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 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.
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 and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021 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 2020 Annual Report on Form 10-K filed with the SEC on February 25, 2021.
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, the fair value of the Company’s interest rate swaps 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 August 4, 2021, 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, accounts receivable and the Company’s interest rate swap hedges. 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.
No individual customer represented more than 10% of total revenues for the three or six months ended June 30, 2021, or more than 10% of accounts receivable as of June 30, 2021 or December 31, 2020.
Derivatives
In connection with borrowing funds under the Company’s credit facility the Company has 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 converted 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 a 7 year term of 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 June 30, 2021 and December 31, 2020 the fair value of the interest rate swaps included in Interest rate swap liabilities in the Company's condensed consolidated balance sheets was $17.8 million and $30.0 million, respectively.
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 recognizes 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 not yet adopted
In March 2020, the Financial Accounting Standards Board (“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 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 is evaluating the impact of this standard on our consolidated financial statements.
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.
2021 Acquisitions
Acquisitions completed during the six months ended June 30, 2021 include the following:
•Panviva - On June 24, 2021, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Panviva Pty Ltd, an Australian proprietary company (“Panviva”), a cloud-based enterprise knowledge management solution. Revenues recorded since the acquisition date through June 30, 2021 were approximately $0.1 million.
•BlueVenn - On February 28, 2021 the Company entered into an agreement to purchase the shares comprising the entire issued share capital of BlueVenn Group Limited, a company limited by shares organized and existing under the laws of England and Wales (“BlueVenn”), a cloud-based customer data platform. Revenues recorded since the acquisition date through June 30, 2021 were approximately $5.4 million. Revenues recorded for BlueVenn for the quarter ended June 30, 2021 were approximately $4.4 million.
•Second Street - On January 19, 2021, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Second Street Media, Inc., a Missouri corporation (“Second Street”), an audience engagement platform. Revenues recorded since the acquisition date through June 30, 2021 were approximately $4.7 million. Revenues recorded for Second Street for the quarter ended June 30, 2021 were approximately $2.7 million.
2020 Acquisition
The acquisition completed during the year ended December 31, 2020 were:
•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.
Consideration
The following table summarizes the consideration transferred for the acquisitions described above (in thousands):
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Panviva
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|
BlueVenn
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|
Second Street
|
|
Localytics
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
19,931
|
|
|
$
|
53,535
|
|
|
$
|
25,436
|
|
|
$
|
67,655
|
|
|
|
|
|
|
|
|
|
|
|
Holdback (1)
|
3,517
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|
|
2,429
|
|
|
5,000
|
|
|
345
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration (2)
|
—
|
|
|
2,535
|
|
|
1,650
|
|
|
1,000
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Working capital adjustment (3)
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—
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|
(537)
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|
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—
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|
|
(5,238)
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|
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Total consideration
|
$
|
23,448
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|
|
$
|
57,962
|
|
|
$
|
32,086
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|
|
$
|
63,762
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(1)Represents the cash holdbacks subject to indemnification claims that are payable 12 months following closing for Panviva, Second Street and Localytics and 18 months following closing for BlueVenn. In addition, the holdback payment to Panviva may be reduced by up to $1.6 million based on the future renewal of a specific customer. The fair value of this potential reduction was $0.0 million as of the acquisition date.
(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 BlueVenn, Second Street and Localytics earn-outs were $22.4 million, $3.0 million, and $1.0 million, respectively. The earn-out for Localytics was paid in full during the year ended December 31, 2020 based on an ending fair value of $1.0 million. Refer to Note 3 for further discussion regarding the calculation of fair value of acquisition related earn-outs.
(3)Working capital and other adjustments includes a $5.2 million settlement in total consideration for Localytics related to a representation and warranty insurance settlement which is included in prepaids and other current assets on the Company’s consolidated balance sheets as of December 31, 2020.
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 2021 acquisitions of Panviva, BlueVenn, and Second Street are preliminary as the Company has not finalized the tax impact of these acquisitions. In addition, the purchase price allocation for Panviva is preliminary as we work to finalize the valuation of intangible assets. Management has recorded the purchase price allocations based upon acquired company information that is currently available. Management expects to complete the purchase accounting for BlueVenn and Second Street no later than the first quarter of 2022 and no later than the second quarter of 2022 for Panviva.
The following condensed table presents the preliminary and finalized acquisition-date fair value of the assets acquired and liabilities assumed for the acquisitions during the year ended December 31, 2020 and through the six months ended June 30, 2021, as well as assets and liabilities (in thousands):
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Preliminary
|
|
Final
|
|
Panviva
|
|
BlueVenn
|
|
Second Street
|
|
Localytics
|
Year Acquired
|
2021
|
|
2021
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
Cash
|
$
|
132
|
|
|
$
|
1,115
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accounts receivable
|
2,119
|
|
|
1,289
|
|
|
1,105
|
|
|
3,648
|
|
Other current assets
|
4,986
|
|
|
2,145
|
|
|
89
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|
|
6,323
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use asset
|
197
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|
|
1,357
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|
|
489
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|
|
7,605
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|
Property and equipment
|
26
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|
|
611
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|
|
156
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|
|
409
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|
Customer relationships
|
8,169
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|
|
15,670
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|
|
14,600
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|
|
30,500
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Trade name
|
76
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|
|
238
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|
|
200
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|
|
300
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|
Technology
|
2,118
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|
|
4,337
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|
|
3,400
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|
|
6,600
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|
|
|
|
|
|
|
|
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Goodwill
|
19,912
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|
|
47,642
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|
|
17,994
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|
|
33,543
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Other assets
|
33
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|
|
24
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|
|
13
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|
|
6
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|
Total assets acquired
|
37,768
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|
|
74,428
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|
|
38,046
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|
|
88,934
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Accounts payable
|
(1,249)
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|
|
(2,809)
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|
|
(230)
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|
|
(2,382)
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|
Accrued expense and other
|
(6,588)
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|
|
(2,196)
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|
|
(429)
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|
|
(6,761)
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Deferred tax liabilities
|
(3,083)
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|
|
(3,468)
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|
|
(4,312)
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|
|
(3,382)
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Deferred revenue
|
(3,203)
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|
(6,636)
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|
(500)
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|
(4,812)
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Operating lease liabilities
|
(197)
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|
|
(1,357)
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|
|
(489)
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|
|
(7,835)
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Total liabilities assumed
|
(14,320)
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|
(16,466)
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|
(5,960)
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|
(25,172)
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Total consideration
|
$
|
23,448
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|
|
$
|
57,962
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|
|
$
|
32,086
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$
|
63,762
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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 six months ended June 30, 2021 and the year ended December 31, 2020 (in years):
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Useful Life
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June 30, 2021
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December 31, 2020
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Customer relationships
|
7.0
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8.0
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Trade name
|
2.0
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|
2.0
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Developed technology
|
5.0
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|
5.0
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Total weighted-average useful life
|
6.5
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|
7.4
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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 goodwill of $119.1 million for the above acquisitions is primarily attributable to the synergies expected to arise after the acquisition and the value of the acquired workforce. Goodwill that is deductible for tax purposes at the time of the acquisitions was $2.0 million.
Total transaction related expenses incurred with respect to acquisition activity during the three months ended June 30, 2021 and June 30, 2020 were $2.0 million and $0.2 million, respectively, and during the six months ended June 30, 2021 and June 30, 2020 were $6.1 million and $3.5 million, respectively. Transaction related expenses, excluding transformation costs, include expenses such as banker fees, legal and professional fees, insurance costs, and deal bonuses. Transaction costs are included in acquisition-related expenses in our condensed consolidated statement of operations.
Other Acquisitions and Divestitures
From time to time we may purchase or sell customer relationships that meet certain criteria. During the year ended December 31, 2020, we completed customer relationship acquisitions totaling $0.2 million.
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 June 30, 2021, the Company had 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, changes in assumed discount periods and rates and changes in foreign exchange 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 June 30, 2021 and December 31, 2020 the fair value of the interest rate swaps are included in Interest rate swap liabilities on the Company's condensed consolidated balance sheets.
Liabilities measured at fair value on a recurring basis are summarized below (in thousands):
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Fair Value Measurements at June 30, 2021
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(unaudited)
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Level 1
|
|
Level 2
|
|
Level 3
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Total
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Liabilities:
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Earnout consideration liability
|
$
|
—
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|
|
$
|
—
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|
|
$
|
1,454
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|
|
$
|
1,454
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|
Interest rate swap liabilities
|
$
|
—
|
|
|
$
|
17,754
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|
|
$
|
—
|
|
|
$
|
17,754
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|
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|
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|
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|
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|
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Fair Value Measurements at December 31, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
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|
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Liabilities:
|
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|
|
|
|
|
|
Interest rate swap liabilities
|
$
|
—
|
|
|
$
|
30,032
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|
|
$
|
—
|
|
|
$
|
30,032
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|
|
|
|
|
|
|
|
|
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) (unaudited):
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|
|
|
|
|
|
June 30, 2021
|
|
|
|
(unaudited)
|
|
|
Balance at December 31, 2020
|
$
|
—
|
|
|
|
|
|
|
|
Acquisitions and settlements:
|
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|
|
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|
|
|
Acquisitions
|
4,185
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remeasurement adjustments:
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|
|
|
Gain included in earnings
|
(2,729)
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
(2)
|
|
|
|
Balance at June 30, 2021
|
$
|
1,454
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration liabilities designated as Level 3 are as follows:
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|
|
|
|
|
|
|
|
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|
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Fair Value at June 30, 2021
|
|
Valuation Technique
|
|
Significant Unobservable Inputs
|
Contingent acquisition consideration:
(BlueVenn and Second Street)
|
$
|
1,454
|
|
|
Binary option model
|
|
Expected future annual revenue streams and probability of achievement
|
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 June 30, 2021 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 June 30, 2021 and December 31, 2020 are $530.6 million and $533.3 million, respectively.
4. Goodwill and Other Intangible Assets
Changes in the Company’s goodwill balance for the six months ended June 30, 2021 are summarized in the table below (in thousands):
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|
|
|
|
Balance at December 31, 2020
|
$
|
383,598
|
|
Acquired in business combinations
|
85,102
|
|
|
|
|
|
Adjustment related to finalization of current year business combinations
|
446
|
|
Foreign currency translation adjustment
|
1,036
|
|
Balance at June 30, 2021
|
$
|
470,182
|
|
Net intangible assets include the estimated acquisition-date fair values of customer relationships, marketing-related assets, developed technology, and non-compete agreements that the Company recorded as part of its business acquisitions.
The following is a summary of the Company’s intangible assets, net (in thousands):
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Estimated Useful
Life (Years)
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
June 30, 2021:
|
|
|
|
|
|
|
|
Customer relationships
|
1-10
|
|
$
|
358,154
|
|
|
$
|
107,792
|
|
|
$
|
250,362
|
|
Trade name
|
1.5-10
|
|
9,824
|
|
|
5,265
|
|
|
4,559
|
|
Developed technology
|
4-9
|
|
89,483
|
|
|
39,652
|
|
|
49,831
|
|
Non-compete agreements
|
3
|
|
1,148
|
|
|
1,148
|
|
|
—
|
|
Total intangible assets
|
|
|
$
|
458,609
|
|
|
$
|
153,857
|
|
|
$
|
304,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful
Life (Years)
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
December 31, 2020:
|
|
|
|
|
|
|
|
Customer relationships
|
1-10
|
|
$
|
318,941
|
|
|
$
|
89,131
|
|
|
$
|
229,810
|
|
Trade name
|
1.5-10
|
|
9,283
|
|
|
4,763
|
|
|
4,520
|
|
Developed technology
|
4-9
|
|
79,382
|
|
|
33,929
|
|
|
45,453
|
|
Non-compete agreements
|
3
|
|
1,148
|
|
|
956
|
|
|
192
|
|
Total intangible assets
|
|
|
$
|
408,754
|
|
|
$
|
128,779
|
|
|
$
|
279,975
|
|
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. Management recorded no impairments of intangible assets or goodwill during the three and six months ended June 30, 2021 or the year ended December 31, 2020. Total amortization expense during the three months ended June 30, 2021 and June 30, 2020 was $12.7 million and $11.2 million, respectively, and during the six months ended June 30, 2021 and June 30, 2020 was $24.7 million and $22.4 million, respectively.
As of June 30, 2021, the estimated annual amortization expense for the next five years and thereafter is as follows (in thousands):
|
|
|
|
|
|
|
Amortization
Expense
|
Year ending December 31:
|
|
Remainder of 2021
|
$
|
25,876
|
|
2022
|
49,173
|
|
2023
|
46,810
|
|
2024
|
44,428
|
|
2025
|
41,124
|
|
2026 and thereafter
|
97,341
|
|
Total
|
$
|
304,752
|
|
5. Income Taxes
The Company’s income tax benefit for the three and six months ended June 30, 2021 and June 30, 2020 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 provision of $1.5 million and benefit of $2.9 million recorded for the three and six months ended June 30, 2021, respectively, are 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 Company’s business combinations during the three months ended March 31, 2021, 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 and the impact, recorded as discrete, of enacted future changes in UK tax rates on the balance of deferred tax assets and liabilities per tax law enacted during the three months ended June 30, 2021. The release of valuation
allowance is attributable to ASC 805-740-30-3 and acquisitions of domestic entities with deferred tax liabilities that, upon acquisition, allowed us to recognize certain deferred tax assets of approximately $4.3 million during the six months ended June 30, 2021 that had previously been offset by a valuation allowance. The benefit for the release of valuation allowance was primarily recorded during the three months ended March 31, 2021.
The tax benefit of $0.7 million and $5.0 million recorded for the three and six months ended June 30, 2020, respectively, are 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 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 June 30, 2021 and June 30, 2020, 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, 2017 and is no longer subject to state and local or foreign income tax examinations by tax authorities for years ending before December 31, 2016, other than where cross-border transactions extend the statute of limitations. The Company is not currently under audit for federal, state or any foreign jurisdictions. U.S. operating losses generated in years prior to 2017 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 June 30, 2021 and December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
Senior secured loans (includes unamortized discount of $10,646 and $11,648 based on an imputed interest rate of 5.8% and 5.8%, at June 30, 2021 and December 31, 2020, respectively)
|
$
|
519,904
|
|
|
$
|
521,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
(3,153)
|
|
|
(3,166)
|
|
Total long-term debt
|
$
|
516,751
|
|
|
$
|
518,437
|
|
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 June 30, 2021. 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 Facility and the $60.0 million revolving credit facility under the Credit Facility.
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 Facility (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.
Interest rate swaps
On August 6, 2019, the Company 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 Facility. The interest rate associated with our new $60 million, 5 year, 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 June 30, 2021, the fair value of the interest rate swap was a $17.8 million liability as a result of a decline in short term interest rates since entering into the swap agreements. The decrease in the fair value of the interest rate swap liability during the three months ended June 30, 2021 is the result of an increase in short term interest rates compared to December 31, 2020. In the next twelve months, the Company estimates that $3.6 million will be reclassified from Accumulated other comprehensive income (loss) and recorded as an increase to Interest expense. Increases/decreases in cash paid for interest as a result of the Company’s interest rate swaps are included cash flows from operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
(Loss) gain recognized in Other comprehensive income on derivative financial instruments
|
$
|
(3,172)
|
|
|
$
|
(3,655)
|
|
|
$
|
12,279
|
|
|
$
|
(35,056)
|
|
(Loss) gain on interest rate swap (included in Interest expense on our consolidated statement of operations)
|
$
|
(2,058)
|
|
|
$
|
(1,520)
|
|
|
$
|
(4,068)
|
|
|
$
|
(1,454)
|
|
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 June 30, 2021, the Company had no borrowings outstanding under the Revolver or related sub-facility.
Covenants
The Credit Facility 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 June 30, 2021 the Company was in compliance with all covenants under the Credit Facility.
Cash interest costs averaged 5.4% and 5.4% for the six months ended June 30, 2021 and for the year ended December 31, 2020, respectively. In addition, as of June 30, 2021 and December 31, 2020 the Company had $10.6 million and $11.6 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.
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 June 30,
|
|
Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net Loss
|
$
|
(19,042)
|
|
|
$
|
(14,159)
|
|
|
$
|
(39,726)
|
|
|
$
|
(34,240)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted–average common shares outstanding, basic and diluted
|
30,097,749
|
|
|
25,032,996
|
|
|
30,034,252
|
|
|
25,057,715
|
|
Net loss per common share, basic and diluted
|
$
|
(0.63)
|
|
|
$
|
(0.57)
|
|
|
$
|
(1.32)
|
|
|
$
|
(1.37)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to the net losses for the three and six months ended June 30, 2021 and June 30, 2020, respectively, basic and diluted loss per share were the same. The following table sets forth the anti–dilutive common share equivalents as of June 30, 2021 and June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2021
|
|
2020
|
|
|
|
|
Stock options
|
251,360
|
|
|
320,840
|
|
Restricted stock awards
|
1,000
|
|
|
197,623
|
|
Restricted stock units
|
2,061,436
|
|
|
1,778,557
|
|
Performance restricted stock units
|
61,437
|
|
|
66,297
|
|
Total anti–dilutive common share equivalents
|
2,375,233
|
|
|
2,363,317
|
|
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.
In addition, the Company purchased software development services pursuant to a technology services agreement with DevFactory FZ-LLC for the three months ended June 30, 2021 and June 30, 2020 totaling $2.4 million and $1.8 million, respectively, and for the six months ended June 30, 2021 and June 30, 2020 totaling $4.8 million and $3.7 million, respectively. The remaining purchase obligation after June 30, 2021 through December 31, 2021 is $4.8 million. See Note 11. 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 effect on the Company's condensed consolidated balances sheets or condensed consolidated statement of operations.
In addition, when we acquire companies, we require that the sellers provide industry standard indemnification for breaches of representations and warranties contained in the acquisition agreement and we will withhold payment of a portion of the purchase price for a period of time in order to satisfy any claims that we may make for indemnification. In certain transactions, we agree with the sellers to purchase a representation and warranty insurance policy that will pay such claims for indemnification. From time to time we may have one or more claims for indemnification pending. Similarly, we may have one or more ongoing negotiations related to the amount of an earnout. Gain contingencies related to indemnification claims are not recognized in our condensed consolidated financial statements until realized.
9. Stockholders' Equity
Registration Statement
On August 10, 2020, we filed a registration statement on Form S-3 (File No. 333-243728) (the “2020 S-3”), which became effective automatically upon its filing and covers an unlimited amount of securities. The 2020 S-3, will remain effective through August 2023.
Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) consists of two elements, net income (loss) 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 (loss). Our other comprehensive income (loss) consists primarily of foreign currency translation adjustments for subsidiaries with functional currencies other than the U.S. dollar, unrealized translation gains (losses) on intercompany loans with foreign subsidiaries, and unrealized gains (losses) on interest rate swaps.
The following table shows the components of accumulated other comprehensive loss, net of income taxes, (“AOCI”) in the stockholders’ equity section of our condensed consolidated balance sheets at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
Foreign currency translation adjustment
|
$
|
(418)
|
|
|
$
|
644
|
|
Unrealized translation gain on intercompany loans with foreign subsidiaries
|
4,934
|
|
|
3,154
|
|
Unrealized loss on interest rate swaps
|
(17,754)
|
|
|
(30,032)
|
|
Total accumulated other comprehensive loss
|
$
|
(13,238)
|
|
|
$
|
(26,234)
|
|
The unrealized translation gain on intercompany loans with foreign subsidiaries as of June 30, 2021 is net of income tax expense of $2.3 million. The tax expense related to unrealized translation gains on intercompany loans three and six months ended June 30, 2021 was $0.1 million and $0.3 million, respectively. The income tax expense/benefit allocated to each component of other comprehensive income (loss) for all other periods and components is not material. The Company reclassifies taxes from AOCI to earnings as the items to which the tax effects relate are similarly reclassified.
The functional currency of our foreign subsidiaries are primarily the local currencies. Results of operations for foreign subsidiaries are translated into 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 intercompany loans that were used to fund the acquisitions of foreign subsidiaries. Due to the long-term nature of the loans, the unrealized translation gains (losses) resulting from re-measurement are recognized as a component of accumulated other comprehensive income (loss).
Stock-Based Compensation
The Company recognizes stock-based compensation expense from all awards in the following expense categories (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Cost of revenue
|
$
|
563
|
|
|
$
|
570
|
|
|
$
|
1,005
|
|
|
$
|
888
|
|
Research and development
|
942
|
|
|
1,019
|
|
|
1,656
|
|
|
1,634
|
|
Sales and marketing
|
1,619
|
|
|
898
|
|
|
2,756
|
|
|
1,447
|
|
General and administrative (1)
|
10,426
|
|
|
8,493
|
|
|
25,957
|
|
|
16,331
|
|
Total
|
$
|
13,550
|
|
|
$
|
10,980
|
|
|
$
|
31,374
|
|
|
$
|
20,300
|
|
(1)In March 2021 our former co-President and Chief Operating Officer (“COO”) resigned from his positions and entered into an advisory agreement with the Company pursuant to which he will serve as a strategic advisor to the Company through December 31, 2022. Stock-based compensation for the six months ended June 30, 2021 includes $6.3 million in incremental stock-based compensation expense related to the deemed modification of the unvested portion of grants held by our former COO at the time of transition, even though these shares continue to vest over their existing vesting schedule through 2022. In accordance with ASC 718, the fair value of these awards were modified and all related expense accelerated on the date of modification as a result of the reduction in required service.
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 six months ended June 30, 2021 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted Stock Units Outstanding
|
|
Weighted-Average Grant Date Fair Value
|
Unvested balances at December 31, 2020
|
1,261,290
|
|
|
$
|
39.92
|
|
Units granted
|
1,106,162
|
|
|
48.93
|
|
Units vested
|
(278,553)
|
|
|
40.24
|
|
Awards forfeited
|
(27,463)
|
|
|
40.48
|
|
Unvested balances at June 30, 2021
|
2,061,436
|
|
|
$
|
44.70
|
|
Performance Based Restricted Stock Units
In 2020 and 2021 fifty percent of the awards made to our Chief Executive Officer were performance based restricted stock units ("PRSUs"). The PRSU agreements provide 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 periods. 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.
PRSU activity during the six months ended June 30, 2021 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
PRSUs Outstanding
|
|
Weighted-Average Grant Date Fair Value
|
Unvested balances at December 31, 2020
|
66,297
|
|
|
$
|
79.72
|
|
Units granted
|
61,437
|
|
|
86.56
|
|
Incremental PRSUs vested in period
|
69,048
|
|
|
|
Units vested
|
(135,345)
|
|
|
79.72
|
|
|
|
|
|
Unvested balances at June 30, 2021
|
61,437
|
|
|
$
|
86.56
|
|
Significant assumptions used in the Monte Carlo simulation model for the PRSUs granted during the six months ended June 30, 2021 and year ended December 31, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
Expected volatility
|
53.6%
|
|
45.1%
|
Risk-free interest rate
|
0.1%
|
|
1.3%
|
Remaining performance period (in years)
|
1.35
|
|
1.35
|
Dividend yield
|
—
|
|
—
|
Restricted Stock Awards
Restricted share activity during the six months ended June 30, 2021 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted Shares
Outstanding
|
|
Weighted-Average Grant Date Fair Value
|
Unvested balances at December 31, 2020
|
34,508
|
|
|
$
|
30.13
|
|
|
|
|
|
Awards vested
|
(33,508)
|
|
|
30.11
|
|
Awards forfeited
|
—
|
|
|
—
|
|
Unvested balances at June 30, 2021
|
1,000
|
|
|
$
|
30.61
|
|
Stock Option Activity
Stock option activity during the six months ended June 30, 2021 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
Outstanding
|
|
Weighted–
Average
Exercise
Price
|
Outstanding at December 31, 2020
|
264,002
|
|
|
$
|
8.93
|
|
|
|
|
|
Options exercised
|
(12,234)
|
|
|
14.50
|
|
|
|
|
|
Options expired
|
(408)
|
|
|
1.56
|
|
Outstanding at June 30, 2021
|
251,360
|
|
|
$
|
8.67
|
|
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 subscription and support 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 subscription and support revenue at the end of each month and is invoiced concurrently. Subscription and support revenue includes revenue related to the Company’s digital engagement application which provides short code connectivity for its two-way short message service (“SMS”) programs and campaigns. As discussed further in the “Principal vs. Agent Considerations” section below, the Company recognizes revenue related to these messaging-related subscription contracts on a gross basis.
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.
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 records 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 (“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.
Principal vs. Agent 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 and messaging-related subscription agreements. 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. 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.
Generally, the Company reports revenues from vendor reseller agreements on a gross basis, meaning the amounts billed to customers are recorded as revenues, and expenses incurred are recorded as cost of revenues. As the Company is primarily
obligated in its messaging-related subscription contracts, 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 with related telecom messaging costs incurred from third parties recorded as cost of revenues. Revenues provided from agreements in which the Company is an agent are immaterial.
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.
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 or services and customer types, we require payment before the products or services are delivered to the customer.
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 invoiced in arrears and for which the Company believes it has an unconditional right to payment. As of June 30, 2021 and December 31, 2020, unbilled receivables were $5.7 million and $4.6 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 on a systematic basis that is consistent with the transfer of goods and services over the expected life of the customer relationships, which has been determined to be approximately 6 years. The expected life of our customer relationships is based on historical data and management estimates, including estimated renewal terms and the useful life of the associated underlying technology. 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 six months ended June 30, 2021.
The following table presents the activity impacting deferred commissions for the six months ended June 30, 2021 (in thousands):
|
|
|
|
|
|
Balance at December 31, 2020
|
$
|
18,746
|
|
|
|
|
|
Capitalized deferred commissions
|
7,301
|
|
Amortization of deferred commissions
|
(3,725)
|
|
Balance at June 30, 2021
|
$
|
22,322
|
|
Commissions capitalized in excess of amortization of deferred commissions for the three and six months ended June 30, 2021 were $2.0 million and $3.6 million, respectively.
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 six months ended June 30, 2021, we recognized $61.8 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 six months ended June 30, 2021 we recognized $3.2 million in revenue that was included in the acquired deferred revenue balance of our 2021 acquisitions as disclosed in Note 2, Acquisitions.
Remaining Performance Obligations
As of June 30, 2021, approximately $272.8 million of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 68% 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 June 30,
|
|
Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Revenues:
|
|
|
|
|
|
|
|
Subscription and support:
|
|
|
|
|
|
|
|
United States
|
$
|
50,862
|
|
|
$
|
50,619
|
|
|
$
|
103,817
|
|
|
$
|
96,590
|
|
United Kingdom
|
12,658
|
|
|
9,350
|
|
|
22,052
|
|
|
19,346
|
|
Canada
|
3,624
|
|
|
3,360
|
|
|
6,962
|
|
|
7,942
|
|
Other International
|
5,261
|
|
|
4,370
|
|
|
10,227
|
|
|
7,712
|
|
Total subscription and support revenue
|
72,405
|
|
|
67,699
|
|
|
143,058
|
|
|
131,590
|
|
Perpetual license:
|
|
|
|
|
|
|
|
United States
|
338
|
|
|
222
|
|
|
591
|
|
|
504
|
|
United Kingdom
|
—
|
|
|
—
|
|
|
11
|
|
|
16
|
|
Canada
|
10
|
|
|
36
|
|
|
52
|
|
|
57
|
|
Other International
|
67
|
|
|
233
|
|
|
113
|
|
|
275
|
|
Total perpetual license revenue
|
415
|
|
|
491
|
|
|
767
|
|
|
852
|
|
|
|
|
|
|
|
|
|
Professional services:
|
|
|
|
|
|
|
|
United States
|
2,150
|
|
|
2,197
|
|
|
4,194
|
|
|
4,907
|
|
United Kingdom
|
802
|
|
|
375
|
|
|
1,466
|
|
|
1,189
|
|
Canada
|
104
|
|
|
96
|
|
|
192
|
|
|
234
|
|
Other International
|
388
|
|
|
457
|
|
|
556
|
|
|
575
|
|
Total professional service revenue
|
3,444
|
|
|
3,125
|
|
|
6,408
|
|
|
6,905
|
|
Total revenue
|
$
|
76,264
|
|
|
$
|
71,315
|
|
|
$
|
150,233
|
|
|
$
|
139,347
|
|
11. 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 (“ESW”) (a non-management investor), which held more than 5% of the Company's capital stock as of June 30, 2021. As of July 9, 2021 ESWs ownership in Upland was reduced to 4.8%. The Company has an outstanding purchase commitment in 2021 for software development services pursuant to this agreement in the amount of $9.6 million. For years after 2021, 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 2021 total revenues increase by 10% as compared to 2020 total revenues, then the 2022 purchase commitment will increase by approximately $1.0 million from the 2021 purchase commitment amount to approximately $10.6 million. The Company purchased software development services pursuant to this agreement with DevFactory of $2.4 million and $1.8 million during the three months ended June 30, 2021 and June 30, 2020, respectively, and $4.8 million and $3.7 million during the six months ended June 30, 2021 and June 30, 2020, respectively. As of June 30, 2021 and December 31, 2020 amounts included in accounts payable and accrued liabilities owed to this company totaled $2.4 million and $0.0 million, respectively.
•The Company purchased services from Crossover, Inc. ("Crossover"), a company controlled by ESW Capital, LLC during the three months ended June 30, 2021 and June 30, 2020 of approximately $0.9 million and $1.4 million, respectively, and $1.9 million and $2.5 million during the six months ended June 30, 2021 and June 30, 2020, 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 2021. As of June 30, 2021 and December 31, 2020 amounts included in accounts payable and accrued liabilities owed to this company totaled $0.7 million and $0.6 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 approximately 26.18% interest in Visionael. Fees earned from this arrangement for the three months ended June 30, 2021 and June 30, 2020 were $0 and $15,000, respectively, and $0 and $30,000 during the six months ended June 30, 2021 and June 30, 2020, respectively. In connection with its arrangement with Visionael, the Company has provided advances to Visionael to help cover short term working capital needs. As of June 30, 2021 and December 31, 2020 advances to Visionael included in Prepaid and other on the Company’s condensed consolidated balance sheets totaled $0.0 million and $0.4 million, respectively, net of allowance for credit losses. During the six months ended June 30, 2021 the Company recognized an allowance for credit loss of $0.4 million against the remaining outstanding balance.