Upland Software(UPLD) - 2018 Q4 - Annual Report

Part I Business Upland Software provides cloud-based enterprise work management software, achieving 53% revenue growth in 2018 primarily through strategic acquisitions - Upland provides cloud-based enterprise work management software through seven main solution suites: Customer Experience Management (CXM), Sales Enablement, Professional Services Automation (PSA), Project and Financial Management, Enterprise Knowledge Management (KM), Secure Document Services, and Document Lifecycle Automation[18][19][20] - The company's growth strategy is centered on acquiring complementary technologies and businesses, having completed 20 acquisitions in the seven years ending December 31, 2018[31] - Upland utilizes a proprietary operating platform called UplandOne, which focuses on six key areas: High-Touch Customer Success, Quality-Focused R&D, Customer-Driven Innovation, Expert Professional Services, 24x7 Global Support, and an Enterprise Cloud Platform primarily using Amazon Web Services (AWS)[32][38] - The company serves over 9,000 customers across a diverse range of industries, with no single customer accounting for more than 3% of revenue in 2018[40] Revenue Growth and Composition (2017-2018) | Revenue Type | 2018 | 2017 | Growth | % of 2018 Total Revenue | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $149.9M | $98.0M | 53% | 100% | | Subscription and Support | $136.6M | $85.5M | 60% | 91% | Risk Factors The company faces significant risks from its acquisition-based growth strategy, customer retention, competition, cybersecurity, and debt covenants - A primary component of the growth strategy is acquisitions, which carries risks such as the inability to identify suitable candidates, consummate deals on acceptable terms, or successfully integrate acquired businesses[68] - Growth depends on retaining existing customers and securing renewals and upgrades, and failure to do so could harm operating results[64] - The company has a $400.0 million loan facility with Wells Fargo that contains operating and financial covenants restricting activities such as asset sales, mergers, and paying dividends, with a breach potentially resulting in default and acceleration of debt[84][88] - Operations are subject to cybersecurity risks, as applications involve storing and transmitting customers' proprietary and confidential information, and a security breach could lead to reputational damage, litigation, and other liabilities[106] - As of December 31, 2018, the company had federal net operating loss carryforwards of approximately $204.8 million, but their usability may be limited under Sections 382 and 383 of the Internal Revenue Code due to ownership changes[133] - As of December 31, 2018, directors, executive officers, and principal stockholders beneficially owned a majority of the outstanding common stock, giving them significant influence over corporate matters, including a change of control[155] Unresolved Staff Comments The company reports no unresolved staff comments - None[161] Properties The company's principal corporate offices are in Austin, Texas, with additional leased facilities domestically and internationally - The main corporate office is in Austin, Texas, with a lease through June 2025, and additional offices are leased domestically and internationally to support operations[162] Legal Proceedings The company is not currently a party to any material legal proceedings - Upland is not presently a party to any material legal proceedings[163] Mine Safety Disclosures This item is not applicable to the company - Not applicable[164] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Upland Software's common stock trades on NASDAQ, with no dividends paid or anticipated as earnings are reinvested for growth - The company's common stock trades on the NASDAQ Global Market under the ticker symbol "UPLD"[166] - Upland has never declared or paid dividends and does not expect to in the foreseeable future, with plans to retain all earnings for business operations and growth[168] Selected Financial Data Selected financial data from 2014-2018 shows significant acquisition-driven revenue growth and Adjusted EBITDA, despite consistent net losses Selected Consolidated Statements of Operations Data (2016-2018) | (in thousands) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total revenue | $149,885 | $97,952 | $74,767 | | Gross profit | $101,296 | $64,305 | $47,202 | | Loss from operations | $(5,594) | $(11,136) | $(8,524) | | Net loss | $(10,839) | $(18,725) | $(13,513) | | Net loss per common share | $(0.54) | $(1.02) | $(0.82) | Selected Consolidated Balance Sheet Data (as of Dec 31) | (in thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Cash and cash equivalents | $16,738 | $22,326 | | Goodwill | $225,322 | $154,607 | | Total assets | $483,198 | $281,259 | | Total liabilities | $395,891 | $189,844 | | Total stockholders' equity | $87,307 | $91,415 | Other Financial Data & Reconciliation of Net Loss to Adjusted EBITDA (2016-2018) | (in thousands, except %) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Annualized recurring revenue | $131,919 | $106,099 | $63,968 | | Annual net dollar retention rate | 98% | 93% | 95% | | Adjusted EBITDA | $53,105 | $30,316 | $12,616 | | Net loss | $(10,839) | $(18,725) | $(13,513) | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes 2018's 53% revenue growth to acquisitions, with positive trends in ARR and Adjusted EBITDA, maintaining liquidity via credit facility Overview and Acquisitions Upland's revenue grew significantly from 2012 to 2018, driven by a series of acquisitions, including four in 2018, expanding its product suites - In 2018, Upland completed four acquisitions: Interfax for $33.6 million plus a holdback, RO Innovation for $12.3 million plus a holdback and potential earn-out, Rant & Rave for $58.5 million plus a holdback, and Adestra for $56.0 million plus a holdback[200][202][203] - In 2017, Upland acquired Omtool, RightAnswers, Waterfall, and Qvidian, continuing its strategy of growth through acquisition[205][206][207] Results of Operations Total revenue increased 53% in 2018 to $149.9 million, primarily due to acquisitions, with a narrowed net loss aided by an income tax benefit Revenue Comparison (2018 vs. 2017) | (in thousands) | 2018 | 2017 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Subscription and support | $136,578 | $85,467 | $51,111 | 60% | | Perpetual license | $3,902 | $4,346 | $(444) | (10)% | | Professional services | $9,405 | $8,139 | $1,266 | 16% | | Total revenue | $149,885 | $97,952 | $51,933 | 53% | - The $51.9 million increase in total revenue in 2018 was entirely attributed to acquisitions closed after January 11, 2017[239] - Acquisition-related expenses increased to $18.7 million in 2018 from $15.1 million in 2017, primarily due to the increased size and number of acquisitions[252] - The company recorded a $9.8 million benefit from income taxes in 2018, compared to a $1.3 million provision in 2017, principally due to the release of a valuation allowance related to deferred tax liabilities from acquisitions[257] Liquidity and Capital Resources Liquidity is maintained through cash from operations and a $400 million credit facility, primarily funding acquisitions, despite a working capital deficit - As of Dec 31, 2018, the company had $16.7 million in cash and cash equivalents and a working capital deficit of $40.4 million, which included $57.6 million of deferred revenue[280][281] - The credit facility was expanded to $400.0 million in 2018, with $283.2 million outstanding at year-end, $60.0 million of committed capital, and a $55.0 million uncommitted accordion available[280][283] Summary of Cash Flows (in thousands) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $7,347 | $7,716 | $3,875 | | Net cash used in investing activities | $(161,686) | $(110,775) | $(13,229) | | Net cash provided by financing activities | $149,923 | $96,178 | $19,525 | Contractual Obligations as of Dec 31, 2018 (in thousands) | Contractual Obligations | Total | Less than 1 Year | 1-3 Years | >3-5 Years | More Than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Debt Obligations | $283,218 | $7,125 | $23,156 | $252,937 | $— | | Interest on Debt Obligations | $61,915 | $18,045 | $34,474 | $9,396 | $— | | Operating Lease Obligations | $6,483 | $2,719 | $1,989 | $1,073 | $702 | | Purchase Commitments | $8,298 | $6,273 | $2,025 | $— | $— | | Total | $360,527 | $34,767 | $61,652 | $263,406 | $702 | Critical Accounting Policies and the Use of Estimates Critical accounting policies involve significant judgment in revenue recognition (ASC 606 adoption), business combinations, goodwill impairment, and income taxes - Critical accounting policies requiring significant estimates include revenue recognition, stock-based compensation, income taxes, business combinations, and goodwill/intangibles[305] - The company adopted ASC 606 (Revenue from Contracts with Customers) on January 1, 2018, using the modified retrospective method, primarily impacting the timing of recognition for some perpetual licenses and requiring capitalization and amortization of sales commissions[394][417] - For business combinations, the company allocates the purchase price to tangible and intangible assets (like customer relationships and developed technology) and liabilities based on estimated fair values, with the excess recorded as goodwill[323] - Goodwill is evaluated for impairment annually at the single reporting unit level, with no impairment identified in 2018, 2017, or 2016[329] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations on variable-rate debt and foreign currency exchange rates from international operations - The primary market risks are interest rate, foreign exchange, and inflation[335] - Interest rate risk is tied to the variable-rate credit facility, where a 100 basis point change in interest rates would result in a potential annual interest expense change of $0.3 million based on the $283.2 million balance at year-end 2018[337] - Foreign currency exchange risk exists due to international operations, and a hypothetical 10% change in foreign currency exchange rates would have impacted 2018 revenue by $3.2 million[339] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2018, detailing assets, liabilities, revenue, net loss, and cash flows, with explanatory notes Consolidated Financial Statements The 2018 consolidated financial statements show increased assets and liabilities due to acquisitions, with total revenue of $149.9 million and a net loss of $10.8 million Consolidated Balance Sheet Highlights (as of Dec 31) | (in thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Total current assets | $67,288 | $51,686 | | Goodwill | $225,322 | $154,607 | | Intangible assets, net | $179,572 | $70,043 | | Total assets | $483,198 | $281,259 | | Total current liabilities | $107,649 | $75,139 | | Notes payable, less current | $273,713 | $108,843 | | Total liabilities | $395,891 | $189,844 | | Total stockholders' equity | $87,307 | $91,415 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | (in thousands) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total revenue | $149,885 | $97,952 | $74,767 | | Gross profit | $101,296 | $64,305 | $47,202 | | Loss from operations | $(5,594) | $(11,136) | $(8,524) | | Net loss | $(10,839) | $(18,725) | $(13,513) | Notes to the Consolidated Financial Statements Notes detail accounting policies, including ASC 606 adoption, purchase price allocations for 2018 acquisitions, debt facility terms, and stock-based compensation - The company adopted ASC 606 on January 1, 2018, using the modified retrospective method, resulting in a cumulative adjustment of $6.3 million to the opening balance of accumulated deficit, and increasing 2018 earnings per share by $0.13[417][538][539] - The 2018 acquisitions of Adestra, Rant & Rave, Interfax, and RO Innovation resulted in the recognition of $70.1 million in goodwill and significant intangible assets, primarily customer relationships and developed technology[443][454] - As of Dec 31, 2018, the company had $283.2 million outstanding on its credit facility, which matures in August 2022 and contains various financial and operating covenants[468][475] - The company recognized $14.1 million in stock-based compensation expense in 2018, up from $10.0 million in 2017[516] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting or financial disclosure matters - None[550] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2018[551] - Management concluded that internal control over financial reporting was effective as of December 31, 2018[555] - The assessment of internal controls excluded the 2018 acquisitions of Interfax, Rant & Rave, and Adestra, which combined represented 38.6% of total assets and 12.1% of total revenue for the year[554] Other Information A correction to 2018 financial results reclassified $890,000 in stamp taxes, increasing the reported GAAP net loss to $10.8 million - A correction was made to the initially reported 2018 financial results, reclassifying $890,000 in stamp taxes from purchase consideration to acquisition-related expense[558] - The reclassification increased the full-year 2018 GAAP net loss from $9.9 million to $10.8 million, and the net loss per share from $0.50 to $0.54[559] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2019 proxy statement - Required information is incorporated by reference from the 2019 Proxy Statement[561] Executive Compensation Executive compensation details are incorporated by reference, with amended employment agreements increasing target bonuses for top executives in March 2019 - On March 13, 2019, employment agreements were amended to increase target bonuses for top executives[562] Executive Target Bonus Amendments (as % of Base Salary) | Executive | Title | Old Target Bonus | New Target Bonus | | :--- | :--- | :--- | :--- | | John T. McDonald | CEO | 100% | 200% | | Timothy W. Mattox | COO | 100% | 150% | | Michael D. Hill | CFO | 100% | 125% | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the 2019 proxy statement - Required information is incorporated by reference from the 2019 Proxy Statement[566] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2019 proxy statement - Required information is incorporated by reference from the 2019 Proxy Statement[566] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2019 proxy statement - Required information is incorporated by reference from the 2019 Proxy Statement[567] Part IV Exhibits and Financial Statement Schedules This item references financial statements in Item 8 and the Exhibit Index for a full list of filed exhibits - This item references the financial statements in Item 8 and the Exhibit Index for a full list of filed exhibits[567][568] Form 10-K Summary This item is not applicable - Not applicable[569]