Upland Software(UPLD) - 2024 Q2 - Quarterly Report

Part I. Financial Information Financial Statements The company's financial statements for the period ended June 30, 2024, show a decrease in total assets, primarily due to a significant goodwill impairment, with total revenues declining year-over-year, leading to a continued net loss that narrowed compared to the same period in 2023, while cash flow from operations decreased and financing activities included significant stock repurchases Condensed Consolidated Balance Sheets As of June 30, 2024, total assets decreased to $739.9 million from $870.0 million at year-end 2023, largely driven by an $89.6 million reduction in goodwill, total liabilities saw a slight decrease to $613.0 million, and total stockholders' equity significantly declined from $126.3 million to $6.5 million, primarily due to an increased accumulated deficit from net losses and stock repurchases Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2024 | December 31, 2023 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $739,855 | $870,024 | ($130,169) | | Cash and cash equivalents | $232,375 | $236,559 | ($4,184) | | Goodwill | $264,164 | $353,778 | ($89,614) | | Intangible assets, net | $152,896 | $182,349 | ($29,453) | | Total Liabilities | $612,964 | $626,092 | ($13,128) | | Notes payable (net) | $475,062 | $476,674 | ($1,612) | | Deferred revenue | $98,212 | $106,623 | ($8,411) | | Total Stockholders' Equity | $6,488 | $126,294 | ($119,806) | Condensed Consolidated Statements of Operations For the three months ended June 30, 2024, total revenue decreased by 7% year-over-year to $69.3 million, with the company reporting a net loss of $11.4 million, an improvement from the $15.1 million loss in the prior-year period, while for the six-month period, revenue decreased 8% to $140.1 million, and the net loss was $107.6 million, which included an $87.2 million goodwill impairment charge Statement of Operations Summary (in thousands, except per share data) | Metric | Q2 2024 | Q2 2023 | YoY Change | Six Months 2024 | Six Months 2023 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $69,339 | $74,497 | -7% | $140,075 | $151,553 | -8% | | Subscription & support | $65,504 | $70,494 | -7% | $132,582 | $143,408 | -8% | | Gross Profit | $48,865 | $50,319 | -3% | $98,552 | $101,839 | -3% | | Loss from Operations | ($5,371) | ($9,387) | 43% | ($97,012) | ($146,818) | 34% | | Impairment of goodwill | $0 | $0 | N/A | $87,227 | $128,755 | -32% | | Net Loss | ($11,439) | ($15,147) | 24% | ($107,569) | ($155,192) | 31% | | Net loss per share | ($0.47) | ($0.51) | 8% | ($3.92) | ($4.88) | 20% | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2024, net cash provided by operating activities was $10.6 million, a significant decrease from $22.8 million in the prior-year period, net cash used in financing activities increased to $14.3 million from $8.8 million, primarily due to $11.0 million in stock repurchases, and the company's cash and cash equivalents decreased by $4.2 million during the period, ending at $232.4 million Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2024 | 2023 | Change | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $10,591 | $22,847 | ($12,256) | | Net cash used in investing activities | ($457) | ($504) | $47 | | Net cash used in financing activities | ($14,298) | ($8,814) | ($5,484) | | Change in cash and cash equivalents | ($4,184) | $13,903 | ($18,087) | - The decrease in operating cash flow was mainly driven by changes in net loss and non-cash adjustments[12][123] - The increase in financing cash outflow was due to $11.0 million in stock repurchases in 2024, compared to none in the same period of 2023[12][125] Notes to Condensed Consolidated Financial Statements The notes detail the company's accounting policies and provide further information on financial statement items, including a goodwill impairment of $87.2 million in Q1 2024 due to a decline in stock price, details of the company's $479.4 million in long-term debt, terms of the Series A Convertible Preferred Stock, completion of a $25 million share repurchase program, and adoption of a tax benefit preservation plan, with revenue from remaining performance obligations standing at $252.7 million - The company performed a quantitative impairment evaluation during Q1 2024 due to a decline in its stock price, resulting in a goodwill impairment of $87.2 million[25] - As of June 30, 2024, the company had $475.1 million in senior secured loans (net of discount), with a $60 million revolving credit facility that was undrawn and set to mature in August 2024[32] - The company's share repurchase plan, authorized for up to $25 million, was completed in May 2024, with 3.2 million shares repurchased for $11.0 million during the first six months of 2024[50] - As of June 30, 2024, the company expects to recognize approximately $252.7 million of revenue from remaining performance obligations, with about 69% of this expected in the next 12 months[69] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 7% year-over-year revenue decline for Q2 2024 primarily to the planned reduction in revenue from 'Sunset Assets', reporting a positive Core Organic Growth Rate of 0.3%, with Adjusted EBITDA for Q2 2024 at $13.6 million, down from $16.6 million in Q2 2023, while operating expenses saw mixed changes, and the company maintains sufficient liquidity with $232.4 million in cash and believes it can fund operations for at least the next twelve months Key Metrics and Non-GAAP Financial Measures The company uses Core Organic Growth Rate and Adjusted EBITDA as key non-GAAP metrics, with the Core Organic Growth Rate for Q2 2024 at a positive 0.3%, and Adjusted EBITDA for Q2 2024 at $13.6 million, a decrease from $16.6 million in the prior-year quarter, while for the six-month period, Adjusted EBITDA was $26.7 million, down from $34.2 million in 2023 - For the three-month period ended June 30, 2024, the company's Core Organic Growth Rate was a positive 0.3%[79] Adjusted EBITDA Reconciliation (in thousands) | Period | Q2 2024 | Q2 2023 | Six Months 2024 | Six Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Net loss | ($11,439) | ($15,147) | ($107,569) | ($155,192) | | Adjusted EBITDA | $13,635 | $16,627 | $26,739 | $34,228 | Results of Operations Total revenue for Q2 2024 decreased 7% YoY to $69.3 million, primarily due to a $4.8 million decline in revenue from 'Sunset Assets', cost of revenue decreased 15% YoY, leading to a gross margin improvement to 70% from 68%, sales and marketing expenses increased by 7% due to growth investments, while G&A expenses decreased by 11%, and a significant goodwill impairment of $87.2 million was recorded in the first six months of 2024 - The Q2 2024 revenue decrease of $5.2 million (7%) was primarily driven by an expected $4.8 million decline from Sunset Assets[90] - Cost of subscription and support revenue for Q2 2024 decreased by $2.9 million (13%) YoY, mainly due to lower infrastructure costs, reduced telecom carrier costs, and decreased amortization related to Sunset Assets[94] - Sales and marketing expense for Q2 2024 increased by $1.0 million (7%) YoY, attributed to higher personnel costs and marketing expenses associated with investments in the company's growth plan[98] - A goodwill impairment of $87.2 million was recorded in Q1 2024 due to declines in the company's stock price[111] Liquidity and Capital Resources As of June 30, 2024, the company had $232.4 million in cash and cash equivalents and a working capital surplus of $167.6 million, with the undrawn $60.0 million revolver maturing in August 2024, and management believes existing cash and operating cash flows are sufficient to fund operations for at least the next twelve months, while net cash from operations decreased to $10.6 million for the first half of 2024 from $22.8 million in the prior year period Liquidity Position (in millions) | Metric | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $232.4 | $236.6 | | Working capital | $167.6 | $169.6 | | Term Loans outstanding | $479.4 | $482.1 | | Revolver availability | $60.0 | $60.0 | - The $4.2 million decrease in cash from year-end 2023 was primarily due to $11.0 million used for stock repurchases and $2.7 million in debt repayment, offset by $10.6 million in cash from operations[119] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate, foreign exchange, and inflation risks, with interest rate risk on its variable-rate debt partially mitigated by interest rate swaps, which fix the rate on $257.2 million of its term loans at 5.4%, and a hypothetical 100 basis point change in rates on the remaining variable debt could impact interest expense by $1.1 million for the six-month period, while the company also has foreign currency exposure, with a hypothetical 10% change in exchange rates potentially impacting revenue by $3.1 million for the same period - The company uses floating-to-fixed interest rate swaps to manage interest rate risk, with $257.2 million of Term Loans having an effective fixed rate of 5.4% and the remaining principal having a floating rate of 9.2% as of June 30, 2024[132] - A hypothetical 100 basis point change in interest rates could have resulted in a $1.1 million increase in total interest expense for the six months ended June 30, 2024[132] - The company is exposed to foreign currency risk, where a hypothetical 10% change in foreign currency exchange rates could have changed revenue by $3.1 million for the six months ended June 30, 2024[133] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2024, with no material changes to the company's internal control over financial reporting during the quarter - Based on an evaluation as of June 30, 2024, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[135] - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, internal controls[136] Part II. Other Information Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2023 - The company reports no material changes during 2024 to the risk factors included in its 2023 Annual Report on Form 10-K[139] Unregistered Sales of Equity Securities and Use of Proceeds The company's $25 million stock repurchase plan was completed during the quarter, with 966,051 shares repurchased at an average price of $2.84 per share in the three months ended June 30, 2024, and as of June 30, 2024, no further amounts are available for repurchase under this plan Issuer Purchases of Equity Securities (Q2 2024) | Period | Total Shares Purchased | Average Price Paid per Share* | | :--- | :--- | :--- | | April 2024 | 438,772 | $2.51 | | May 2024 | 527,279 | $3.11 | | June 2024 | 0 | N/A | | Total | 966,051 | $2.84 | - As of June 30, 2024, the Share Repurchase Plan was complete, and no further amounts are available for share repurchases[140] Other Information During the three months ended June 30, 2024, none of the company's officers or directors adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement - No officers or directors adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the second quarter of 2024[142] Exhibits The report includes several exhibits, most notably the company's 2024 Tax Benefit Preservation Plan, the 2024 Omnibus Incentive Plan, and certifications from the CEO and CFO as required by the Sarbanes-Oxley Act - Key exhibits filed with the report include: - 4.1: Tax Benefit Preservation Plan, dated June 5, 2024 - 10.1: Upland Software, Inc. 2024 Omnibus Incentive Plan - 31.1 & 31.2: CEO and CFO Certifications pursuant to Section 302 of the Sarbanes-Oxley Act - 32.1 & 32.2: CEO and CFO Certifications pursuant to Section 906 of the Sarbanes-Oxley Act[143]