Upland Software(UPLD) - 2021 Q1 - Quarterly Report

Part I. FINANCIAL INFORMATION This section details Upland Software's unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements This section presents Upland Software's unaudited condensed consolidated financial statements and detailed notes Condensed Consolidated Balance Sheets This table provides a snapshot of Upland Software's financial position at specific dates Condensed Consolidated Balance Sheets (in thousands) | Metric | March 31, 2021 | December 31, 2020 | | :----------------------------------- | :------------- | :---------------- | | Assets | | | | Cash and cash equivalents | $186,672 | $250,029 | | Total current assets | $250,823 | $317,540 | | Total assets | $1,035,117 | $1,011,220 | | Liabilities | | | | Total current liabilities | $147,245 | $121,420 | | Notes payable, less current maturities | $517,636 | $518,437 | | Interest rate swap liabilities | $14,581 | $30,032 | | Total liabilities | $717,457 | $704,605 | | Stockholders' Equity | | | | Total stockholders' equity | $317,660 | $306,615 | | Total liabilities and stockholders' equity | $1,035,117 | $1,011,220 | Condensed Consolidated Statements of Operations This table details Upland Software's financial performance over the reporting periods Condensed Consolidated Statements of Operations (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | | :----------------------------------- | :----- | :----- | | Total revenue | $73,969 | $68,032 | | Gross profit | $49,542 | $45,831 | | Loss from operations | $(17,528) | $(15,323) | | Net loss | $(20,684) | $(20,081) | | Net loss per common share, basic and diluted | $(0.69) | $(0.81) | | Weighted-average common shares outstanding | 29,970,050 | 24,906,932 | - Total revenue increased by 9% year-over-year, from $68.0 million in Q1 2020 to $74.0 million in Q1 2021. Subscription and support revenue, the largest component, grew 11% from $63.9 million to $70.7 million[11] - Net loss slightly increased from $(20.1) million in Q1 2020 to $(20.7) million in Q1 2021, while net loss per common share improved from $(0.81) to $(0.69) due to an increase in weighted-average common shares outstanding[11] Condensed Consolidated Statements of Comprehensive Loss This table presents Upland Software's comprehensive loss, including other comprehensive income items Condensed Consolidated Statements of Comprehensive Loss (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | | :----------------------------------- | :----- | :----- | | Net loss | $(20,684) | $(20,081) | | Foreign currency translation adjustment | $(2,387) | $(3,459) | | Unrealized translation gain (loss) on foreign currency denominated intercompany loans | $840 | $(7,313) | | Unrealized gain (loss) on interest rate swaps | $15,451 | $(31,401) | | Comprehensive loss | $(6,780) | $(62,254) | - Comprehensive loss significantly improved from $(62.3) million in Q1 2020 to $(6.8) million in Q1 2021, primarily driven by a substantial unrealized gain on interest rate swaps in 2021 compared to a large loss in 2020[14] Condensed Consolidated Statements of Stockholders' Equity This table outlines changes in Upland Software's stockholders' equity over the period Changes in Stockholders' Equity (Three Months Ended March 31, 2021, in thousands) | Metric | Balance at Dec 31, 2020 | Stock-based Compensation | Unrealized Gain on Interest Rate Swaps | Net Loss | Balance at Mar 31, 2021 | | :----------------------------------- | :---------------------- | :----------------------- | :----------------------------------- | :--------- | :---------------------- | | Additional Paid-In Capital | $515,219 | $17,824 | — | — | $533,044 | | Accumulated Other Comprehensive Loss | $(26,234) | — | $15,451 | — | $(12,330) | | Accumulated Deficit | $(182,373) | — | — | $(20,684) | $(203,057) | | Total Stockholders' Equity | $306,615 | $17,824 | $15,451 | $(20,684) | $317,660 | - Total stockholders' equity increased from $306.6 million at December 31, 2020, to $317.7 million at March 31, 2021, primarily due to stock-based compensation and unrealized gains on interest rate swaps, partially offset by the net loss[18] Condensed Consolidated Statements of Cash Flows This table summarizes Upland Software's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Three Months Ended March 31, in thousands) | Activity | 2021 | 2020 | | :----------------------------------- | :----- | :----- | | Net cash provided by (used in) operating activities | $12,503 | $(5,309) | | Net cash used in investing activities | $(72,900) | $(68,148) | | Net cash used in financing activities | $(2,095) | $(3,204) | | Effect of exchange rate fluctuations on cash | $(865) | $325 | | Change in cash and cash equivalents | $(63,357) | $(76,336) | | Cash and cash equivalents, end of period | $186,672 | $98,688 | - Net cash provided by operating activities significantly improved to $12.5 million in Q1 2021 from a use of $5.3 million in Q1 2020. Cash used in investing activities increased to $72.9 million, primarily due to acquisitions[20] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations for the condensed consolidated financial statements 1. Summary of Significant Accounting Policies This section outlines the key accounting principles and estimates used in financial reporting - The financial statements are prepared in conformity with GAAP and include Upland Software, Inc. and its wholly-owned subsidiaries. Management's estimates are based on historical experience and assumptions, with no specific COVID-19 related updates to estimates as of May 5, 2021[22][25][26] - The Company uses floating-to-fixed interest rate swap agreements to hedge exposure to interest rate risk on its $540 million term loans, effectively fixing the rate at 5.4%. These derivatives are recognized at fair value as liabilities[29] - The fair value of interest rate swaps was $14.6 million as of March 31, 2021, down from $30.0 million at December 31, 2020[29] 2. Acquisitions This section details the company's business acquisitions and their financial impact - In Q1 2021, Upland acquired BlueVenn (cloud-based customer data platform) and Second Street (audience engagement platform), contributing approximately $1.0 million and $2.0 million in revenue, respectively, since their acquisition dates through March 31, 2021[39] Acquisition Consideration (in thousands) | Acquisition | Cash | Holdback | Contingent Consideration | Working Capital Adjustment | Total Consideration | | :---------- | :--- | :------- | :----------------------- | :------------------------- | :------------------ | | BlueVenn | $53,535 | $2,429 | $2,742 | — | $58,706 | | Second Street | $25,436 | $5,000 | $1,650 | $104 | $32,190 | | Localytics (2020) | $67,655 | $345 | $1,000 | $(5,238) | $63,762 | - The purchase accounting for BlueVenn and Second Street is preliminary, with finalization expected by Q1 2022. Goodwill of $98.7 million from these acquisitions is primarily attributed to expected synergies[38][43] 3. Fair Value Measurements This section describes the valuation methods and categories for financial instruments - The Company measures contingent accrued earnout business acquisition consideration liabilities as Level 3 instruments, remeasured periodically based on anticipated revenue levels, discount periods/rates, and foreign exchange rates[47] Liabilities Measured at Fair Value (March 31, 2021, in thousands) | Liability | Level 1 | Level 2 | Level 3 | Total | | :-------------------------- | :------ | :------ | :------ | :------ | | Earnout consideration liability | — | — | $4,350 | $4,350 | | Interest rate swap liabilities | — | $14,581 | — | $14,581 | - The fair value of interest rate swaps, categorized as Level 2, was a $14.6 million liability at March 31, 2021, reflecting a decline in short-term interest rates since the swap agreements were initiated[48] 4. Goodwill and Other Intangible Assets This section provides details on the company's goodwill and other intangible assets Goodwill Balance (in thousands) | Metric | Amount | | :--------------------------- | :------- | | Balance at December 31, 2020 | $383,598 | | Acquired in business combinations | $65,190 | | Foreign currency translation adjustment | $(230) | | Balance at March 31, 2021 | $448,558 | Intangible Assets, Net (March 31, 2021, in thousands) | Asset Class | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | | :-------------------- | :-------------------- | :----------------------- | :------------------ | | Customer relationships | $348,678 | $98,022 | $250,656 | | Trade name | $9,700 | $4,992 | $4,708 | | Developed technology | $87,044 | $36,627 | $50,417 | | Non-compete agreements | $1,148 | $1,052 | $96 | | Total intangible assets | $446,570 | $140,693 | $305,877 | - Total amortization expense for Q1 2021 was $12.0 million, up from $11.2 million in Q1 2020. No impairments of intangible assets or goodwill were recorded[55] 5. Income Taxes This section explains the company's income tax provisions and deferred tax assets/liabilities - The Company recorded an income tax benefit of $4.4 million for Q1 2021, primarily due to the release of valuation allowance related to deferred tax liabilities from the Second Street acquisition and foreign income taxes[58] - As of March 31, 2021, Upland had $355 million in total net operating loss carryforwards, with approximately $214 million available for utilization prior to expiration[60] 6. Debt This section details the company's long-term debt obligations and credit facilities Long-term Debt (in thousands) | Metric | March 31, 2021 | December 31, 2020 | | :----------------------------------- | :------------- | :---------------- | | Senior secured loans (net of discount) | $520,806 | $521,603 | | Less current maturities | $(3,170) | $(3,166) | | Total long-term debt | $517,636 | $518,437 | - The Company's Credit Facility includes a $350 million Term Loan and a $190 million Incremental Term Loan, both with interest rates effectively fixed at 5.4% via interest rate swaps, and a $60 million revolving credit facility which remains floating[63][64][68] - As of March 31, 2021, the Company had no outstanding borrowings under the Revolver and was in compliance with all Credit Facility covenants[72][75] 7. Net Loss Per Share This section presents the calculation of net loss per common share Net Loss Per Share Computation (Three Months Ended March 31, in thousands, except share and per share amounts) | Metric | 2021 | 2020 | | :----------------------------------- | :----- | :----- | | Net Loss | $(20,684) | $(20,081) | | Weighted–average common shares outstanding, basic and diluted | 29,970,050 | 24,906,932 | | Net loss per common share, basic and diluted | $(0.69) | $(0.81) | - Due to net losses, basic and diluted loss per share were the same. Anti-dilutive common share equivalents totaled 2,660,192 as of March 31, 2021[77] 8. Commitments and Contingencies This section outlines the company's contractual commitments and potential liabilities - The Company has purchase commitments for hosting services, third-party technology, and software development services, including a remaining obligation of $7.2 million for DevFactory FZ-LLC through December 31, 2021[78][79] - The Company is not involved in any current or pending legal proceedings that would materially adversely affect its financial statements[80] 9. Stockholders' Equity This section provides further details on the components of stockholders' equity Accumulated Other Comprehensive Loss (in thousands) | Component | March 31, 2021 | December 31, 2020 | | :---------------------------------------------------- | :------------- | :---------------- | | Foreign currency translation adjustment | $(1,743) | $644 | | Unrealized translation gain on intercompany loans | $3,994 | $3,154 | | Unrealized loss on interest rate swaps | $(14,581) | $(30,032) | | Total accumulated other comprehensive loss | $(12,330) | $(26,234) | - Stock-based compensation expense totaled $17.8 million in Q1 2021, up from $9.3 million in Q1 2020, primarily due to a $6.3 million incremental expense related to the deemed modification of unvested grants for the former COO[88] - Unvested Restricted Stock Units (RSUs) increased from 1,261,290 at Dec 31, 2020, to 2,234,764 at March 31, 2021, with 1,096,662 units granted during the quarter[89] 10. Revenue Recognition This section explains the company's policies for recognizing revenue from various sources - Revenue is recognized when control of promised goods or services is transferred to customers, following a five-step model. Performance obligations include subscription and support, perpetual licenses, and professional services[95][96] - Subscription and support revenue is recognized ratably over the contract term (generally 1-3 years). Perpetual license revenue is recognized upfront when software is made available. Professional services revenue is recognized over time as services are performed[97][98][99] Disaggregated Revenue by Geography (Three Months Ended March 31, 2021, in thousands) | Revenue Type | United States | United Kingdom | Canada | Other International | Total | | :----------------------- | :------------ | :------------- | :----- | :------------------ | :------ | | Subscription and support | $52,955 | $9,394 | $3,338 | $4,966 | $70,653 | | Perpetual license | $253 | $11 | $42 | $46 | $352 | | Professional services | $2,044 | $664 | $88 | $168 | $2,964 | | Total revenue | $55,252 | $10,069 | $3,468 | $5,180 | $73,969 | 11. Related Party Transactions This section details transactions with affiliated entities and related parties - The Company has an agreement with DevFactory FZ LLC (an affiliate of a non-management investor) for software development services, with a purchase commitment of $9.6 million in 2021. Payments were $2.4 million in Q1 2021[116] - Services were also purchased from Crossover, Inc. (controlled by the same investor) for approximately $1.0 million in Q1 2021, for identifying and connecting with technology software development resources[116] - An arrangement with former subsidiary Visionael Corporation, in which the CEO holds a significant interest, generated no fees in Q1 2021 (down from $15,000 in Q1 2020). An allowance for credit loss of $0.4 million was recognized against advances to Visionael[118] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Upland Software's financial condition, operational results, and liquidity Overview This section provides a general description of Upland Software's business and strategy - Upland Software provides cloud-based enterprise work management software across various functional areas including Marketing, Sales, Contact Center, Project Management, Information Technology, Business Operations, and Human Resources/Legal[123][126][127][134] - The Company employs a 'land-and-expand' go-to-market strategy, serving over 10,000 customers with more than 1,000,000 users. Revenue grew from $98.0 million in 2017 to $291.8 million in 2020, a 44% CAGR[128][129][130] - COVID-19 impacted new bookings and churn, but was offset by strength in cloud offerings and US election-year campaigns in 2020. Acquisition activity resumed in Q1 2021 after a pause in 2020[132][133][134][135] Key Metrics This section defines and reconciles key non-GAAP financial metrics used for performance evaluation - Adjusted EBITDA is a key non-GAAP metric used to evaluate operational effectiveness and efficiency, defined as net income (loss) plus depreciation, amortization, interest, other expense, taxes, stock-based compensation, acquisition-related expenses, and purchase accounting adjustments for deferred revenue[137] Reconciliation of Net Loss to Adjusted EBITDA (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | | :----------------------------------- | :----- | :----- | | Net loss | $(20,684) | $(20,081) | | Depreciation and amortization expense | $12,468 | $11,737 | | Interest expense, net | $7,787 | $7,643 | | Other expense (income), net | $(237) | $1,402 | | Benefit from income taxes | $(4,394) | $(4,287) | | Stock-based compensation expense | $17,824 | $9,320 | | Acquisition-related expense | $9,586 | $15,158 | | Purchase accounting deferred revenue discount | $494 | $3,701 | | Adjusted EBITDA | $22,844 | $24,593 | - Adjusted EBITDA decreased by 7.1% from $24.6 million in Q1 2020 to $22.8 million in Q1 2021[139] Results of Operations This section analyzes Upland Software's financial performance, including revenue and expenses Revenue This section details Upland Software's revenue streams and their year-over-year changes Revenue (Three Months Ended March 31, in thousands) | Revenue Type | 2021 | 2020 | % Change | | :----------------------- | :----- | :----- | :------- | | Subscription and support | $70,653 | $63,891 | 11 % | | Perpetual license | $352 | $361 | (2)% | | Professional services | $2,964 | $3,780 | (22)% | | Total revenue | $73,969 | $68,032 | 9 % | - Total revenue increased by $6.0 million (9%) to $74.0 million in Q1 2021. Acquisitions contributed $5.8 million, while organic business revenue increased by $0.7 million, despite a $2.1 million decline in CXM usage revenue from US election campaigns[146] - Professional services revenue decreased by $0.8 million (22%), primarily due to reduced on-site work from COVID-19 travel impacts[149] Cost of Revenue and Gross Profit Percentage This section analyzes the costs associated with revenue and the resulting gross profit Cost of Revenue and Gross Profit (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | % Change | | :----------------------------------- | :----- | :----- | :------- | | Cost of subscription and support | $22,682 | $19,939 | 14 % | | Cost of professional services and other | $1,745 | $2,262 | (23)% | | Total cost of revenue | $24,427 | $22,201 | 10 % | | Gross profit | $49,542 | $45,831 | 8 % | | Gross profit percentage | 67 % | 67 % | 0 pp | | Amortization included in cost of revenue | $2,714 | $2,395 | 13 % | | Stock Compensation included in cost of revenue | $442 | $318 | 39 % | - Cost of subscription and support revenue increased by $2.8 million (14%), with acquisitions contributing $1.8 million. Cost of professional services decreased by $0.6 million (23%) due to planned operating efficiencies[151][152] Operating Expenses This section details Upland Software's various operating expenses Sales and Marketing Expense This section analyzes sales and marketing expenditures and their drivers Sales and Marketing Expense (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | % Change | | :----------------------- | :----- | :----- | :------- | | Sales and marketing | $12,432 | $10,931 | 14 % | | Percentage of total revenue | 17 % | 16 % | 1 pp | | Stock Compensation | $1,137 | $549 | 107 % | - Sales and marketing expense increased by $1.5 million (14%), with $0.4 million from acquisitions and $1.1 million from organic business due to go-to-market investments[155] Research and Development Expense This section details research and development investments and their changes Research and Development Expense (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | % Change | | :----------------------- | :----- | :----- | :------- | | Research and development | $10,940 | $9,118 | 20 % | | Percentage of total revenue | 15 % | 14 % | 1 pp | | Stock Compensation | $714 | $615 | 16 % | - Research and development expense increased by $1.8 million (20%), with $0.8 million from acquisitions and $1.0 million from organic business, primarily due to outsourced technology development services[157] General and Administrative Expense This section analyzes general and administrative costs, including significant one-time items General and Administrative Expense (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | % Change | | :----------------------- | :----- | :----- | :------- | | General and administrative | $24,369 | $16,676 | 46 % | | Percentage of total revenue | 33 % | 25 % | 8 pp | | Stock Compensation | $15,531 | $7,838 | 98 % | - General and administrative expense increased by $7.7 million (46%), driven primarily by a one-time $7.6 million increase in non-cash stock compensation expense related to the COO's departure[159][160] Depreciation and Amortization Expense This section details depreciation and amortization expenses Depreciation and Amortization Expense (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | % Change | | :----------------------------------- | :----- | :----- | :------- | | Depreciation | $444 | $461 | (4)% | | Amortization | $9,299 | $8,810 | 6 % | | Total depreciation and amortization | $9,743 | $9,271 | 5 % | - Total depreciation and amortization expense increased by $0.4 million (5%), with acquisitions contributing $1.0 million, partially offset by a $0.6 million decrease in organic business due to fully amortized assets[162] Acquisition-related Expenses This section analyzes expenses incurred due to acquisition activities Acquisition-related Expenses (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | % Change | | :----------------------- | :----- | :----- | :------- | | Acquisition-related expenses | $9,586 | $15,158 | (37)% | | Percentage of total revenue | 13 % | 21 % | (8) pp | | Transaction related expenses | $4,000 | $3,300 | 21 % | | Transformational expenses | $5,600 | $11,900 | (53)% | - Acquisition-related expenses decreased by $5.6 million (37%), primarily due to a significant reduction in transformational expenses, despite an increase in transaction-related expenses from renewed acquisition activity[164] Other Income (Expense) This section details non-operating income and expenses, including interest and currency effects Other Income (Expense) (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | % Change | | :----------------------- | :----- | :----- | :------- | | Interest expense, net | $(7,787) | $(7,643) | 2 % | | Other income (expense), net | $237 | $(1,402) | (117)% | | Total other expense | $(7,550) | $(9,045) | (17)% | - Total other expense decreased by $1.5 million (17%), driven by a shift from other expense of $1.4 million in Q1 2020 to other income of $0.2 million in Q1 2021, primarily due to currency exchange gains[166][168] Benefit from Income Taxes This section explains the income tax benefit recognized by the company Benefit from Income Taxes (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | % Change | | :----------------------- | :----- | :----- | :------- | | Benefit from income taxes | $4,394 | $4,287 | 2 % | | Percentage of total revenue | 6 % | 6 % | 0 pp | - The income tax benefit slightly increased by $0.1 million, primarily due to deferred tax benefits from the release of valuation allowance related to business combinations in both periods[169] Liquidity and Capital Resources This section discusses Upland Software's cash position, debt, and capital management - As of March 31, 2021, Upland had $186.7 million in cash and cash equivalents and $60.0 million available under its revolving credit facility, with $531.9 million outstanding under its credit facility[172] - Cash and cash equivalents decreased by $63.3 million from December 31, 2020, primarily due to $77.9 million in cash paid for two acquisitions in Q1 2021[172] - Net cash provided by operating activities was $12.5 million in Q1 2021, a significant increase from $5.3 million used in Q1 2020, driven by increased scale and favorable working capital changes[183] Critical Accounting Policies and the Use of Estimates This section highlights accounting policies requiring significant management judgment and estimates - Key accounting policies involving significant management judgments and estimates include revenue recognition, stock-based compensation, deferred sales commissions, income taxes, and business combinations (goodwill and long-lived assets)[192] - No material changes to critical accounting policies were reported for Q1 2021 compared to the 2020 Annual Report on Form 10-K[193] Recent Accounting Pronouncements This section outlines the impact of recently issued accounting standards - The Company is evaluating the impact of ASU 2020-04, Reference Rate Reform (Topic 848), which provides optional guidance to ease accounting burdens related to reference rate reform (e.g., LIBOR discontinuation)[34] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details Upland Software's exposure to market risks, including interest rate, foreign exchange, and inflation - The Company's exposure to interest rate risk is primarily from variable rate indebtedness. Interest rate hedge instruments effectively fix the interest rate on $540 million of term loans at 5.4%, mitigating risk[197] - Foreign currency exchange risk arises from international operations and expenses in foreign currencies (CAD, GBP, EUR). A hypothetical 10% change in exchange rates could impact Q1 2021 revenue by $1.5 million. No currency hedging strategies have been employed to date[198] - Inflation has not had a material effect on the business in the last three fiscal years, but significant inflationary pressures could harm financial results if not offset by price increases[200] Item 4. Controls and Procedures This section confirms the effectiveness of Upland Software's disclosure controls and procedures - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of March 31, 2021[203] - No material changes to internal control over financial reporting occurred during the quarter ended March 31, 2021[204] - Internal controls have inherent limitations, including human diligence, judgment lapses, and potential circumvention by collusion or management override, which could lead to undetected material misstatements[205] Part II. OTHER INFORMATION This section includes additional information not covered in the financial statements Item 1A. Risk Factors This section refers to the risk factors detailed in the Company's 2020 Annual Report on Form 10-K - No material changes to the risk factors included in the Company's 2020 Annual Report on Form 10-K were identified during 2021[208] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications and agreements - Exhibits include an Advisory Agreement with Tim Mattox, CEO and CFO certifications (pursuant to Exchange Act Rules 13a-14(a), 15d-14(a), and 18 U.S.C. Section 1350), and Inline XBRL documents[212] Signature The report was officially signed by the Chief Financial Officer on May 5, 2021 - The report was signed by Michael D. Hill, Chief Financial Officer, on May 5, 2021[216]