Upland Software(UPLD) - 2020 Q2 - Quarterly Report

Part I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Unaudited financials reveal decreased assets, increased liabilities, and a larger net loss despite revenue growth Condensed Consolidated Balance Sheets Total assets decreased to $859.4 million, liabilities rose to $707.1 million, and equity declined to $152.2 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $87,910 | $175,024 | | Intangible assets, net | $292,316 | $282,727 | | Goodwill | $379,486 | $346,134 | | Total assets | $859,383 | $896,828 | | Liabilities & Equity | | | | Deferred revenue (current) | $81,032 | $76,558 | | Notes payable, less current maturities | $520,155 | $521,881 | | Total liabilities | $707,146 | $683,967 | | Total stockholders' equity | $152,237 | $212,861 | Condensed Consolidated Statements of Operations Revenues increased to $139.3 million, but net loss widened to $34.2 million due to higher operating expenses Statement of Operations Highlights (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $71,315 | $53,013 | $139,347 | $101,506 | | Gross profit | $47,643 | $36,430 | $93,474 | $70,135 | | Loss from operations | $(6,944) | $(5,532) | $(22,267) | $(8,097) | | Net loss | $(14,159) | $(5,369) | $(34,240) | $(13,199) | | Net loss per share | $(0.57) | $(0.24) | $(1.37) | $(0.61) | Condensed Consolidated Statements of Comprehensive Loss Comprehensive loss rose to $78.7 million for H1 2020, primarily due to net loss and unrealized interest rate swap losses Comprehensive Loss Components - Six Months Ended June 30 (in thousands) | Component | 2020 | 2019 | | :--- | :--- | :--- | | Net loss | $(34,240) | $(13,199) | | Foreign currency translation adjustment | $(2,240) | $612 | | Unrealized loss on interest rate swaps | $(35,056) | — | | Comprehensive loss | $(78,717) | $(12,587) | Condensed Consolidated Statements of Cash Flows Cash flows show $4.5 million used in operations, $68.5 million in investing, leading to an $87.1 million net cash decrease Cash Flow Summary - Six Months Ended June 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $(4,504) | $5,396 | | Net cash used in investing activities | $(68,548) | $(83,188) | | Net cash provided by (used in) financing activities | $(14,604) | $168,617 | | Change in cash and cash equivalents | $(87,114) | $91,623 | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, acquisitions, debt structure, and revenue recognition, highlighting the Localytics acquisition and debt - On February 6, 2020, the company acquired Localytics, a provider of mobile app personalization and analytics solutions, for total consideration of $69.0 million. This acquisition contributed approximately $7.1 million in revenue through June 30, 2020[45][46] - The company entered into interest rate swaps to effectively fix the interest rate at 5.4% on its $540 million in term loans. As of June 30, 2020, the fair value of these swaps was a liability of $32.6 million[56][76][77] - As of June 30, 2020, the company had approximately $242.8 million of revenue expected to be recognized from remaining performance obligations, with about 70% expected to be recognized over the next 12 months[119] - The company has a technology services agreement with DevFactory FZ LLC, an affiliate of a major shareholder, with a purchase commitment of $7.3 million for 2020. Payments under this agreement totaled $3.7 million for the first six months of 2020[123] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes 37% revenue growth to acquisitions, with net loss increasing to $34.2 million due to higher operating costs - The company's growth strategy is centered on acquiring complementary technologies and businesses, having completed twenty-six acquisitions from February 2012 through June 30, 2020[134] - Due to the COVID-19 pandemic, the company has seen an impact on new bookings and churn and anticipates a pause in its acquisition activity until at least Q4 2020. However, the pandemic did not have a material adverse impact on financial results for H1 2020 as approximately 95% of revenue is recurring[137] Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Metric | H1 2020 | H1 2019 | | :--- | :--- | :--- | | Net loss | $(34,240) | $(13,199) | | Depreciation and amortization | $23,395 | $15,152 | | Stock-based compensation | $20,300 | $11,529 | | Acquisition-related expense | $20,939 | $16,987 | | Adjusted EBITDA | $48,340 | $36,853 | Cash Flow Summary - Six Months Ended June 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $(4,504) | $5,396 | | Net cash used in investing activities | $(68,548) | $(83,188) | | Net cash provided by (used in) financing activities | $(14,604) | $168,617 | | Cash and cash equivalents, end of period | $87,910 | $108,361 | Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate and foreign currency risks, with interest rate swaps mitigating term loan risk - Interest rate risk on the company's term loans is mitigated through interest rate hedge instruments, effectively fixing the interest rate at 5.4% for the 7-year term[217] - The company is exposed to foreign exchange rate fluctuations. A hypothetical 10% change in foreign currency exchange rates would have changed revenue by $3.2 million for the six months ended June 30, 2020[218] Controls and Procedures Disclosure controls were ineffective due to a material weakness in income tax accounting, with remediation underway and a new ERP system implemented - Management concluded that disclosure controls and procedures were not effective as of June 30, 2020, due to a material weakness in internal control over financial reporting related to annual income tax accounting[223] - A remediation plan is underway to address the material weakness, including adding resources and streamlining processes. The company expects the remediation to be complete before year-end 2020[225] - During Q2 2020, the company implemented a new global enterprise resource planning (ERP) system to enhance internal controls and support business scaling[226] Part II. OTHER INFORMATION Risk Factors No material changes to risk factors except for a new one concerning the COVID-19 pandemic's potential adverse impact on business operations - A new risk factor has been added regarding the COVID-19 pandemic, which could adversely affect the company's business, financial condition, and results of operations[231] - The pandemic's impact is uncertain, but potential negative effects include reduced or delayed technology spending by customers and attempts to renegotiate contracts[232] Exhibits This section references the Exhibit Index, listing documents like CEO and CFO certifications and Inline XBRL financial data - The report includes certifications from the Chief Executive Officer and Chief Financial Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[236]