 million. See Note 12. Related Party Transactions for more information regarding our purchase commitment to this related party.
Litigation
In the normal course of business, the Company may become involved in various lawsuits and legal proceedings. At this time, the Company is not involved in any current or pending legal proceedings, and does not anticipate any legal proceedings, that may have a material adverse affect on the Company's condensed consolidated balances sheets or condensed consolidated statement of operations.
9. Stockholders' Equity
Registration Statement
On December 12, 2018, the Company filed a registration statement on Form S-3 (File No. 333-228767) (the “S-3”), to register Upland securities in an aggregate amount of up to $250.0 million for offerings from time to time. On May 13, 2019, the Company completed a registered underwritten public offering pursuant to the S-3 of 3,795,000 shares of the Company's $0.0001 par value common stock for an offering price to the public of $42.00 per share. This included the 495,000 shares issuable pursuant to a fully exercised option to purchase additional shares granted to the underwriters of the offering. The net proceeds of the offering of $151.1 million, net of issuance costs of $8.3 million, were used for general business purposes, including the funding of acquisitions.
Accumulated Comprehensive Income (Loss)
Comprehensive income consists of two elements, net income and other comprehensive income (loss). Other comprehensive income (loss) items are recorded in the stockholders’ equity section of our condensed consolidated balance sheets and excluded from net income. Our other comprehensive income (loss) consists of foreign currency translation adjustments for subsidiaries with functional currencies other than the U.S. dollar, unrealized translation gains (losses) on foreign currency denominated intercompany loans, and unrealized gains (losses) on interest rate swaps.
The following table shows the components of accumulated other comprehensive loss, net of income taxes, in the stockholders’ equity section of our condensed consolidated balance sheets at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
Foreign currency translation adjustment
|
$
|
(7,989)
|
|
|
$
|
(4,530)
|
|
Unrealized translation gain (loss) on foreign currency denominated intercompany loans
|
(6,430)
|
|
|
883
|
|
Unrealized gain (loss) on interest rate swaps
|
(28,977)
|
|
|
2,424
|
|
Total accumulated other comprehensive loss
|
$
|
(43,396)
|
|
|
$
|
(1,223)
|
|
Income tax expense/benefit allocated to each component of other comprehensive income (loss) is not material.
The functional currency of our foreign subsidiaries are the local currencies. Results of operations for foreign subsidiaries are translated in United States dollars using the average exchange rates on a monthly basis during the year. The assets and liabilities of those subsidiaries are translated into United States dollars using the exchange rates in effect at the balance sheet date. The related translation adjustments are recorded in a separate component of stockholders' equity in accumulated other comprehensive loss.
The Company has foreign currency denominated intercompany loans that were used to fund the acquisitions of foreign subsidiaries. Due to the long-term nature of the loan, the foreign currency gains (losses) resulting from re-measurement are recognized as a component of accumulated other comprehensive income (loss). During the three months ended March 31, 2020 and March 31, 2019, a foreign currency translation adjustment loss of $7.3 million and gain of $3.0 million, respectively, was recognized as a component of accumulated other comprehensive income (loss) related to this long-term intercompany loan.
Stock-Based Compensation
The Company recognized stock-based compensation expense from all awards in the following expense categories (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Cost of revenue
|
$
|
318
|
|
|
$
|
160
|
|
|
|
|
|
Research and development
|
615
|
|
|
322
|
|
|
|
|
|
Sales and marketing
|
549
|
|
|
139
|
|
|
|
|
|
General and administrative
|
7,838
|
|
|
4,007
|
|
|
|
|
|
Total
|
$
|
9,320
|
|
|
$
|
4,628
|
|
|
|
|
|
Restricted Stock Units
Beginning in 2019, the Company began granting restricted stock units under its 2014 Stock Incentive Plan, in lieu of restricted stock awards, primarily for stock plan administrative purposes. Restricted stock unit activity during the three months ended March 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted Stock Units Outstanding
|
|
Weighted-Average Grant Date Fair Value
|
Unvested balances at December 31, 2019
|
790,807
|
|
|
$
|
39.55
|
|
Units granted
|
1,221,273
|
|
|
40.82
|
|
Units vested
|
(104,212)
|
|
|
41.80
|
|
Awards forfeited
|
(59,802)
|
|
|
42.07
|
|
Unvested balances at March 31, 2020
|
1,848,066
|
|
|
$
|
40.18
|
|
Performance Based Restricted Stock Units
In 2020 fifty percent of the awards made to our Chief Executive Officer were performance based restricted stock units ("PRSUs"). The PRSU agreement provides that the quantity of units subject to vesting may range from 0% to 300% of the units granted per the table below based on the Company's absolute total shareholder return at the end of the eighteen month performance period. Units granted per the table below are based on a 100% target payout. Compensation expense is recognized over the required service period of the grant and is determined based on the grant date fair value of the award and is not subject to fluctuation due to achievement of the underlying market-based target. The Company did not grant PRSUs prior to 2020.
PRSU activity during the three months ended March 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
PRSUs Outstanding
|
|
Weighted-Average Grant Date Fair Value
|
Unvested balances at December 31, 2019
|
—
|
|
|
$
|
—
|
|
Units granted
|
66,297
|
|
|
41.48
|
|
|
|
|
|
|
|
|
|
Unvested balances at March 31, 2020
|
66,297
|
|
|
$
|
41.48
|
|
Restricted Stock Awards
Restricted share activity during the three months ended March 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted Shares
Outstanding
|
|
Weighted-Average Grant Date Fair Value
|
Unvested balances at December 31, 2019
|
371,217
|
|
|
$
|
28.26
|
|
|
|
|
|
Awards vested
|
(29,502)
|
|
|
28.79
|
|
Awards forfeited
|
(23,670)
|
|
|
28.44
|
|
Unvested balances at March 31, 2020
|
318,045
|
|
|
$
|
28.20
|
|
Stock Option Activity
Stock option activity during the three months ended March 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
Outstanding
|
|
Weighted–
Average
Exercise
Price
|
Outstanding at December 31, 2019
|
329,698
|
|
|
$
|
8.57
|
|
|
|
|
|
Options exercised
|
(8,712)
|
|
|
6.13
|
|
Options forfeited
|
—
|
|
|
—
|
|
Options expired
|
(73)
|
|
|
1.79
|
|
Outstanding at March 31, 2020
|
320,913
|
|
|
$
|
8.64
|
|
10. Revenue Recognition
Revenue Recognition Policy
Revenues are recognized when control of the promised goods or services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services over the term of the agreement, generally when made available to the customers. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenues are recognized net of sales credits and allowances. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.
Revenue is recognized based on the following five step model in accordance with ASC 606, Revenue from Contracts with Customers:
•Identification of the contract with a customer
•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, the Company satisfies a performance obligation
Performance obligations under our contracts consist of subscription and support, perpetual licenses, and professional services revenues within a single operating segment.
Subscription and Support Revenues
The Company's software solutions are available for use as hosted application arrangements under subscription fee agreements without licensing perpetual rights to the software. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company's solution is made available to the customer. As our customers have access to use our solutions over the term of the contract agreement we believe this method of revenue recognition provides a faithful depiction of the transfer of services provided. Our subscription contracts are generally 1 to 3 years in length. Amounts that have been invoiced are recorded in accounts receivable and deferred revenues or revenues, depending on whether the revenue recognition criteria have been met. Additional fees for monthly usage above the levels included in the standard subscription fee are recognized as revenue at the end of each month and is invoiced concurrently.
Perpetual License Revenues
The Company also records revenue from the sales of proprietary software products under perpetual licenses. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. The Company’s products do not require significant customization.
Professional Services Revenue
Professional services provided with subscription and support licenses and perpetual licenses consist of implementation fees, data extraction, configuration, and training. The Company’s implementation and configuration services do not involve significant customization of the software and are not considered essential to the functionality. Revenues from professional services are recognized over time as such services are performed. Revenues for fixed price services are generally recognized over time applying input methods to estimate progress to completion. Revenues for consumption-based services are generally recognized as the services are performed.
Messaging-related Revenue
The Company recognizes subscription revenue for its digital engagement application which provides short code connectivity for its two-way SMS programs and campaigns. The Company evaluates whether it is appropriate to recognize revenue based on the gross amount billed to its customers for these services. Since the Company is primarily obligated in these transactions, has latitude in establishing prices associated with its messaging program management services, is responsible for fulfillment of the transaction, and has credit risk, revenue is recorded on a gross basis. While none of the factors individually are considered presumptive or determinative, in reaching conclusions on gross versus net revenue recognition, the Company places the most weight on the analysis of whether or not it is the primary obligor in the arrangement.
Significant Judgments
Performance Obligations and Standalone Selling Price
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of accounting. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. The Company has contracts with customers that often include multiple performance obligations, usually including professional services sold with either individual or multiple subscriptions or perpetual licenses. For these contracts, the Company accounts for individual performance obligations separately if they are distinct by allocating the contract's total transaction price to each performance obligation in an amount based on the relative standalone selling price, or SSP, of each distinct good or service in the contract.
Judgment is required to determine the SSP for each distinct performance obligation. A residual approach is only applied in limited circumstances when a particular performance obligation has highly variable and uncertain SSP and is bundled with other performance obligations that have observable SSP. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, historical standalone sales, customer demographics, geographic locations, and the number and types of users within our contracts.
Other Considerations
The Company evaluates whether it is the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis) for vendor reseller agreements. Generally, the Company reports revenues from these types of contracts on a gross basis, meaning the amounts billed to customers are recorded as revenues, and expenses incurred are recorded as cost of revenues. Where the Company is the principal, it first obtains control of the inputs to the specific good or service and directs their use to create the combined output. The Company's control is evidenced by its involvement in the integration of the good or service on its platform before it is transferred to its customers, and is further supported by the Company being primarily responsible to its customers and having a level of discretion in establishing pricing. Revenues provided from agreements in which the Company is an agent are immaterial.
Deferred revenues primarily consist of amounts that have been billed to or received from customers in advance of revenue recognition and prepayments received from customers in advance for maintenance and other services, as well as initial subscription fees. We recognize deferred revenues as revenues when the services are performed, and the corresponding revenue recognition criteria are met. Customer prepayments are generally applied against invoices issued to customers when services are performed and billed. Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products our services and customer types, we require payment before the products or services are delivered to the customer.
Contract Balances
The timing of revenue recognition, billings and cash collections can result in billed accounts receivable, unbilled receivables, and deferred revenues. Billings scheduled to occur after the performance obligation has been satisfied and revenue recognition has occurred result in unbilled receivables, which are expected to be billed during the succeeding twelve-month period and are recorded in 'Unbilled receivables' in our condensed consolidated balance sheets. A contract liability results when we receive prepayments or deposits from customers in advance for implementation, maintenance and other services, as well as subscription fees. Customer prepayments are generally applied against invoices issued to customers when services are performed and billed. We recognize contract liabilities as revenues upon satisfaction of the underlying performance obligations. Contract liabilities that are expected to be recognized as revenues during the succeeding twelve-month period are recorded in 'Deferred revenue' and the remaining portion is recorded in 'Deferred revenue noncurrent' on the accompanying condensed consolidated balance sheets at the end of each reporting period.
Unbilled Receivables
Unbilled receivables represent amounts for which the Company has recognized revenue, pursuant to its revenue recognition policy, for software licenses already delivered and professional services already performed, but billed in arrears and for which the Company believes it has an unconditional right to payment. As of March 31, 2020 and December 31, 2019, unbilled receivables were $5.7 million and $5.1 million, respectively.
Deferred Commissions
Sales commissions earned by our sales force, and related payroll taxes, are considered incremental and recoverable costs of obtaining a contract with a customer. Deferred commissions and other costs for new customer contracts are capitalized upon
contract signing and amortized over the expected life of the customer relationships, which has been determined to be approximately 6 years based on historical data and managements judgment in a pattern similar to how revenue is recognized. Commissions paid on renewal contracts are not commensurate with commissions paid on new customer contracts, as such, deferred commissions related to renewals are capitalized and amortized over the estimated contractual renewal term of 18 months. We utilized the 'portfolio approach' practical expedient permitted under ASC 606-10-10-4, which allows entities to apply the guidance to a portfolio of contracts with similar characteristics as the effects on the financial statements of this approach would not differ materially from applying the guidance to individual contracts. The portion of capitalized costs expected to be amortized during the succeeding twelve-month period is recorded in current assets as deferred commissions, current, and the remainder is recorded in long-term assets as deferred commissions, net of current portion. Amortization expense is included in sales and marketing expenses in the accompanying condensed consolidated statements of operations. Deferred commissions are reviewed for impairment whenever events or circumstances indicate their carrying value may not be recoverable consistent with the Company's long-lived assets policy. No indicators of impairment were identified during the three months ended March 31, 2020.
The following table presents the activity impacting deferred commissions for the three months ended March 31, 2020 (in thousands):
|
|
|
|
|
|
Balance at December 31, 2019
|
$
|
11,822
|
|
|
|
|
|
Capitalized deferred commissions
|
2,144
|
|
Amortization of deferred commissions
|
(894)
|
|
Balance at March 31, 2020
|
$
|
13,072
|
|
Deferred Revenue
Deferred revenue represents either customer advance payments or billings for which the aforementioned revenue recognition criteria have not yet been met.
Deferred revenue is mainly unearned revenue related to subscription services and support services. During the three months ended March 31, 2020, we recognized $30.4 million and $1.6 million of subscription services and professional services revenue, respectively, that was included in the deferred revenue balances at the beginning of the period. In addition, during the three months ended March 31, 2020 we recognized $1.7 million in revenue that was included in the acquired deferred revenue balance of our 2020 acquisition as disclosed in Note 2. Acquisitions.
Remaining Performance Obligations
As of March 31, 2020, approximately $245.5 million of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 67% of these remaining performance obligations over the next 12 months, with the balance recognized thereafter.
Disaggregated Revenue
The Company disaggregates revenue from contracts with customers by geography and revenue generating activity, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Revenue by geography is based on the ship-to address of the customer, which is intended to approximate where the customers' users are located. The ship-to country is generally the same as the billing country. The Company has operations primarily in the U.S., United Kingdom and Canada. Information about these operations is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Revenues:
|
|
|
|
|
|
|
|
Subscription and support:
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
$
|
45,971
|
|
|
$
|
29,839
|
|
United Kingdom
|
|
|
|
|
9,996
|
|
|
9,316
|
|
Canada
|
|
|
|
|
4,582
|
|
|
2,384
|
|
Other International
|
|
|
|
|
3,342
|
|
|
3,444
|
|
Total subscription and support revenue
|
|
|
|
|
63,891
|
|
|
44,983
|
|
Perpetual license:
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
282
|
|
|
568
|
|
United Kingdom
|
|
|
|
|
16
|
|
|
9
|
|
Canada
|
|
|
|
|
21
|
|
|
42
|
|
Other International
|
|
|
|
|
42
|
|
|
38
|
|
Total perpetual license revenue
|
|
|
|
|
361
|
|
|
657
|
|
|
|
|
|
|
|
|
|
Professional services:
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
2,711
|
|
|
1,980
|
|
United Kingdom
|
|
|
|
|
814
|
|
|
491
|
|
Canada
|
|
|
|
|
138
|
|
|
120
|
|
Other International
|
|
|
|
|
117
|
|
|
262
|
|
Total professional service revenue
|
|
|
|
|
3,780
|
|
|
2,853
|
|
Total revenue
|
|
|
|
|
$
|
68,032
|
|
|
$
|
48,493
|
|
12. Related Party Transactions
We are a party to two agreements with companies controlled by a non-management investor in the Company:
•On March 28, 2017, the Company entered into an amendment to the Amended and Restated Technology Services Agreement with DevFactory FZ LLC ("DevFactory") to extend the initial term end date from December 31, 2017 to December 31, 2021. Additionally, the Company amended the option for either party to renew annually for one additional year. The effective date of the amendment is January 1, 2017. DevFactory is an affiliate of ESW Capital LLC, which holds more than 5% of the Company's capital stock. The Company has an outstanding purchase commitment in 2020 for software development services pursuant to this agreement in the amount of $7.3 million. For years after 2020, the purchase commitment amount for software development services will be equal to the prior year purchase commitment increased (decreased) by the percentage change in total revenue for the prior year as compared to the preceding year. For example, if 2020 total revenues increase by 10% as compared to 2019 total revenues, then the 2021 purchase commitment will increase by approximately $0.8 million from the 2020 purchase commitment amount to approximately $8.1 million. The Company purchased software development services pursuant to this agreement with DevFactory of $1.9 million and $1.2 million during the three months ended March 31, 2020 and March 31, 2019, respectively. As of March 31, 2020 and December 31, 2019 amounts included in accounts payable owed to this company totaled $1.9 million and $1.2 million, respectively.
•The Company purchased services from Crossover, Inc. ("Crossover"), a company controlled by ESW Capital, LLC (a non-management investor) during the three months ended March 31, 2020 and March 31, 2019 of approximately $1.1 million and $1.0 million, respectively. Crossover provides a proprietary technology system to help the Company identify, screen, select, assign, and connect with necessary resources from time to time to perform technology software development and other services throughout the Company, and track productivity of such resources. While there are no purchase commitments with Crossover, the Company continues to use its services in 2020. As of
March 31, 2020 and December 31, 2019 amounts included in accounts payable owed to this company totaled $0.6 million and $0.4 million, respectively.
The Company has an arrangement with a former subsidiary, Visionael Corporation ("Visionael"), to provide management, human resource, payroll and administrative services. John T. McDonald, the Company's Chief Executive Officer and Chairman of the Board, beneficially holds an approximate 26.18% interest in Visionael. The Company received fees from this arrangement during the three months ended March 31, 2020 and March 31, 2019 totaling $15,000 and $15,000, respectively.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2019, filed on March 2, 2020. In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements generally relate to future events or our future financial or operating performance. Forward-looking statements may be identified by the use of forward-looking words such as “anticipate,” “believe,” “may,” “will,” “continue,” “seek,” “estimate,” “intend,” “hope,” “predict,” “could,” “should,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions, although not all forward-looking statements contain these words. These forward-looking statements include, but are not limited to, statements concerning the following:
•our financial performance and our ability to achieve or sustain profitability or predict future results;
•our plans regarding future acquisitions and our ability to consummate and integrate acquisitions;
•our ability to obtain financing in the future on acceptable terms or at all;
•our expectations with respect to revenue, cost of revenue and operating expenses in future periods;
•our ability to attract and retain customers;
•our ability to successfully enter new markets and manage our international expansion;
•our ability to comply with privacy laws and regulations;
•our ability to deliver high-quality customer service;
•the growth of demand for enterprise work management applications;
•our plans regarding, and our ability to effectively manage our growth;
•maintaining our senior management team and key personnel;
•our ability to maintain and expand our direct sales organization;
•the performance of our resellers;
•our ability to adapt to changing market conditions and competition;
•our ability to adapt to technological change and continue to innovate;
•the anticipated impact on our business of the COVID-19 pandemic and related public health measures;
•economic and financial conditions;
•our ability to integrate our applications with other software applications;
•maintaining and expanding our relationships with third parties;
•costs associated with defending intellectual property infringement and other claims;
•our ability to maintain, protect and enhance our brand and intellectual property;
•our expectations with regard to trends, such as seasonality, which affect our business;
•our expectations with regard to revenue from perpetual licenses and professional services;
•our plans with respect to foreign currency exchange risk and inflation;
•our beliefs regarding how our applications benefit customers and what our competitive strengths are; and
•other risk factors included under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 2, 2020, as updated by this Quarterly Report on Form 10-Q and periodically updated as necessary in our future quarterly reports on Form 10-Q and other filings that we make with the SEC.
The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from our forward-looking statements, including risks and uncertainties detailed in this and our other reports and filings with the SEC. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
Overview
We provide cloud-based enterprise work management software. We define enterprise work management software as software applications that enable organizations to plan, manage and execute projects and work. Our family of applications enables users to manage their projects, professional workforce and IT investments, automate document-intensive business processes, and effectively engage with their customers, prospects, and community via the web and mobile technologies.
The continued growth of an information-based economy has given rise to a large and growing group of knowledge workers who operate in dynamic work environments as part of geographically dispersed and virtual teams. We believe that manual processes and legacy on- premise enterprise systems are insufficient to address the needs of the modern work environment. In order for knowledge workers to be successful, they need to interact with intuitive enterprise work systems in a collaborative way, including real-time access. Today, legacy processes and systems are being disrupted and replaced by cloud-based enterprise work management software that improves visibility, collaboration and productivity.
In response to these changes, we are providing organizations and their knowledge workers with software applications that better align resources with business objectives and increase visibility, governance, collaboration, quality of customer experience, and responsiveness to changes in the business environment. This results in increased work capacity, higher productivity, better execution, and greater levels of customer engagement. Our applications are easy-to-use, scalable, and offer real-time collaboration for knowledge workers distributed on a local or global scale. Our software applications address diverse enterprise work challenges and our four cloud offerings are as follows:
•Customer Experience Management Cloud. The Upland Customer Experience Management Cloud, or CXM Cloud, enables organizations to manage the complete customer lifecycle from awareness to acquisition to advocacy across multiple channels - including email, short message service, or SMS, multimedia messaging service, or MMS, web, social, and mobile apps.
•Enterprise Sales and Marketing Cloud. The Upland Enterprise Sales and Marketing Cloud, or ESM Cloud, enables sales and marketing organizations to optimize sales activities, digital content production, automate key proposal and reference processes, and track key metrics to more effectively and predictably drive revenue retention and growth.
•Project and IT Management Cloud. The Upland Project and IT Management Cloud, or PITM Cloud, enables professional services and information technology (“IT”) organizations to better manage services delivery, project portfolios, enterprise knowledge sharing and spending across projects and IT/telecom infrastructure.
•Document Workflow Cloud. The Upland Document Workflow Cloud, or DW Cloud, enables enterprises to manage and automate document intensive business processes with data security through scan and fax platforms, data monitoring and breach prevention capabilities, and the automated routing of content to its final destination.
We sell our software applications primarily through a direct sales organization comprised of inside sales and field sales personnel. In addition to our direct sales organization, we have an indirect sales organization, which sells to distributors and value-added resellers. We employ a land-and-expand go-to-market strategy. After we demonstrate the value of an initial application to a customer, our sales and account management teams work to expand the adoption of that initial application across the customer, as well as cross-sell additional applications to address other enterprise work management needs of the customer. Our customer success organization supports our direct sales efforts by managing the post-sale customer lifecycle.
Our subscription agreements are typically sold either on a per-seat basis or on a minimum contracted volume basis with overage fees billed in arrears, depending on the application being sold. We service customers ranging from large global corporations and government agencies to small- and medium-sized businesses. We have more than 9,000 customers with over 1,000,000 users across a broad range of industries, including financial services, retail, technology, manufacturing, legal, education, consumer goods, media, telecommunications, government, non-profit, food and beverage, healthcare and life sciences.
Through a series of acquisitions and integrations, we have established a diverse family of software applications under the Upland brand and in the product solution categories listed above, each of which addresses a specific enterprise work management need. Our revenue has grown from $22.8 million in 2012 to $222.6 million in 2019 (and to $68.0 million for the three months ended March 31, 2020), representing an approximate 878% growth rate between 2012 and 2019. During the three months ended March 31, 2020 foreign revenue as a percent of total revenue decreased to 28% compared to 30% during the year ended December 31, 2019. See Note 10. Revenue Recognition in the notes to our unaudited condensed consolidated financial statements for more information regarding our revenue as it relates to domestic and foreign operations.
In the fourth quarter of 2019, in connection with the periodic review of its business and in light of Upland’s new go-to-market strategy that is centered on thematic solution suites of related products, Upland has determined to divest of and/or sunset certain minor non-strategic customer contracts and related website management and analytics assets (collectively referred to as “Sunset Assets”). Refer to Note 2. Acquisitions and Note 4. Goodwill and Other Intangible Assets in our condensed consolidated financial statements for further discussion.
To support continued growth, we intend to pursue acquisitions within our core enterprise solution suites of complementary technologies and businesses. This will expand our product families, customer base, and market access resulting in increased benefits of scale. Consistent with our growth strategy, we have made twenty-six acquisitions from February 2012 through March 31, 2020.
COVID-19 Impact
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout the U.S. and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. We cannot predict the extent to which the COVID-19 outbreak will impact our business or operating results, which is highly dependent on inherently uncertain future developments, including the severity of COVID-19 and the actions taken by governments and private businesses in relation to COVID-19 containment. As our platform is offered as a subscription-based service, the effect of the outbreak may not be fully reflected in our operating results until future periods, if at all. As of the date of this report, we do not yet know the extent of the negative impact on our ability to attract, serve, retain or upsell customers. Furthermore, existing and potential customers may choose to reduce or delay technology spending in response to the COVID-19 outbreak, or attempt to renegotiate contracts and obtain concessions, which may materially and negatively impact our operating results, financial condition and prospects.
As a result of the pandemic, Upland has taken certain measures to support the health and well-being of our employees, customers, partners and communities during this time of uncertainty. Prior to the wide-spread implementation of stay-at-home measures last month, approximately 60 percent of our employee and contractor workforce was already remote. This enabled us to quickly convert the entire company to remote work status to ensure the safety of our employees, while still allowing us to continue serving our customers without disruption. In addition, while we typically host virtual user conferences for our customers, we do not anticipate hosting any in person user group meetings until Fall of 2020.
As approximately 94% of our revenue is associated with recurring revenue with minimal organic growth assumptions the disruptions related to the pandemic did not have a material adverse impact on our financial results for the first quarter of fiscal 2020. While we have limited exposure to the industry verticals that have been hardest hit by the pandemic (including the travel, transportation, entertainment and retail industries) we currently expect a moderate reduction in projected revenue for fiscal 2020 as a result of the pandemic. We expect that current cash and cash equivalent balances and cash flows generated from operations will be sufficient to meet our domestic and international working capital needs for at least the next 12 months. We anticipate a slowdown in the pace of our acquisition activities in the second and third quarters of 2020 while we continue to gauge the overall economic impact of the pandemic and related containment measures.
Key Metrics
In addition to the GAAP financial measures described below in “Components of Operating Results,” we regularly review the following key metrics to evaluate and identify trends in our business, measure our performance, prepare financial projections and make strategic decisions.
Adjusted EBITDA
We monitor our Adjusted EBITDA to help us evaluate the effectiveness and efficiency of our operations. Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss), calculated in accordance with GAAP, plus depreciation and amortization expense, interest expense, net, other expense (income), net, provision for income taxes, stock-based compensation expense, acquisition-related expenses, and purchase accounting adjustments for deferred revenue.
The following table presents a reconciliation of net loss from continuing operations, the most comparable GAAP measure, to Adjusted EBITDA for each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
Reconciliation of net loss to Adjusted EBITDA:
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
$
|
(20,081)
|
|
|
$
|
(7,830)
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
|
|
11,737
|
|
|
7,387
|
|
Interest expense, net
|
|
|
|
|
7,643
|
|
|
5,116
|
|
|
|
|
|
|
|
|
|
Other expense (income), net
|
|
|
|
|
1,402
|
|
|
761
|
|
Benefit from income taxes
|
|
|
|
|
(4,287)
|
|
|
(612)
|
|
Stock-based compensation expense
|
|
|
|
|
9,320
|
|
|
4,628
|
|
Acquisition-related expense
|
|
|
|
|
15,158
|
|
|
7,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase accounting deferred revenue discount
|
|
|
|
|
3,701
|
|
|
597
|
|
Adjusted EBITDA
|
|
|
|
|
$
|
24,593
|
|
|
$
|
17,770
|
|
We believe that Adjusted EBITDA provides useful information to management, investors and others in understanding and evaluating our operating results for the following reasons:
•Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired;
•our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, in the preparation of our annual operating budget, as a measure of our operating performance, to assess the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance because Adjusted EBITDA eliminates the impact of items that we do not consider indicative of our core operating performance;
•Adjusted EBITDA provides more consistency and comparability with our past financial performance, facilitates period-to-period comparisons of our operations and also facilitates comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.
Adjusted EBITDA should not be considered as an alternative to net loss or any other measure of financial performance calculated and presented in accordance with GAAP. The use of Adjusted EBITDA as an analytical tool has limitations such as:
•depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect cash requirements for such replacements; however, much of the depreciation and amortization currently reflected relates to amortization of acquired intangible assets as a result of business combination purchase accounting adjustments, which will not need to be replaced in the future;
•Adjusted EBITDA may not reflect changes in, or cash requirements for, our working capital needs or contractual commitments;
•Adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation;
•Adjusted EBITDA does not reflect interest or tax payments that could reduce cash available for use; and,
•other companies, including companies in our industry, might calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as comparative measures.
Because of these limitations, you should consider Adjusted EBITDA together with other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.