Upland Software(UPLD) - 2019 Q4 - Annual Report

PART I Item 1. Business Upland Software provides cloud-based enterprise work management software and grows primarily through strategic acquisitions - Upland provides cloud-based enterprise work management software through four main cloud offerings: Customer Experience Management Cloud (CXM), Enterprise Sales and Marketing Cloud (ESM), Project and IT Management Cloud (PITM), and Document Workflow Cloud (DW)[19] - Total revenue grew 49% from $149.9 million in 2018 to $222.6 million in 2019, with subscription and support revenue also growing by 49%[20] - The company has completed 25 acquisitions in the 8 years ending December 31, 2019, as a primary component of its growth strategy[21] - Key competitive strengths include a diversified customer base of over 9,000 customers, a recurring revenue model, and proven M&A capability[25][26] - Key growth strategies include acquiring complementary software businesses, increasing sales to existing customers, and adding new customers[27] - As of December 31, 2019, the company had 832 employees, with the majority located in the United States, Canada, and the United Kingdom[42] Revenue by Type | Revenue Type | 2019 (%) | 2018 (%) | 2017 (%) | | :--- | :--- | :--- | :--- | | Subscription and support | 92% | 91% | 87% | | Perpetual license | 3% | 3% | 4% | | Professional services | 5% | 6% | 9% | Item 1A. Risk Factors The company faces risks related to customer retention, acquisition integration, competition, international operations, cybersecurity, and internal controls - Growth depends on retaining existing customers, securing additional subscriptions, and cross-selling, with non-renewals potentially harming future operating results[45] - Failure to effectively manage rapid growth from frequent acquisitions could disrupt operations, increase costs, and negatively impact customer satisfaction[47][49] - The company's $410.0 million loan facility contains operating and financial covenants that may restrict business and financing activities[62][63] - The market for enterprise work management software is intensely competitive, with competition from larger companies and point solution providers[64][65] - International expansion efforts are subject to risks such as uncertain political climates, compliance with foreign laws, and data privacy regulations like GDPR[69][70][119][120][121] - Actual or perceived security vulnerabilities or failures to comply with privacy obligations like CCPA could lead to reputational damage and loss of business[80][110][112] - The company identified a material weakness in the operating effectiveness of its income tax provision review process as of December 31, 2019[504][511] Item 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[140] Item 2. Properties The company's principal corporate offices are in Austin, Texas, with additional leased facilities in domestic and international locations - The principal corporate offices are in Austin, Texas, with a lease expiring in June 2025[141] - Additional leased office facilities are located domestically and internationally in Australia, Canada, Ireland, Israel, and the United Kingdom[141] Item 3. Legal Proceedings The company is not currently a party to any material legal proceedings - The company is not currently involved in any legal proceedings that would have a material adverse effect on its business or financial condition[142] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the registrant[143] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under "UPLD", and it does not anticipate paying dividends in the foreseeable future - Common stock is traded on the NASDAQ Global Market under the symbol "UPLD"[145] - As of February 21, 2020, there were 36 stockholders of record and the closing price was $42.42[146] - The company has never declared or paid dividends on its common stock and does not expect to, prioritizing earnings for operations and growth[147] Item 6. Selected Financial Data This section presents five years of selected historical financial data, highlighting significant revenue growth and key non-GAAP metrics Consolidated Statements of Operations Data (in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Subscription and support | $203,866 | $136,578 | $85,467 | $65,552 | $57,193 | | Perpetual license | $5,738 | $3,902 | $4,346 | $1,650 | $2,805 | | Professional services | $13,033 | $9,405 | $8,139 | $7,565 | $9,913 | | Total revenue | $222,637 | $149,885 | $97,952 | $74,767 | $69,911 | | Total cost of revenue | $69,117 | $48,589 | $33,647 | $27,565 | $26,671 | | Gross profit | $153,520 | $101,296 | $64,305 | $47,202 | $43,240 | | Total operating expenses | $177,826 | $106,890 | $75,441 | $55,726 | $53,463 | | Loss from operations | $(24,306) | $(5,594) | $(11,136) | $(8,524) | $(10,223) | | Total other expense | $(27,870) | $(15,054) | $(6,293) | $(3,459) | $(2,402) | | Net loss | $(45,371) | $(10,839) | $(18,725) | $(13,513) | $(13,664) | | Net loss per common share | $(1.96) | $(0.54) | $(1.02) | $(0.82) | $(0.91) | Consolidated Balance Sheet Data (in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $175,024 | $16,738 | $22,326 | $28,758 | $18,473 | | Total assets | $896,828 | $483,198 | $281,259 | $150,588 | $122,414 | | Deferred revenue | $77,054 | $58,204 | $45,377 | $23,799 | $19,939 | | Total liabilities | $683,967 | $395,891 | $189,844 | $91,575 | $62,144 | | Total stockholders' equity (deficit) | $212,861 | $87,307 | $91,415 | $59,013 | $60,270 | Other Financial Data (in thousands, except %) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Annualized recurring revenue value at year-end | $209,700 | $131,919 | $106,099 | $63,968 | $58,918 | | Annual net dollar retention rate | 93 % | 97 % | 98 % | 95 % | 90 % | | Adjusted EBITDA | $82,520 | $53,105 | $30,316 | $12,616 | $4,143 | Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net loss | $(45,371) | $(10,839) | $(18,725) | $(13,513) | $(13,664) | | Depreciation and amortization expense | 34,621 | 21,347 | 11,914 | 9,794 | 8,451 | | Interest expense, net | 22,313 | 13,273 | 6,582 | 2,781 | 1,858 | | Loss on debt extinguishment | 2,317 | — | — | — | — | | Other expense (income), net | 3,240 | 1,781 | (289) | 678 | 544 | | Provision for income taxes | (6,805) | (9,809) | 1,296 | 1,530 | 1,039 | | Stock-based compensation expense | 25,754 | 14,130 | 9,977 | 4,333 | 2,741 | | Acquisition-related expense | 39,657 | 18,728 | 15,092 | 5,583 | 2,455 | | Non-recurring litigation costs | — | — | — | 25 | 406 | | Purchase accounting deferred revenue discount | 6,794 | 4,494 | 4,469 | 1,405 | 313 | | Adjusted EBITDA | $82,520 | $53,105 | $30,316 | $12,616 | $4,143 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial results, emphasizing the acquisition-driven growth strategy, revenue composition, operating costs, and liquidity - Upland's revenue grew 878% from $22.8 million in 2012 to $222.6 million in 2019, primarily driven by acquisitions[173] - Subscription and support revenue accounted for 92% of total revenue in 2019, indicating a strong recurring revenue model[174] - The company completed five acquisitions in 2019 and four in 2018, contributing significantly to revenue growth[177][178][179] - Total revenue increased by $72.7 million (49%) from 2018 to 2019, with $65.6 million attributed to acquisitions closed after January 1, 2018[207] - Net loss increased significantly from $(10.8) million in 2018 to $(45.4) million in 2019, primarily due to higher acquisition-related and interest expenses[204] - Acquisition-related expenses more than doubled from $18.7 million in 2018 to $39.7 million in 2019[221][222] - As of December 31, 2019, the company had $175.0 million in cash and $539.0 million in outstanding borrowings under its credit facility[231][233][234] Key Financial Metrics (in thousands, except %) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Annualized recurring revenue value at year-end | $209,700 | $131,919 | $106,099 | | Annual net dollar retention rate | 97 % | 98 % | 93 % | | Adjusted EBITDA | $82,520 | $53,105 | $30,316 | Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to interest rate, foreign exchange, and inflation risks, with hedging instruments used for its term loan - Interest rate risk on the $540 million term loan is hedged, fixing the rate at 5.4% for 7 years, while the $60 million revolving facility has a floating rate[282] - A hypothetical 10% change in foreign currency exchange rates would have resulted in a $5.9 million change in revenue for 2019[283] - The company has not engaged in foreign currency hedging strategies to date[283] - Inflation has not had a material effect on the business in the last three fiscal years[285] Item 8. Financial Statements and Supplementary Data This section presents audited consolidated financial statements, which received an unqualified opinion despite an adverse opinion on internal controls - The Independent Registered Public Accounting Firm issued an adverse opinion on the company's internal control over financial reporting as of December 31, 2019, due to a material weakness[292][510][511] - Despite the material weakness, the auditor expressed an unqualified opinion on the consolidated financial statements for the period ended December 31, 2019[291][513] Consolidated Balance Sheets (in thousands) | Asset/Liability | December 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $175,024 | $16,738 | | Total current assets | $238,880 | $67,288 | | Intangible assets, net | $282,727 | $179,572 | | Goodwill | $346,134 | $225,322 | | Total assets | $896,828 | $483,198 | | Total current liabilities | $129,367 | $107,649 | | Notes payable, less current maturities | $521,881 | $273,713 | | Total liabilities | $683,967 | $395,891 | | Total stockholders' equity | $212,861 | $87,307 | Consolidated Statements of Operations (in thousands) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total revenue | $222,637 | $149,885 | $97,952 | | Gross profit | $153,520 | $101,296 | $64,305 | | Total operating expenses | $177,826 | $106,890 | $75,441 | | Loss from operations | $(24,306) | $(5,594) | $(11,136) | | Net loss | $(45,371) | $(10,839) | $(18,725) | | Net loss per common share | $(1.96) | $(0.54) | $(1.02) | Consolidated Statements of Cash Flows (in thousands) | Activity | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $12,076 | $7,347 | $7,716 | | Net cash used in investing activities | $(217,761) | $(161,686) | $(110,775) | | Net cash provided by financing activities | $363,768 | $149,923 | $96,178 | | Change in cash and cash equivalents | $158,286 | $(5,588) | $(6,432) | | Cash and cash equivalents, end of period | $175,024 | $16,738 | $22,326 | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants on accounting and financial disclosure matters - There were no changes in or disagreements with accountants on accounting and financial disclosure[498] Item 9A. Controls and Procedures Management concluded disclosure controls were not effective due to a material weakness in the income tax provision review process - Management concluded that disclosure controls and procedures were not effective as of December 31, 2019, due to a material weakness in the income tax provision review process[499][504] - The assessment of internal control over financial reporting excluded recently acquired InGenius and Altify, which constituted 16.4% of total assets[502] - Remediation plans are underway to add resources and modify internal processes to improve the income tax review process[506] Item 9B. Other Information The company reported no other information required by this item - No other information is required to be reported[507] PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, officers, and governance is incorporated by reference from the 2020 Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 Annual Meeting of Stockholders Proxy Statement[521] - The company has adopted a "Code of Business Conduct and Ethics" applicable to its directors, officers, and employees, available on its website[520] Item 11. Executive Compensation Executive compensation details are incorporated by reference from the 2020 Proxy Statement - Executive compensation information is incorporated by reference from the 2020 Annual Meeting of Stockholders Proxy Statement[521] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2020 Proxy Statement - Security ownership information for certain beneficial owners and management is incorporated by reference from the 2020 Annual Meeting of Stockholders Proxy Statement[522] Item 13. Certain Relationships and Related Transactions and Director Independence Information on related transactions and director independence is incorporated by reference from the 2020 Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2020 Annual Meeting of Stockholders Proxy Statement[522] Item 14. Principal Accountant Fees and Services Principal accountant fees and services information is incorporated by reference from the 2020 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the 2020 Annual Meeting of Stockholders Proxy Statement[523] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements and provides an index of exhibits filed with the report - Financial statements are listed on the "Index to Consolidated Financial Statements" in Item 8[523] - An Exhibit Index is provided, detailing various agreements, certificates, and other documents, many of which are incorporated by reference[523][528][529][531][532] - Schedule II-Valuation and Qualifying Accounts has been omitted because the required information is included in the notes to the consolidated financial statements[525] Item 16. Form 10-K Summary This item is not applicable to the report - Form 10-K Summary is not applicable[524] SIGNATURES