Upland Software(UPLD) - 2022 Q2 - Quarterly Report

Part I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements and accompanying notes for the reporting periods Condensed Consolidated Balance Sheets Key Balance Sheet Items | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $138,284 | $189,158 | | Accounts receivable | $35,120 | $50,499 | | Total current assets | $205,812 | $262,991 | | Total assets | $1,030,046 | $1,029,007 | | Total current liabilities | $170,538 | $156,444 | | Total liabilities | $718,116 | $712,719 | | Total stockholders' equity | $311,930 | $316,288 | Condensed Consolidated Statements of Operations Key Operational Results | Metric (in thousands, except per share) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $80,227 | $76,264 | $158,943 | $150,233 | | Gross profit | $53,674 | $51,252 | $107,635 | $100,794 | | Loss from operations | $(10,888) | $(9,163) | $(25,665) | $(26,691) | | Net loss | $(16,393) | $(19,042) | $(39,224) | $(39,726) | | Net loss per common share, basic and diluted | $(0.52) | $(0.63) | $(1.25) | $(1.32) | Condensed Consolidated Statements of Comprehensive Loss Comprehensive Loss Summary | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(16,393) | $(19,042) | $(39,224) | $(39,726) | | Other comprehensive income (loss) | $(14,703) | $(908) | $9,170 | $12,996 | | Comprehensive loss | $(31,096) | $(19,950) | $(30,054) | $(26,730) | Condensed Consolidated Statements of Stockholders' Equity Changes in Stockholders' Equity | Metric (in thousands) | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Common Stock | $3 | $3 | | Additional Paid-In Capital | $594,080 | $568,384 | | Accumulated Other Comprehensive Loss | $(2,344) | $(11,514) | | Accumulated Deficit | $(279,809) | $(240,585) | | Total Stockholders' Equity | $311,930 | $316,288 | - The number of common shares issued and outstanding increased from 31,096,548 as of December 31, 2021, to 31,632,628 as of June 30, 2022[9] Condensed Consolidated Statements of Cash Flows Summary of Cash Flows | Metric (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $22,260 | $23,308 | | Net cash used in investing activities | $(62,653) | $(92,924) | | Net cash used in financing activities | $(6,608) | $(3,381) | | Change in cash and cash equivalents | $(50,874) | $(73,490) | | Cash and cash equivalents, end of period | $138,284 | $176,539 | Notes to Condensed Consolidated Financial Statements 1. Basis of Presentation and Summary of Significant Accounting Policies - The financial statements are prepared in conformity with GAAP and include Upland Software, Inc and its wholly-owned subsidiaries[26][27][29] - The Company assessed the impact of COVID-19 on estimates and assumptions and determined there was no material impact as of August 9, 2022[30] - No individual customer represented more than 10% of total revenues for the six months ended June 30, 2022, or more than 10% of accounts receivable as of June 30, 2022 or December 31, 2021[32] - Interest rate swap agreements effectively converted $540 million of variable interest debt to a fixed rate of 5.4%, with the fair value of these swaps being a $26.0 million asset as of June 30, 2022[33] - ASU 2020-06 (debt with conversion options) was adopted in Q1 2022 with no material impact, while ASU 2021-08 (business combinations) is being evaluated[38][40] 2. Acquisitions - In 2022, Upland acquired BA Insight and Objectif Lune, which contributed approximately $2.8 million and $10.5 million in revenue respectively since their acquisition dates[42] - In 2021, Upland completed acquisitions of Panviva, BlueVenn, and Second Street, with earnout payments for BlueVenn and Second Street resulting in no payments made[42][46][47][55] - Goodwill of $126.6 million from these acquisitions is primarily attributed to expected synergies and the value of the acquired workforce[50] Cash Consideration for Recent Acquisitions | Acquisition | Cash Consideration (in thousands) | | :--- | :--- | | BA Insight | $33,355 | | Objectif Lune | $29,750 | | Panviva | $19,931 | | BlueVenn | $53,535 | | Second Street | $25,436 | Transaction Related Expenses | Transaction Related Expenses (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total transaction related expenses | $400 | $2,000 | $4,900 | $6,100 | 3. Fair Value Measurements - The fair value of the interest rate swap was a $26.0 million asset as of June 30, 2022, an increase from an $8.4 million liability at December 31, 2021, due to rising short-term interest rates[56][57] - The carrying value of long-term debt ($525.2 million at June 30, 2022) approximates its fair value[58] 4. Goodwill and Other Intangible Assets Goodwill and Intangible Asset Balances | Metric (in thousands) | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Goodwill | $492,481 | $457,472 | | Total intangible assets, net | $277,001 | $279,920 | Amortization Expense | Amortization Expense (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total amortization expense | $13,500 | $12,700 | $27,400 | $24,700 | Estimated Annual Amortization Expense | Estimated Annual Amortization Expense (in thousands) | | :--- | | Remainder of 2022 | $25,803 | | 2023 | $50,546 | | 2024 | $48,060 | | 2025 | $44,823 | | 2026 | $41,871 | | 2027 and thereafter | $65,898 | | Total | $277,001 | 5. Income Taxes - The Company recognized an income tax benefit of $0.5 million for Q2 2022 and $0.6 million for the six months ended June 30, 2022, primarily from foreign income taxes[63] - For the six months ended June 30, 2021, a tax benefit of $2.9 million was recognized, mainly from releasing a valuation allowance related to the Second Street acquisition[64] - A valuation allowance is recorded against U.S. net deferred tax assets due to historical operating losses[65] 6. Debt - The Credit Facility includes a $350 million Term Loan, a $190 million Incremental Term Loan, and a $60 million Revolving Credit Facility, which was fully available as of June 30, 2022[69][70][79] - Interest rate swaps fix the interest rate for the Term Loans at 5.4% for the full 7-year term[74] - The fair value of the interest rate swap was a $26.0 million asset at June 30, 2022, with an estimated $6.4 million expected to be reclassified to Interest expense in the next twelve months[75][76] - The Company was in compliance with all debt covenants as of June 30, 2022[81] Long-Term Debt Summary | Metric (in thousands) | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Senior secured loans | $516,725 | $518,330 | | Less current maturities | $(3,167) | $(3,167) | | Total long-term debt | $513,558 | $515,163 | 7. Net Loss Per Share - Due to net losses, basic and diluted loss per share were the same for all periods presented[83] Net Loss Per Share Calculation | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Loss per common share, basic and diluted | $(0.52) | $(0.63) | $(1.25) | $(1.32) | 8. Commitments and Contingencies - The Company has purchase commitments for hosting services, third-party technology, and other operational services[84] - No current or pending legal proceedings are anticipated to have a material adverse effect on the Company's financial statements[85] 9. Stockholders' Equity - Accelerated stock-based compensation expense was $4.4 million for the three and six months ended June 30, 2022[94] - Unvested restricted units outstanding as of June 30, 2022, totaled 1,986,210 units[97] Components of Accumulated Other Comprehensive Income (AOCI) | Component of AOCI (in thousands) | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Foreign currency translation adjustment | $(24,060) | $(5,657) | | Unrealized translation gain on intercompany loans | $(4,243) | $2,552 | | Unrealized gain (loss) on interest rate swaps | $25,959 | $(8,409) | | Total accumulated other comprehensive loss | $(2,344) | $(11,514) | Stock-Based Compensation Expense | Stock-Based Compensation Expense (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total | $14,877 | $13,550 | $26,496 | $31,374 | 10. Revenue Recognition - Revenue is recognized when control of goods or services is transferred to customers, following a five-step model in accordance with ASC 606[101][102] - Subscription and support revenue is recognized ratably over the contract term, while perpetual license revenue is recognized upfront[104][105] - Professional services revenue is recognized over time as services are performed[106] - As of June 30, 2022, approximately $298.6 million of revenue is expected to be recognized from remaining performance obligations, with 70% expected within the next 12 months[119] Revenue by Geography | Revenue by Geography (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | United States | $55,482 | $53,350 | $109,258 | $108,602 | | United Kingdom | $10,952 | $13,460 | $23,459 | $23,529 | | Canada | $5,783 | $3,738 | $9,531 | $7,206 | | Other International | $8,010 | $5,716 | $16,695 | $10,896 | | Total revenue | $80,227 | $76,264 | $158,943 | $150,233 | 11. Related Party Transactions - The Company reported no material related party transactions for the three and six months ended June 30, 2022[123] 12. Subsequent Events - On July 14, 2022, Upland entered into an agreement to issue and sell 115,000 shares of Series A Preferred Stock for an aggregate purchase price of $115.0 million[124] - Holders of Series A Preferred Stock will receive dividends at 4.5% per annum for the first seven years, increasing to 7% thereafter[125] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition, operational results, and key business metrics Overview - Upland provides cloud-based software applications for digital transformation across various business functions[130][139] - The Company employs a 'land-and-expand' go-to-market strategy, selling primarily through a direct sales organization[132] - Revenue grew from $98.0 million in 2017 to $302.0 million in 2021, a compound annual growth rate of 33%[134] - Upland has completed 31 acquisitions from February 2012 through June 30, 2022, as part of its growth strategy[135] - The COVID-19 pandemic's impact is ongoing, but the Company has seen improved market stability and resumed acquisition activity in 2021 and early 2022[137][138][139] Results of Operations Revenue - Total revenue growth for Q2 2022 was negatively impacted by 3 percentage points from foreign currency exchange rates (FX)[144][148] - Acquisitions contributed $10.0 million to total revenue increase in Q2 2022 and $18.4 million in 6M 2022[144][148] - Non-GAAP Core Organic Revenue decreased by $3.0 million for Q2 2022 and by $3.9 million for 6M 2022, primarily due to declines in several revenue categories[144][145][147][148][149][150][151] Revenue by Category | Revenue Category (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | % Change | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Subscription and support | $75,017 | $72,405 | 4% | $148,644 | $143,058 | 4% | | Perpetual license | $1,858 | $415 | 348% | $3,636 | $767 | 374% | | Professional services | $3,352 | $3,444 | (3)% | $6,663 | $6,408 | 4% | | Total revenue | $80,227 | $76,264 | 5% | $158,943 | $150,233 | 6% | Cost of Revenue and Gross Profit Percentage - Acquisitions contributed $1.6 million to subscription and support cost of revenue in Q2 2022 and $3.7 million in 6M 2022[154][156] - Acquisitions contributed $0.7 million to professional services cost of revenue in Q2 2022 and $1.6 million in 6M 2022[155][157] Cost of Revenue Summary | Cost of Revenue (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | % Change | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Subscription and support | $24,125 | $23,161 | 4% | $46,194 | $45,843 | 1% | | Professional services and other | $2,428 | $1,851 | 31% | $5,114 | $3,596 | 42% | | Total cost of revenue | $26,553 | $25,012 | 6% | $51,308 | $49,439 | 4% | | Gross profit percentage | 67% | 67% | - | 68% | 67% | - | Operating Expenses - Sales and marketing expense increased due to acquisitions ($1.8M in Q2, $3.9M in 6M) and ongoing go-to-market investments[159][160] - Research and development expense increased due to acquisitions ($2.0M in Q2, $3.9M in 6M), offset by lower organic personnel costs[162][164] - General and administrative expense increased in Q2 2022 due to higher non-cash stock compensation but decreased in 6M 2022 due to overall lower compensation costs[166][167] - Depreciation and amortization expense increased due to acquired intangible assets from recent acquisitions ($1.5M in Q2, $3.3M in 6M)[169][171] - Acquisition-related expenses decreased in Q2 2022 due to lower transaction costs but increased slightly in 6M 2022 due to higher integration expenses[173][174] Operating Expense Summary | Operating Expense (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | % Change | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Sales and marketing | $15,331 | $14,298 | 7% | $30,924 | $26,730 | 16% | | Research and development | $11,676 | $11,113 | 5% | $23,743 | $22,053 | 8% | | General and administrative | $21,828 | $19,192 | 14% | $41,442 | $43,561 | (5)% | | Depreciation and amortization | $10,802 | $10,278 | 5% | $21,853 | $20,021 | 9% | | Acquisition-related expenses | $4,925 | $5,534 | (11)% | $15,338 | $15,120 | 1% | Other Income (Expense) - Other income (expense), net, shifted from an expense to an income in both the three and six months ended June 30, 2022, primarily due to currency exchange gains[176][177] Other Income (Expense) Summary | Other Income (Expense) (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | % Change | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Interest expense, net | $(7,754) | $(7,942) | (2)% | $(15,516) | $(15,729) | (1)% | | Other income (expense), net | $1,777 | $(399) | (545)% | $1,359 | $(162) | (939)% | Benefit from (Provision for) Income Taxes - The Company recorded an income tax benefit in Q2 2022, primarily from foreign operations, a significant change from a provision in Q2 2021[179][181] Income Tax Summary | Income Taxes (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | % Change | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Benefit from (provision for) income taxes | $472 | $(1,538) | (131)% | $598 | $2,856 | (79)% | Key Metrics - Adjusted EBITDA, a non-GAAP measure, increased by 3% for both the three and six months ended June 30, 2022, compared to the prior year periods[185] Adjusted EBITDA | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Adjusted EBITDA | $24,508 | $23,728 | $47,954 | $46,572 | Liquidity and Capital Resources - The Company believes current cash and available credit will be sufficient to fund operations and support continued growth through acquisitions for at least the next twelve months[189] - Cash and cash equivalents decreased by $50.9 million from December 31, 2021, to June 30, 2022, primarily due to $62.4 million in cash paid for acquisitions[190] - The recently announced Securities Purchase Agreement will provide an additional $115.0 million in liquidity[193] - Cash provided by operating activities decreased by $1.0 million to $22.3 million for the six months ended June 30, 2022[205] - Cash used in investing activities decreased by $30.3 million to $62.7 million for the six months ended June 30, 2022, due to fewer acquisitions[208] - Cash used in financing activities increased by $3.2 million to $6.6 million for the six months ended June 30, 2022[211] Key Liquidity Metrics | Metric (in thousands) | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $138,284 | $189,158 | | Available borrowings under credit facility | $60,000 | $60,000 | | Borrowings outstanding under credit facility | $525,200 | $527,900 | | Working capital surplus | $35,300 | $106,500 | Critical Accounting Policies and the Use of Estimates - Key accounting policies involving significant management judgment include revenue recognition, income taxes, business combinations, and stock-based compensation[215] - No material changes to critical accounting policies and estimates were reported for the six months ended June 30, 2022[214] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the Company's exposure to interest rate, foreign currency, and inflation risks - The Company's exposure to interest rate risk is mitigated by interest rate swaps that fix the Term Loan rate at 5.4%[218] - Foreign currency exchange risk arises from international operations; a hypothetical 10% change in exchange rates could impact revenue by $4.0 million for the six months ended June 30, 2022[219] - Inflation has not had a material effect on the Company's business in the last three fiscal years, but future pressures could adversely affect financial results[221] Item 4. Controls and Procedures This section details the evaluation of the Company's disclosure controls and internal financial reporting controls - Management concluded that the Company's disclosure controls and procedures were effective as of June 30, 2022[224] - There were no changes in internal control over financial reporting during the quarter ended June 30, 2022, that materially affected, or are reasonably likely to materially affect, internal controls[225] Part II. OTHER INFORMATION Item 1A. Risk Factors This section updates risk factors related to inflation and the issuance of Series A Preferred Stock - Inflation has the potential to adversely affect the Company's liquidity and results of operations by increasing costs[230] - The newly issued Series A Preferred Stock ranks senior to common stock, carries corporate governance rights, and could lead to dilution of common stockholders' rights[231][232][233] - A redemption feature of the Series A Preferred Stock may discourage or delay potential takeovers of the Company[234] Item 6. Exhibits This section lists all exhibits filed as part of the Quarterly Report on Form 10-Q - The exhibits include certifications from the CEO and CFO pursuant to the Sarbanes-Oxley Act of 2002 and Inline XBRL data[238] SIGNATURES This section contains the required signatures for the Quarterly Report on Form 10-Q - The report was signed on August 9, 2022, by Michael D. Hill, Chief Financial Officer of UPLAND SOFTWARE, INC[243]