Upland Software(UPLD) - 2022 Q4 - Annual Report

Part I Business Upland Software provides cloud-based software applications for digital transformation, primarily growing through acquisitions and operating on a recurring revenue model - Upland provides cloud-based software applications for digital transformation in areas like Marketing, Sales, Contact Center, Knowledge Management, Project Management, and IT[19] - The company's growth strategy focuses on acquiring complementary technologies and businesses, with 31 acquisitions completed in the 11 years ending December 31, 2022[21] Revenue Growth and Mix (2021 vs 2022) | Metric | 2021 | 2022 | Growth | | :--- | :--- | :--- | :--- | | Total Revenue | $302.0M | $317.3M | 5% | | Subscription & Support Revenue | $287.6M | $297.9M | 4% | Revenue Breakdown by Type (FY2020-2022) | Revenue Type | % of Total Revenue (2022) | % of Total Revenue (2021) | % of Total Revenue (2020) | | :--- | :--- | :--- | :--- | | Subscription and support | 94% | 95% | 95% | | Perpetual license | 2% | 1% | 1% | | Professional services | 4% | 4% | 4% | - Upland's annual net dollar retention rate was 95% as of December 31, 2022, driven by a dedicated customer success organization[25] - As of December 31, 2022, the company had 1,006 full-time employees, with a majority located in the United States, Australia, Canada, India, Ireland, and the United Kingdom[41] Risk Factors The company faces risks from its acquisition strategy, cybersecurity, financial covenants, and data privacy regulations - A primary risk is the company's reliance on acquisitions for growth, including challenges in identifying suitable candidates, consummating deals, and integrating acquired businesses successfully[45][47] - The company faces risks from operating as a multinational corporation, including foreign currency fluctuations, varied political and labor conditions, and complex tax laws, with approximately 30% of total revenue in 2022 from customers outside the U.S[60] - Actual or perceived security vulnerabilities and cyberattacks pose a material risk, potentially leading to loss of confidential information, reputational damage, litigation, and regulatory fines[70] - The company's loan facility contains operating and financial covenants that may restrict business activities, including incurring additional debt, making investments, and paying dividends[95][96] - The issuance of Series A Preferred Stock in 2022 introduces risks, as these shares rank senior to common stock in priority of distribution and have additional corporate governance rights, including the right to elect a director[133][135] - The company's ability to use its net operating loss (NOL) carryforwards of approximately $357.8 million is subject to limitations under Section 382 of the Internal Revenue Code, which could result in the expiration of a significant portion of these tax assets before utilization[101][102] - The company is subject to evolving data privacy laws like GDPR in Europe and CCPA/CPRA in California, with non-compliance potentially leading to significant monetary penalties and reputational damage[118][119] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[142] Properties Upland's principal corporate office is in Austin, Texas, with additional leased facilities domestically and internationally - The main corporate office is in Austin, Texas, with a lease for 9,900 sq. ft. expiring in June 2025[143] - The company leases additional office space in various US states and internationally, including Australia, Canada, Europe, and India[143] Legal Proceedings The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business - As of the report date, Upland is not involved in any legal proceedings expected to have a material adverse effect on the company[144] Mine Safety Disclosures This item is not applicable to the company - Not applicable[145] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Upland's common stock trades on NASDAQ, with the company historically retaining earnings for growth rather than paying dividends - The company's common stock is traded on the NASDAQ Global Market under the symbol "UPLD"[147] - Upland has never declared or paid dividends on its common stock and does not expect to in the foreseeable future, with earnings planned for reinvestment into the business[149] - As of February 21, 2023, there were 29 stockholders of record[148] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 2022's 5% revenue growth, key financial metrics, liquidity, and critical accounting policies, including a Q4 goodwill impairment charge - Total revenue grew 5% from $302.0 million in 2021 to $317.3 million in 2022, including a 2% negative impact from foreign currency exchange rates[194] - In Q4 2022, the company decided to sunset certain non-strategic product offerings and customer contracts, referred to as "Sunset Assets"[162] - A Goodwill impairment charge of $12.5 million was recorded in Q4 2022 due to a decline in the company's stock price and market capitalization[176][208] Key Metrics (as of Dec 31) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Annualized recurring revenue (ARR) | $266.3M | $257.1M | $220.5M | | Annual net dollar retention rate | 95% | 94% | 94% | | Adjusted EBITDA | $97.1M | $96.7M | $99.9M | - Total liquidity increased from $249.2 million at year-end 2021 to $308.7 million at year-end 2022, primarily due to the $115.0 million Series A Preferred Stock issuance[227][230] Cash Flow Summary (in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $29,979 | $41,738 | | Net cash used in investing activities | $(63,222) | $(93,532) | | Net cash provided by (used in) financing activities | $94,151 | $(8,180) | Quantitative and Qualitative Disclosures About Market Risk Upland is exposed to interest rate, foreign currency, and inflation risks, with interest rate risk on term loans mitigated by swap agreements - The company's primary market risks are interest rate, foreign exchange, and inflation[272] - Interest rate risk on the $540 million in term loans is hedged via interest rate swaps, effectively fixing the rate at 5.4%, while the $60 million revolver remains at a floating rate but is undrawn[275] - The company is exposed to foreign currency exchange risk from its international operations but has not engaged in hedging; a hypothetical 10% change in exchange rates would have impacted revenue by $7.5 million in 2022[276] Financial Statements and Supplementary Data This section presents audited financial statements and the auditor's unqualified opinion, highlighting critical audit matters like revenue recognition and goodwill impairment - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[284][508] - Critical Audit Matters identified by the auditor include: revenue recognition for new products and services, measurement of the income tax provision, and the evaluation of goodwill for impairment[288] Consolidated Statement of Operations Highlights (in thousands) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Revenue | $317,303 | $302,016 | $291,778 | | Gross Profit | $213,562 | $202,563 | $193,332 | | Loss from Operations | $(40,228) | $(34,677) | $(23,813) | | Impairment of goodwill | $12,500 | $0 | $0 | | Net Loss | $(68,413) | $(58,212) | $(51,219) | | Net Loss per Share | $(2.23) | $(1.92) | $(1.92) | Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $248,653 | $189,158 | | Total Assets | $1,113,459 | $1,029,007 | | Goodwill | $477,043 | $457,472 | | Total Liabilities | $692,298 | $712,719 | | Total Stockholders' Equity | $308,870 | $316,288 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles or financial disclosure - None[496] Controls and Procedures Management and the auditor concluded the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[497] - Based on the COSO 2013 framework, management assessed internal control over financial reporting to be effective as of December 31, 2022[500] - There were no changes to internal control over financial reporting during the year ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, internal controls[502] Other Information The company reports no other information for this item - None[503] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's 2023 Proxy Statement - The required information is incorporated by reference from the registrant's Proxy Statement for the 2023 Annual Meeting of Stockholders[517] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2023 Proxy Statement - The required information is incorporated by reference from the registrant's Proxy Statement for the 2023 Annual Meeting of Stockholders[518] 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 company's 2023 Proxy Statement - The required information is incorporated by reference from the registrant's Proxy Statement for the 2023 Annual Meeting of Stockholders[519] Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related party transactions, and director independence is incorporated by reference from the company's 2023 Proxy Statement - The required information is incorporated by reference from the registrant's Proxy Statement for the 2023 Annual Meeting of Stockholders[520] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2023 Proxy Statement - The required information is incorporated by reference from the registrant's Proxy Statement for the 2023 Annual Meeting of Stockholders[521] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements and provides an index of all exhibits filed with or incorporated by reference into the Form 10-K - This section provides a list of the financial statements included in Item 8 and an index of all exhibits filed with the report[522] Form 10-K Summary This item is not applicable - Not applicable[523]