We believe the principal competitive factors in our market include the following:
We rely on a combination of trademark, copyright, trade secret, and patent laws in the United States and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our intellectual property.
We were incorporated in Delaware in 2010. Our principal executive offices are located at 401 Congress Avenue, Suite 1850, Austin, TX 78701. Our main telephone number at that location is (833) 875-2631.(512) 960-1010. Our website address is www.uplandsoftware.com. Information on our website is not part of this report and should not be relied upon in determining whether to make an investment decision. The inclusion of our website address in this report does not include or incorporate by reference into this report any information on our website.
In order to improve our operating results, it is important that our customers renew or upgrade their agreements with us when the applicable contract term expires, and also purchase additional applications from us. Typically contract terms are one to three years for subscription agreements, and one year for perpetual license agreements. Upon expiration, customers can renew their existing subscriptions, upgrade their subscriptions to add more seats or additional minimum contracted volume, downgrade their subscriptions to fewer seats or lower minimum contracted volume, or not renew. A renewal constitutes renewing an existing contract for an application under the same terms, and an upgrade includes purchasing additional seats or volume under an existing contract. We may also cross-sell additional applications to existing customers. Our ability to grow revenue and achieve profitability depends, in part, on customer renewals, customer upgrades, and cross-sales to existing customers exceeding downgrades and non-renewals. However, we may not be able to increase our penetration within our existing customer base as anticipated, and we may not otherwise retain subscriptions from existing customers. Our customers
We depend on our senior management team and the loss of one or more key personnel, or an inability to attract and retain highly skilled personnel may impair our ability to grow our business.
We face intense competition for qualified individuals from numerous technology and software companies. If we fail to attract and retain suitably qualified individuals, including software engineers and sales personnel, our ability to implement our business plan and develop and maintain our applications could be adversely affected. As a result, our ability to compete would decrease, our operating results would suffer, and our revenue would decrease.
Because we generally recognize revenue from our customers over the terms of their agreements, but incur most costs associated with generating such agreements in advance, rapid growth in our customer base may increase our losses in the short-term.
of our applications, and potential changes in our pricing policies or rates of renewals, may not be fully reflected in our results of operations until future periods. Similarly, it would be difficult for us to rapidly increase our revenue through new sales, renewals, and upgrades of existing customer agreements, or through additional cross-selling opportunities, in a given period due to the timing of revenue recognition inherent in our subscription model.
Perpetual license revenue is unpredictable, and a material increase or decrease in perpetual license revenue from period to period can produce substantial variation in the total revenue and earnings we recognize in a given period.
Perpetual license revenue reflects the revenue recognized from sales of perpetual licenses relating to our workflow automation and enterprise content management applications to new customers and additional licenses for such applications to existing customers. We generally recognize the license fee portion of the arrangement in advance.at the time of delivery. Perpetual licenses of our workflow automation and enterprise content management applications are sold through third-party resellers, and as such, the timing of sales of perpetual licenses is difficult to predict with the timing of recognition of associated revenue unpredictable. A material increase or decrease in the sale of perpetual licenses from period to period could produce substantial variation in the revenue we recognize. Accordingly, comparing our perpetual license revenue on a period to period basis may not be a meaningful indicator of a trend or future results.
Any disruption of service at the data centers that house our equipment and deliver our applications or with our hosting service providerproviders could harm our business.
Our reputation and ability to attract, retain, and serve our customer is dependent upon the reliable performance of our computer systems and those of third parties that we utilize in our operations. These systems may be subject to damage or interruption from earthquakes, adverse weather conditions, other natural disasters, terrorist attacks, power loss, telecommunications failures, vendor limitations, computer viruses, computer denial of service attacks, or other attempts to harm these systems. Supply chain disruptions stemming from the Russia-Ukraine or Israeli-Hamas wars may harm our customers and suppliers and further complicate existing supply chain constraints. Interruptions in these systems, or with the Internet in general, could make our service unavailable or degraded or otherwise hinder our ability to deliver application data to our customers. Service interruptions, errors in our software, or the unavailability of computer systems used in our operations could diminish the overall attractiveness of our applications to existing and potential customers.
Our servers and those of third parties we use in our operations are vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions. We have implemented security protocols within our applications; however, we have no assurance that our systems are completely secure. Our insurance does not cover expenses related to disruptions to our service or unauthorized access to our applications. Any significant disruption to our service or access to our systems could result in a loss of customers and adversely affect our business and results of operation.
Our applications involve the storage and transmission of our customers’ proprietary and confidential information, including personal or identifying information regarding their employees and customers.customers and are subject to attempted cyberattacks. Any security breaches, unauthorized access, unauthorized usage, virus, or similar breach or disruption could result in loss of confidential information, damage to our reputation, early termination of our contracts, litigation, regulatory investigations, indemnity obligations, or other liabilities. If our security measures or those of our third-party software providers and data centers are breached as a result of third-party action, employee error, malfeasance or otherwise, resulting in unauthorized access to customer data, our reputation will be damaged, our business may suffer, and we could incur significant liability. Unauthorized parties may attempt to misappropriate or compromise our confidential information or that of third parties, create system disruptions, product or service vulnerabilities or cause shutdowns. These perpetrators of cyberattacks also may be able to develop and deploy viruses, worms, malware and other malicious software programs that directly or indirectly attack our products, services or infrastructure (including our third party cloud service providers). Because the techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any or all of these issues could negatively affect our ability to attract new customers, cause existing customers to elect not to renew or upgrade their subscriptions, result in reputational damage, or subject us to third-party lawsuits, regulatory fines, or other action or liability, which could adversely affect our operating results. In addition, to the extent we are diverting our resources to address and mitigate these vulnerabilities, it may hinder our ability to deliver and support our solutions and customers in a timely manner. Despite our efforts to build secure services, we can make no assurance that we will be able to detect, prevent, timely and adequately address, or mitigate the negative effects of cyberattacks or other security breaches.
Our success depends on our ability to adapt to technological change and continue to innovate.
Our business depends on the overall demand for information technology and enterprise work management software spend and on the economic health of our current and prospective customers. If worldwide economic conditions become unstable, our existing customers and prospective customers may re-evaluate their decision to purchase our applications. Weak global economic conditions or a reduction in information technology or enterprise work management software spending by our customers could harm our business in a number of ways, including longer sales cycles and lower prices for our applications.
We rely on third-party software that is required for the development and deployment of our applications, which may be difficult to obtain or which could cause errors or failures of our applications.
We rely on software licensed from or hosted by third parties to offer our applications. In addition, we may need to obtain licenses from third parties to use intellectual property associated with the development of our applications, which might not be available to us on acceptable terms, or at all. Any loss of the right to use any software required for the development, maintenance, and delivery of our applications could result in delays in the provision of our applications until equivalent technology is either developed by us or, if available, is identified, obtained and integrated, which could harm our business. Any errors or defects in third-party software could result in errors or a failure of our applications, which could harm our business.
If our applications contain serious errors or defects, we may lose revenue and market acceptance, and we may incur costs to defend or settle product-related claims.
Complex software applications such as ours often contain errors or defects, particularly when first introduced or when new versions or enhancements are released. Our current and future applications may contain serious defects.
Since our customers use our applications for critical business purposes, defects or other performance problems could negatively impact our customers and could result in:
loss or delayed market acceptance and sales;
breach of warranty or other claims for damages;
sales credits or refunds for prepaid amounts related to unused subscription services;
canceled contracts and loss of customers;
diversion of development and customer service resources; and
injury to our reputation.
The costs incurred in correcting any material errors or defects might be substantial and could adversely affect our operating results. Although our customer agreements typically contain provisions designed to limit our exposure to certain of the claims above, existing or future laws or unfavorable judicial decisions could negate these limitations. Even if not successful, a breach of warranty or other claim brought against us would likely be a
distraction to management, time-consuming and costly to resolve, and could seriously damage our reputation in the marketplace, making it harder for us to sell our applications. Additionally, our errors and omissions insurance may be inadequate or may not be available in the future on acceptable terms, or at all, and our policy may not cover all claims made against us. Further, defending a suit, regardless of its merit, could be costly and divert management’s attention.
If we fail to integrate our applications with other software applications and competitive or adjacent offerings that are developed by others, or fail to make our applications available on mobile and other handheld devices, our applications may become less marketable, less competitive or obsolete, and our operating results could be harmed.
Our applications integrate with a variety of other software applications, and also with competing and adjacent third-party offerings,.offerings. We need to continuously modify and enhance our platform to adapt to changes in cloud-enabled hardware, software, networking, browser and database technologies. Any failure of our applications to integrate effectively with other software applications and product offerings could reduce the demand for our applications or result in customer dissatisfaction and harm to our business. If we are unable to respond to changes in the applications and tools with which our applications integrate in a cost-effective manner, our applications may become less marketable, less competitive, or obsolete. Competitors may also impede our attempts to create integration between our applications and competitive offerings, which may decrease demand for our applications. In addition, an increasing number of individuals within organizations are utilizing devices other than personal computers, such as mobile phones, tablets and other handheld devices, to access the Internet and corporate resources and to conduct business. If we cannot effectively make our applications available on these devices, we may experience difficulty attracting and retaining customers.
If we fail to develop and maintain relationships with third parties, our business may be harmed.
Our business depends in part on the development and maintenance of technology integration, joint sales, and reseller relationships. Maintaining relationships with third parties requires significant time and resources, as does integrating third-party content and technology. Further, third parties may not perform as expected under any relationships into which we may enter, and we may have disagreements or disputes with third parties that could negatively affect our brand and reputation. If we are unsuccessful in establishing or maintaining relationships with third parties, our ability to compete in the marketplace or to grow our revenue could be impaired, and our operating results could suffer.
Our use of open source software could negatively affect our ability to sell our applications and subject us to possible litigation.
A portion of our applications incorporate open source software, and we expect to continue to incorporate open source software in the future. Few of the licenses applicable to open source software have been interpreted by courts, and their application to the open source software integrated into our proprietary software may be uncertain. Moreover, we cannot provide any assurance that we have not incorporated additional open source software in our applications in a manner that is inconsistent with the terms of the license or our current policies and procedures. If we fail to comply with these licenses, we may be subject to certain requirements, including requirements that we offer our applications that incorporate the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software, and that we license such modifications or derivative works under the terms of applicable open source licenses. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from the sale of our applications that contained the open source software, and required to comply with the foregoing conditions, which could disrupt the distribution and sale of some of our applications. In addition, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. As a result, we could be subject to suits by parties claiming infringement due to the reliance by our applications on certain open source software. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition, or require us to devote additional research and development resources to change our applications.
Certain of our operating results and financial metrics are difficult to predict as a result of seasonality.
We have historically experienced seasonality in terms of when we enter into customer agreements. We sign a significantly higher percentage of agreements with new customers, and renew agreements with existing customers, in the fourth quarter of each calendar year as our customers tend to follow budgeting cycles at the end of the calendar year. Our cash flow from operations has historically been higher in the first quarter of each calendar year than in other quarters. This seasonality is reflected to a much lesser extent, and sometimes is not immediately apparent, in our revenue, due to the fact that we defer revenue recognition. In addition, seasonality may be difficult to observe in our financial results during periods in which we acquire businesses, as such results typically are most significantly impacted by such acquisitions. We expect this seasonality
to continue, or possibly increase in the future, which may cause fluctuations in our operating results and financial metrics. If our quarterly operating results or outlook fall below the expectations of research analysts or investors, the price of our common stock could decline substantially.
We could incur substantial costs as a result of any claim of infringement of another party’s intellectual property rights.
In recent years, there has been significant litigation involving patents and other intellectual property rights in our industry. Companies providing software are increasingly bringing and becoming subject to suits alleging infringement of proprietary rights, particularly patent rights, and to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property infringement claims. We do not have a significant patent portfolio, which could prevent us from deterring patent infringement claims through our own patent portfolio, and our competitors and others may now and in the future have significantly larger and more mature patent portfolios than we have. The risk of patent litigation has been amplified by the increase in the number of a type of patent holder, which we refer to as a non-practicing entity, whose sole business is to assert such claims and against whom our own intellectual property portfolio may provide little deterrent value. We could incur substantial costs in prosecuting or defending any intellectual property litigation.litigation and may not have adequate insurance coverage for these types of actions. If we sue to enforce our rights or are sued by a third-party that claims that our applications infringe its rights, the litigation could be expensive and could divert our management resources. Moreover, our acquisition strategy could expose us to additional risk of intellectual property litigation as we acquire new businesses with diverse software offerings and intellectual property assets.
In addition, in most instances, we have agreed to indemnify our customers against claims that our applications infringe the intellectual property rights of third parties. Our business could be adversely affected by any significant disputes between us and our customers as to the applicability or scope of our indemnification obligations to them. Any intellectual property litigation to which we might become a party, or for which we are required to provide indemnification, may require us to do one or more of the following:
•cease selling or using applications that incorporate the intellectual property that we allegedly infringe;
•make substantial payments for legal fees, settlement payments or other costs or damages;
•obtain a license, which may not be available on reasonable terms or at all, to sell or use the relevant technology; or
•redesign the allegedly infringing applications to avoid infringement, which could be costly, time-consuming or impossible.
If we are required to make substantial payments or undertake any of the other actions noted above as a result of any intellectual property infringement claims against us or any obligation to indemnify our customers for such claims, such payments or actions could harm our business.
We could incur substantial costs in protecting our intellectual property from infringement, and any failure to protect our intellectual property could impair our business.
Our success and ability to compete depend, in part, upon our intellectual property. We seek to protect the source code for our proprietary software and other proprietary technology and information under a combination of copyright, trade secrets, and patent law, and we seek to protect our brands through trademark law. Our policy is to enter into confidentiality agreements, or agreements with confidentiality provisions, with our employees, consultants, vendors, and customers, and to control access to our software, documentation, and other proprietary
information. Despite these precautions, it may be possible for unauthorized parties to copy our software or other proprietary technology or information, or to develop similar software independently.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our applications or to obtain and use information that we regard as proprietary. Policing unauthorized use of our applications is difficult, and we are unable to determine the extent to which piracy of our software exists or will occur in the future. Litigation may be necessary in the future to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others, or defend against claims of infringement or invalidity. Such litigation could be costly, time-consuming, and distracting to management, result in a diversion of resources or the narrowing or invalidation of portions of our intellectual property, and have a material adverse effect on our business, operating results, and financial condition. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights or alleging that we infringe the counterclaimant’s own intellectual property. These steps may be inadequate to protect our intellectual property. Third parties may challenge the validity or ownership of our intellectual property, and these challenges could cause us to lose our rights, in whole or in part, to such intellectual property or narrow its scope such that it no longer provides meaningful protection. We will not be able to
protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer, and disclosure of our applications may be unenforceable under the laws of certain jurisdictions and foreign countries. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. To the extent we expand our international activities, our exposure to unauthorized copying, transfer, and use of our applications and proprietary technology or information may increase.
There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology. If we fail to meaningfully protect our intellectual property, our business, brands, operating results and financial condition could be materially harmed.
We rely on third-party software that is required for the development and deployment of our applications, which may be difficult to obtain or which could cause errors or failures of our applications.
We rely on software licensed from or hosted by third parties to offer our applications. In addition, we may need to obtain licenses from third parties to use intellectual property associated with the development of our applications, which might not be available to us on acceptable terms, or at all. Any loss of the right to use any software required for the development, maintenance, and delivery of our applications could result in delays in the provision of our applications until equivalent technology is either developed by us or, if available, is identified, obtained and integrated, which could harm our business. Any errors or defects in third-party software could result in errors or a failure of our applications, which could harm our business.
Market Risks
The markets in which we participate are intensely competitive, and if we do not compete effectively, our operating results could be adversely affected.
The overall market for software is rapidly evolving and subject to changing technology, shifting customer needs and frequent introductions of new applications. The intensity and nature of our competition varies significantly across our family of software applications. Many of our competitors and potential competitors are larger and have greater brand name recognition, longer operating histories, larger marketing budgets, and significantly greater resources than we do. Some of our smaller competitors may offer applications on a stand-alone basis at a lower price than our price due to lower overhead or other factors, while some of our larger competitors may offer applications at a lower price in an attempt to cross-sell additional products in the future or retain a customer using a different application.
We believe there are a limited number of direct competitors that provide a comprehensive software offering. However, we face competition both from point solution providers, including legacy on-premise enterprise systems, and other cloud-based work management software vendors that may address one or more of the functional elements of our applications, but are not designed to address a broad range of software needs. In addition, we face competition from manual processes and traditional tools, such as paper-based techniques, spreadsheets, and email.
If our competitors’ products, service, or technologies become more accepted than our software applications, if they are successful in bringing their products or services to market earlier than ours, or if their products or services are more technologically capable than ours, our revenues could be adversely affected.
Mergers of, or other strategic transactions by, our competitors could weaken our competitive position or reduce our revenue.
If one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscape could adversely affect our ability to compete effectively. In order to take advantage of customer demand for cloud-based software applications, vendors of legacy systems are expanding their cloud-based software applications through acquisitions and internal development. A potential result of such expansion is that certain of our current or potential competitors may be acquired by third parties with greater available resources and the ability to further invest in product improvements and initiate or withstand substantial price competition. Our competitors also may establish or strengthen cooperative relationships with our current or future value-added resellers, third-party consulting firms or other parties with whom we have relationships, thereby limiting our ability to promote our applications. Disruptions in our business caused by these events could reduce our revenue.
Our quarterly operating results may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of research analysts or investors, which could cause our stock price to decline, and you may lose part or all of your investment.
Our quarterly operating results may fluctuate as a result of a variety of factors, many of which are outside of our control. Accordingly, the results of any one quarter may not fully reflect the underlying performance of our business and should not be relied upon as an indication of future performance. If our quarterly operating results or outlook fall below the expectations of research analysts or investors, the price of our common stock could decline substantially.
Financial Risks
We may need financing in the future, and any additional financing may result in restrictions on our operations or substantial dilution to our stockholders. We may seek to renegotiate or refinance our loan facility, and we may be unable to do so on acceptable terms or at all.
We have funded our operations since inception primarily through equity financings, cash from operations, and cash available under our loan facility. We may need to raise funds in the future, for example, to expand our business, acquire complementary businesses, develop new technologies, respond to competitive pressures, or react to unanticipated situations. We may try to raise additional funds through public or private financings, strategic relationships, or other arrangements. Our ability to obtain debt or equity funding will depend on a number of factors, including market conditions, our operating performance, and investor interest. In addition, under the terms of our Series A Preferred Stock, holders of our Series A Preferred Stock have certain approval rights over additional financings. Additional funding may not be available to us on acceptable terms or at all. If adequate funds are not available, we may be required to reduce expenditures, including curtailing our growth strategies, reducing our product-development efforts, or foregoing acquisitions. If we succeed in raising additional funds through the issuance of equity or convertible securities, it could result in substantial dilution to existing stockholders. If we raise additional funds through the issuance of debt securities or preferred stock, these new securities would have rights, preferences, and privileges senior to those of the holders of our common stock. In addition, any debt financing obtained by us in the future or issuance of preferred stock could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. For example, our Series A Preferred Stock contains a number of restrictive covenants. See "—Risks Related to Our Common Stock.” Additionally, we may need to renegotiate the terms of our loan facility, and our lender may be unwilling to do so, or may agree to such changes subject to additional restrictive covenants on our operations and ability to raise capital.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations and interest expense to increase significantly.
At December 31, 2023, the total outstanding indebtedness under our Credit Facility (as defined herein) was $482.1 million.
Interest rates may remain at existing levels or may further increase in the near term which could cause our debt service obligations and interest expense to increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, could correspondingly decrease.
We have floating-to-fixed interest rate swap agreements in order to reduce interest rate volatility in connection with $258.5 million of the outstanding term debt on our Credit Facility, but $223.5 million of our outstanding term debt and all our $60.0 million Revolver (as defined herein), which remains undrawn, are not currently subject to any interest rate instruments.
Our Credit Facility contains operating and financial covenants that may restrict our business and financing activities.
Our obligations under our Credit Facility are secured by a security interest in substantially all of our assets and assets of the co-borrowers’ and of any guarantors, including intellectual property. The terms of the Credit Facility limit, among other things, our ability to
•Incur additional indebtedness or guarantee indebtedness of others;
•Create liens on their assets;
•Make investments, including certain acquisitions;
•Enter into mergers or consolidations;
•Dispose of assets;
•Pay dividends and make other distributions on the Company’s capital stock, and redeem and repurchase the Company’s capital stock;
•Enter into transactions with affiliates; and
•Prepay indebtedness or make changes to certain agreements.
Furthermore, the Credit Facility requires us and our subsidiaries to comply with certain financial covenants if greater than 35% of revolving credit facility is drawn. The operating and other restrictions and covenants in the Credit Facility, and in any future financing arrangements that we may enter into, may restrict our ability to finance our operations, engage in certain business activities, or expand or fully pursue our business strategies, or otherwise limit our discretion to manage our business. Our ability to comply with these restrictions and covenants may be affected by events beyond our control, and we may not be able to meet those restrictions and covenants. A breach of any of the restrictions and covenants could result in a default under the loan facility or any future financing arrangements, which could cause any outstanding indebtedness under the loan facility or under any future financing arrangements to become immediately due and payable, and result in the termination of commitments to extend further credit.
Fluctuations in the exchange rate of foreign currencies could result in losses on currency transactions.
Our customers are generally invoiced in the currency of the country in which they are located. In addition, we incur a portion of our operating expenses in foreign currencies, including Australian dollars, British pounds, Canadian dollars, Indian Rupees, Euros and Israeli New Shekels, and in the future, as we expand into other foreign countries, we expect to incur operating expenses in other foreign currencies. As a result, we are exposed to foreign exchange rate fluctuations as the financial results of our international operations and our revenue and operating results could be adversely affected. We have not previously engaged in foreign currency hedging. If we decide to hedge our foreign currency exchange rate exposure, we may not be able to hedge effectively due to lack of experience, unreasonable costs, or illiquid markets.
If we are unable to implement and maintain effective internal controls over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports, and the market price of our common stock may be negatively affected.
As a public company, we are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and that our independent registered public accounting firm issue an attestation report annually regarding the effectiveness of our internal control over financial reporting. We have identified material weaknesses in our internal controls over financial reporting in the past and if we have a material weakness in our internal controls over financial reporting, we may not detect errors on a timely basis, and our financial statements may be materially misstated. We may need additional finance and accounting personnel with certain skill sets to assist us with the reporting requirements we will encounter as a public company and to support our anticipated growth. In addition, implementing internal controls may distract our officers and employees, entail substantial costs to modify our existing processes, and take significant time to complete.
If we identify material weaknesses in our internal controls over financial reporting, if we are unable to assert that our internal controls over financial reporting are effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports; the market price of our common stock could be negatively affected; and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2023, the Company had total net operating loss carryforwards of approximately $304.2 million consisting of $256.0 million and $48.2 million related to the U.S. federal and foreign net operating loss carryforwards, respectively. In addition, as of December 31, 2023, the Company had research and development credit carryforwards of approximately $4.0 million. The U.S. federal net operating loss and credit carryforwards will expire beginning in 2024, if not utilized. The annual limitation will result in the expiration of approximately $155.0 million of U.S. federal net operating losses and $4.0 million of credit carryforwards before utilization. $48.0 million of foreign net operating loss carryforwards carry forward indefinitely, and the remainder will expire beginning in 2041.
Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules apply under state tax laws. Based on analysis of acquired net operating losses and credits, utilization of our net operating losses and research and development credits will be subject to annual limitations. The
annual limitation will result in the expiration of $155.0 million of federal net operating losses and $4.0 million of research and development credit carryforwards before utilization. In the event that it is determined that we have in the past experienced additional ownership changes, or if we experience one or more ownership changes as a result of future transactions in our stock, then we may be further limited in our ability to use our net operating loss carryforwards and other tax assets to reduce taxes owed on the net taxable income that we earn. Any such limitations on the ability to use our net operating loss carryforwards and other tax assets could adversely impact our business, financial condition, and operating results. As noted below, we entered into a Tax Benefit Preservation Plan in an effort to preserve our net operating loss carryforwards but cannot ensure that the plan will provide for full or partial utilization of our net operating losses.
We may be required to record charges to future earnings if our Goodwill or Intangible Assets become impaired.
Accounting principles generally accepted in the United States of America (“GAAP”) require us to assess Goodwill for impairment at least annually. In addition, we assess our Goodwill and Intangible Assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Depending on the results of our review, we could be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or intangible assets were determined, negatively impacting our results of operations. See “Note 5. Goodwill and Other Intangible Assets” in the notes to our consolidated financial statements for more information regarding our first quarter 2023 and fourth quarter 2022 Goodwill impairments.
We may be adversely affected by the effects of inflation.
Inflation has the potential to adversely affect our liquidity, business, financial condition and results of operations by increasing our overall cost structure, particularly if we are unable to achieve commensurate increases in the prices we charge our customers. The existence of inflation in the economy has resulted in, and may continue to result in, higher interest rates and capital costs, shipping costs, supply shortages, increased costs of labor, weakening exchange rates and other similar effects. As a result of inflation, we have experienced and may continue to experience, cost increases. Although we may take measures to mitigate the impact of this inflation, if these measures are not effective, our business, financial condition, results of operations and liquidity could be materially adversely affected. Even if such measures are effective, there could be a difference between the timing of when these beneficial actions impact our results of operations and when the cost of inflation is incurred.
Legal and Regulatory Risks
Unanticipated challenges by tax authorities could harm our future results.
We are subject to income taxes in the United States and various non-U.S. jurisdictions. We may be subject to income tax audits by various tax jurisdictions throughout the world, many of which have not established clear guidance on the tax treatment of cloud-based companies. The application of tax laws in such jurisdictions may be subject to diverging and sometimes conflicting interpretations by tax authorities in these jurisdictions. Although we believe our income tax liabilities are reasonably estimated and accounted for in accordance with applicable laws and principles, an adverse resolution of one or more uncertain tax positions in any period could have a material impact on the results of operations for that period.
Taxing authorities may successfully assert that we should have collected or, in the future, should collect additional sales and use taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations.
We have not historically filed sales and use tax returns or collected sales and use taxes in all jurisdictions in which we have sales, based on our belief that such taxes are not applicable. While operations of these jurisdictions are managed based on our interpretation of local regulations, a change in regulations or interpretations of legislation may result in an obligation that we are not aware of. Taxing authorities may seek to impose such taxes on us, including for past sales, which could result in penalties and interest. Any such tax assessments may adversely affect the results of our operations.
Our operating results could be adversely affected by an increase in our effective tax rate as a result of U.S. and foreign tax law changes, outcomes of current or future tax examinations, or by material differences between our forecasted and actual effective tax rates.
Our operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions, with a significant amount of our foreign earnings generated by our subsidiaries organized in Australia, Canada, Ireland and the United Kingdom. Any significant change in our future effective tax rates could adversely impact our results of operations for future periods. Our future effective tax rates could be adversely affected by the following:
•changes in tax laws or the interpretation of such tax laws as applied to our business and corporate structure in the United States, Australia, Canada, France, Germany, India, Ireland, Israel, Malaysia, the Netherlands, Romania and the United Kingdom, or other international locations where we have operations;
•earnings being lower than anticipated in countries where we are taxed at lower rates as compared to the United States federal and state statutory tax rates;
•an increase in expenses not deductible for tax purposes;
•changes in tax benefits from stock-based compensation;
•changes in the valuation allowance against our deferred tax assets;
•changes in judgment from the evaluation of new information that results in a recognition, derecognition or change in measurement of a tax position taken in a prior period;
•increases to interest or penalty expenses classified in the financial statements as income taxes;
•new accounting standards or interpretations of such standards; or
•results of examinations by the Internal Revenue Service (“IRS”), state, and foreign tax or other governmental authorities.
The IRS and other tax authorities regularly examine our income tax returns and other non-income tax returns, such as payroll, sales, use, value-added, net worth or franchise, property, goods and services, consumption, import, stamp, and excise taxes, in both the United States and foreign jurisdictions. The calculation of our provision for income taxes and our accruals for other taxes requires us to use significant judgment and involves dealing with uncertainties in the application of complex tax laws and regulations. In determining the adequacy of our provision for income taxes, we regularly assess the potential settlement outcomes resulting from income tax examinations. However, the final outcome of tax examinations, including the total amount payable or the timing of any such payments upon resolution of these issues, cannot be estimated with certainty. In addition, we cannot be certain that such amount will not be materially different from the amount that is reflected in our historical income tax provisions and accruals for other taxes. Should the IRS or other tax authorities assess additional taxes, penalties or interest as a result of a current or a future examination, we may be required to record charges to operations in future periods that could have a material impact on our results of operations, financial position or cash flows in the applicable period or periods.
Forecasts of our annual effective tax rate are complex and subject to uncertainty because our income tax position for each year combines the effects of estimating our annual income or loss, the mix of profits and losses earned by us and our subsidiaries in tax jurisdictions with a broad range of income tax rates, as well as benefits from available deferred tax assets, the impact of various accounting rules, our interpretations of changes in tax laws and results of tax audits. Forecasts of our annual effective tax rate do not include the anticipation of future tax law changes. In addition, we report for certain tax benefits from stock-based compensation in the period the stock compensation vests or is settled, which may cause increased variability in our quarterly effective tax rates. If there were a material difference between forecasted and actual tax rates, it could have a material impact on our results of operations.
Tax laws, regulations, and compliance practices are evolving and may have a material adverse effect on our results of operations, cash flows and financial position.
The U.S. Tax Cuts and Jobs Act (the “Tax Act”) was enacted in December 2017 and significantly affected U.S. tax law by changing how the United States imposes income tax on multinational corporations. The U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the law and impact our results of operations. As additional interpretative guidance is issued by the applicable authorities, we may need to revise our provision (benefit) for income taxes in future periods. These revisions could materially affect our results of operations, cash flow and financial position.
Further, the Inflation Reduction Act of 2022 was enacted in August 2022, which contained provisions effective January 1,
2023, including a 15% corporate alternative minimum tax and a 1% excise tax on certain stock repurchases by public corporations, both of which we do not expect to have a material impact on our results of operations, financial condition or cash flows. While we do not anticipate these changes to be significant, these revisions could materially affect our results of operations, cash flow and financial position.
Tax laws, regulations, and administrative practices in various jurisdictions are evolving and may be subject to significant changes due to economic, political and other conditions. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. Governments are increasingly focused on ways to increase tax revenues, particularly from multinational corporations, which may lead to an increase in audit activity and harsher positions taken by tax authorities. We are currently subject to tax audits in various jurisdictions and these jurisdictions may assess additional tax liabilities against us.
The Organisation for Economic Co-operation and Development (“OECD”), an international association of countries, including the United States, released the final reports from its Base Erosion and Profit Shifting (“BEPS”) Action Plans, which aim to standardize and modernize global tax policies. The BEPS Action Plans propose revisions to numerous tax rules, including country-by-country reporting, permanent establishment, hybrid entities and instruments, transfer pricing, and tax treaties. The BEPS Action Plans have been or are being enacted by countries where we have operations. The European Commission (“EC”) has conducted investigations in multiple countries focusing on whether local country tax rulings provide preferential tax treatment that violates European Union state aid rules and concluded that certain countries, including Ireland, have provided illegal state aid in certain cases. The EC and OECD have also been evaluating new rules on the taxation of the digital economy to provide greater taxing rights to jurisdictions where customers or users are located and to address additional base erosion and profits shifting issues. In addition, many countries have recently introduced new laws or proposals to tax digital transactions. These developments in tax laws and regulations, and compliance with these rules, could have a material adverse effect on our operating results, financial position and cash flows.
Taxing authorities could reallocate our taxable income among our subsidiaries, which could increase our consolidated tax liability.
We conduct integrated operations internationally through subsidiaries in various tax jurisdictions pursuant to transfer pricing arrangements between our subsidiaries and between our subsidiaries and us. If two or more affiliated companies are located in different countries, the tax laws or regulations of each country generally require that transfer prices be the same as those between unrelated companies dealing at arms’ length and that contemporaneous documentation is maintained to support the transfer prices. While we believe that we operate in compliance with applicable transfer pricing laws and intend to continue to do so, our transfer pricing procedures are not binding on
applicable tax authorities. If tax authorities in any of these countries were to successfully challenge our transfer prices as not reflecting arms’ length transactions, they could require us to adjust our transfer prices and thereby reallocate our income to reflect these revised transfer prices, which could result in a higher tax liability to us. Such reallocations may subject us to interest and penalties that would increase our consolidated tax liability, and could adversely affect our financial condition, results of operations, and cash flows.
Our ability to use our net operating loss carryforwardsNew laws and certain other tax attributes may be limited.
Asincreasing levels of December 31, 2017, we had federal net operating loss carryforwards of approximately $181.9 million and research and development credit carryforwards of approximately $3.9 million, which begin expiring in 2018. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre- change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules apply under state tax laws. Based on analysis of acquired net operating losses and credits, utilization of our net operating losses and research and development credits will be subject to annual limitations. The annual limitation will resultregulation in the expirationareas of $77 million of federal net operating losses and $3.9 million of research and development credit carryforwards before utilization. In the event that it is determined that we have in the past experienced additional ownership changes, or if we experience one or more ownership changes as a result of future transactions in our stock, then we may be further limited in our ability to use our net operating loss carryforwards and other tax assets to reduce taxes owed on the net taxable income that we earn. Any such limitations on the ability to use our net operating loss carryforwards and other tax assets could adversely impact our business, financial condition, and operating results.
Changes in laws or regulations related to the Internet may diminish the demand for our applications, and any failure of the Internet infrastructure could have a negative impact on our business.
We deliver our cloud-based applications through the Internet. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting data privacy and the useprotection of the Internet. In addition, government agencies or private organizations may begin to impose taxes, fees, or other charges for accessing the Internet or on commerce conducted via the Internet. Increased enforcement of existing laws and regulations, as well as any laws, regulations, or changes that may be adopted or implemented in the future,user data could limit the growth of the use of cloud-based applications or communications generally, result in a decline in the use of the Internet and the viability of cloud-based applications such as ours, and reduce the demand forharm our applications.business
The success of our enterprise work management software applications depends onregulatory framework for privacy and data security matters around the development and maintenance of the Internet infrastructure. This includes maintenance of a reliable network backbone with the necessary speed, data capacity and security, as well as the timely development of complementary products for providing reliable Internet access and services. The Internet has experienced,world is rapidly evolving and is likely to remain volatile for the foreseeable future. We are subject to privacy and data security obligations in the United States, United Kingdom, European Union and other foreign jurisdictions relating to the collection, use, sharing, retention, security, transfer and other handling of personal data about individuals, including our users and employees around the world. Data protection, consumer protection and privacy laws may differ, conflict and be interpreted and applied inconsistently, from country to country. In many cases, these laws apply not only to user data, employee data and third-party transactions, but also to transfers of personal data between or among ourselves, our subsidiaries, and other parties with which we have commercial relations, in addition to methods of communication and consent for such communication. These laws continue to experience, significant growthdevelop in the amount of trafficU.S. and around the globe, including through regulatory and legislative action and judicial decisions, in ways we cannot predict and that may be unableharm our business. For example, a new Quebec data protection law took effect in September 2023, and updates to support such demands.Canadian federal privacy legislation are pending. India passed the Digital Personal Data Protection Act in 2023. In addition, problems caused by viruses, worms, malware,the United States, through the Federal Communications Commission, recently implemented new lead generation “robot-text” and similar programs“robo-calls” regulations under the Telephone Consumer Protection Act (TCPA). As the particulars of these regulations are unknown at this time, these new consumer protection regulations could impact our organization’s corporate go-to-market sales initiatives, as well as certain feature sets in our current product stack.
Any failure to comply with applicable laws, regulations or contractual obligations may harm the performance of the Internet. Any outages and delays in the Internet could reduce the level of usage of our services, which could materially adversely affect our business, financial condition, results of operations and prospects.financial condition. If we are subject to an investigation or litigation or suffer a breach of security of personal data, we may incur costs or be subject to forfeitures and penalties that could reduce our profitability. In addition, compliance
with these laws may restrict our ability to provide services to our customers that they may find to be valuable. For example, the General Data Protection Regulation (“GDPR”) became effective in May 2018. The GDPR, which applies to personal data collected in the context of all of our activities conducted from an establishment in the European Union, related to products and services offered to individuals in the European Union or related to the monitoring of individuals’ behavior in Europe, imposes a range of significant compliance obligations regarding the handling of personal data. Actions required to comply with these obligations depend in part on how particular and strict regulators interpret and apply them. If we fail to comply with the GDPR, or if regulators assert we have failed to comply with the GDPR, we may be subject to, for example, regulatory enforcement actions, that can result in monetary penalties of up to 4% of our annual worldwide revenue or EUR 20 million (whichever higher), private lawsuits, class actions, regulatory orders to stop processing and delete data, and reputational damage. In June 2021, the European Commission published new versions of the Standard Contractual Clauses, which are used as a legal cross-border mechanism allowing companies to transfer/allow access to personal data outside the European Economic Area. Use of the previous versions of the Standard Contractual Clauses is no longer allowed and all contracts that include the earlier versions should have been amended to replace them with the new versions by December 27, 2022. Also in June 2021, the European Data Protection Board finalized its recommendations regarding supplemental transfer measures to protect personal data during cross-border transfers. We must incur costs and expenses to comply with the new requirements, which may impact the cross-border transfer of personal data throughout our organization and to/from third parties.
In the United States, at least thirteen states have adopted generally applicable and comprehensive privacy laws. These new and developing state laws provide a number of new privacy rights for residents of these states and impose corresponding obligations on organizations doing business in these states. Not only do these laws require that we make new disclosures to consumers, business contacts, employees, job applicants and others about our data collection, use and sharing practices, but they also require that we provide new rights, such as the rights to access, delete and correct personal data. While the California Consumer Privacy concernsAct (the “CCPA”) became effective in 2020, it has already been amended significantly, and compliance with the amended law, the California Privacy Protection Act (the “CPRA”) was required as of January 2023. Compliance with the other states’ laws will be required at different times during 2023. In addition, a number of other U.S. states are considering adopting laws and regulations imposing obligations regarding the handling of personal data. Compliance with the GDPR, the new state laws, and other current and future applicable U.S. and international privacy, data protection, cybersecurity, artificial intelligence and other data-related laws can be costly and time-consuming. Complying with these varying requirements could cause us to incur substantial costs and/or require us to change our business practices in a manner adverse to our business. Violations of data and privacy-related laws can result in significant penalties.
Australia recently amended its Privacy Act, increasing the maximum penalties available for serious or repeated data breaches from AUS 2.2 million to the greater of: (i) AUS 50 million; (ii) three times the value of any benefit obtained through misuse of the information; or (iii) 30% of a company’s adjusted turnover in the relevant period.
We also may be bound by additional, more stringent contractual obligations relating to our collection, use and disclosure of personal data or may find it necessary or desirable to join industry or other domesticself-regulatory bodies or foreign regulations may reduceother privacy or security related organizations that require compliance with their rules pertaining to privacy and data protection.
We post on our websites our privacy notices and practices concerning the effectivenesscollection, use, sharing, disclosure, deletion and retention of our applicationsuser data. Any failure, or perceived failure, by us to comply with our posted privacy notices or with any regulatory requirements or orders or other federal, state or international privacy -related laws and regulations, including the GDPR, CCPA and CPRA, could result in proceedings or actions against us by governmental entities or others (e.g., class action plaintiffs), subject us to significant penalties and negative publicity, require us to change our business practices, increase our costs and adversely affect our business. We may also experience security breaches and likely will in the future, which themselves may result in a violation of these laws and give rise to regulatory enforcement and/or private litigation.
Our customers can use our applicationsAny failure to collect, use,comply with governmental export and store personal or identifying information regarding their customers and employees. Federal, state and foreign government bodies and agencies have adopted, are considering adopting, or may adoptimport control laws and regulations regarding the collection, use, storage, and disclosure of personal information obtained from individuals. The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to the businesses of our customers may limit the use and adoption of our applications and reduce overall demand, or lead to significant fines, penalties or liabilities for any noncompliance with such privacy laws. For example, the European Union and many countries in Europe have stringent privacy laws and regulations that may impact our ability to profitably operate in certain European countries. Furthermore, privacy
concerns may cause our customers to resist providing the personal data necessary to allow them to use our applications effectively. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our applications in certain industries. All of these domestic and international legislative and regulatory initiatives may adversely affect our customers’ ability to process, handle, store, use, and transmit demographic and personal information from their customers and employees, which could reduce demand for our applications.
In addition to government activity, privacy advocacy groups and the technology and other industries are considering various new, additional, or different self-regulatory standards that may place additional burdens on us. If the processing of personal information were to be curtailed in this manner, our applications would be less effective, which may reduce demand for our applications and adversely affect our business.
We are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing requirements and subject us to liability if we are not in compliance with applicable laws.
Our applications are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations, and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. Exports of our applications must be made in compliance with these laws and regulations. If we fail to comply with these laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including: the possible loss of export or import privileges; fines, which may be imposed on us and responsible employees or managers; and, in extreme cases, the incarceration of responsible employees or managers. Obtaining the necessary authorizations, including any required license, for a particular sale may be time-consuming,time-
consuming, is not guaranteed, and may result in the delay or loss of sales opportunities. In addition, changes in our applications or changes in applicable export or import regulations may create delays in the introduction and sale of our applications in international markets, prevent our customers with international operations from deploying our applications, or, in some cases, prevent the export or import of our applications to certain countries, governments, or persons altogether. Any change in export or import regulations, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could also result in decreased use of our applications, or in our decreased ability to export or sell our applications to existing or potential customers with international operations. Any decreased use of our applications or limitation on our ability to export or sell our applications would likely adversely affect our business.
Furthermore, we incorporate encryption technology into certain of our applications. Various countries regulate the import of certain encryption technology, including through import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our applications or could limit our customers’ ability to implement our applications in those countries. Encrypted applications and the underlying technology may also be subject to export control restrictions. Governmental regulation of encryption technology and regulation of imports or exports of encryption products, or our failure to obtain required import or export approval for our applications, when applicable, could harm our international sales and adversely affect our revenue. Compliance with applicable regulatory requirements regarding the export of our applications, including with respect to new releases of our applications, may create delays in the introduction of our applications in international markets, prevent our customers with international operations from deploying our applications throughout their globally-distributed systems or, in some cases, prevent the export of our applications to some countries altogether.
Moreover, U.S. export control laws and economic sanctions programs prohibit the shipment of certain products and services to countries, governments, and persons that are subject to U.S. economic embargoes and trade sanctions. Even though we take precautions to prevent our applications from being shipped or provided to U.S. sanctions targets, our applications and services could be shipped to those targets or provided by third parties despite such precautions. Any such shipment could have negative consequences, including government investigations, penalties and reputational harm.
If we are unable to implement and maintain effective internal controls over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports, and the market price of our common stock may be negatively affected.
As a public company, we are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act, requires that we evaluate and determine the effectiveness of our internal controls over financial reporting. Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting until the later of our second annual report or the first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company” as defined in the JOBS Act. If we have a material weakness in our internal controls over financial reporting, we may not detect errors on a timely basis, and our financial statements may be materially misstated. We are in the process of designing and implementing the internal controls over financial reporting required to comply with this obligation, which process will be time consuming, costly and complicated. We may need additional finance and accounting personnel with certain skill sets to assist us with the reporting requirements we will encounter as a public company and to support our anticipated growth. In addition, implementing internal controls may distract our officers and employees, entail substantial costs to modify our existing processes, and take significant time to complete.
In the future, if we identify material weaknesses in our internal controls over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, if we are unable to assert that our internal controls over financial reporting are effective, or if our independent registered public accounting firm is not required to express an opinion due to the provisions of the JOBS Act or is unable to express an opinion as to the effectiveness of our internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports; the market price of our common stock could be negatively affected; and we could become subject to investigations by the stock exchange on which our securities are listed, the Securities and Exchange Commission (SEC), or other regulatory authorities, which could require additional financial and management resources.
We incur significant costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could harm our operating results.
As a public company, we will incur significant legal, accounting, investor relations, and other expenses, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with current corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act, as well as rules implemented by the SEC and the exchange on which we list our common stock. These rules and regulations may substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. As a public company, it is more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantially higher costs to obtain coverage or to accept reduced policy limits and coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.
We are an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act and, for as long as we continue to be an emerging growth company, we may choose to take advantage of certain exemptions from various reporting requirements applicable to other public companies including, but not limited to: not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act; reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and exemptions from the requirements to hold a nonbinding advisory vote on executive compensation and to obtain stockholder approval of any golden parachute payments not previously approved. We may take advantage of these provisions until such time that we are no longer an “emerging growth company.” We will cease to be an “emerging growth company” upon the earliest of the first fiscal year following the fifth anniversary of the consummation of our initial public offering; the first fiscal year after our annual gross revenue is $1 billion or more; the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities; or the date on which we are deemed to be a “large accelerated filer” as defined in the Securities Exchange Act of 1934, or the Exchange Act. To the extent we take advantage of any of these reduced reporting burdens in this Annual Report or in future filings, the information that we provide our security holders may be different than you might get from other public companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive because we may rely on these
exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile.
Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We are choosing to “opt out” of such extended transition period, however, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. The requirements of being a public company may strain our resources and divert management’s attention.
Risks Related to Ownership of Our Common Stock
The market price of our common stock may be volatile, which could result in substantial losses for investors.
The market price of our common stock could be subject to significant fluctuations. Some of the factors that may cause the market price of our common stock to fluctuate include:
actual or anticipated changes in the estimates of our operating results that we provide to the public, our failure to meet these projections or changes in recommendations by securities analysts that elect to follow our common stock;
price and volume fluctuations in the overall equity markets from time to time;
significant volatility in the market price and trading volume of comparable companies;
changes in the market perception of enterprise work management software generally or in the effectiveness of our applications in particular;
disruptions in our services due to computer hardware, software or network problems;
announcements of technological innovations, new products, strategic alliances or significant agreements by us or by our competitors;
announcements of new customer agreements or upgrades and customer downgrades or cancellations or delays in customer purchases;
litigation involving us;
our ability to successfully consummate and integrate acquisitions;
investors’ general perception of us;
recruitment or departure of key personnel;
sales of our common stock by us or our stockholders;
fluctuations in the trading volume of our shares or the size of our public float; and
general economic, legal, industry and market conditions and trends unrelated to our performance.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Because of the potential volatility of our stock price, we may become the target of securities litigation in the future. If we were to become involved in securities litigation, it could result in substantial costs, divert management’s attention and resources from our business and adversely affect our business.
If securities or industry analysts do not publish, or cease publishing, research or reports about us, our business or our market, if they publish negative evaluations of our stock, or if we fail to meet the expectations of analysts, the price of our stock and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If few analysts commence coverage of us, the trading price of our stock would likely decrease if one or more of the analysts covering our business downgrade their evaluation of our stock, the price of our stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could cause our stock price to decline. Furthermore, if our operating results fail to meet analysts’ expectations our stock price would likely decline.
Sales of a substantial number of shares of our common stock in the public market by our existing stockholders could cause our stock price to fall.
The price of our common stock could decline if there are substantial sales of our common stock in the public stock market. On August 28, 2017, we filed a registration statement on Form S-3 on behalf of certain of our stockholders. If the stockholders listed in that registration statement sell a significant amount of stock at one time, our stock price could be negatively impacted by such sale. We also have registered shares of common stock that we may issue under our stock-based compensation plans, which can be freely sold in the public market upon issuance, subject to the lock-up agreements and the restrictions imposed on our affiliates under Rule 144 under the Securities Act. Our 2014 Equity Incentive Plan provides for automatic increases to the number of shares available for issuance thereunder and we undertake each year to add those shares to a registration statement on Form S-8. These increases could have a negative effect on our stock price as the holders of such shares elect to sell their shares.
Our existing directors, executive officers and principal stockholders have substantial control over us, which could limit your ability to influence the outcome of key transactions, including a change of control.
As of December 31, 2017, our directors, executive officers, principal stockholders and their affiliates beneficially owned or controlled, directly or indirectly, a majority of our outstanding common stock. As a result, these stockholders, acting together, could have significant influence over the outcome of matters submitted to our stockholders for approval, including the election or removal of directors, any amendments to our certificate of incorporation or bylaws and any merger, consolidation or sale of all or substantially all of our assets, and over the management and affairs of our company. This concentration of ownership may also have the effect of delaying or preventing a change in control of our company or discouraging others from making tender offers for our shares and might affect the market price of our common stock.
Because we do not expect to pay any dividends on our common stock for the foreseeable future, our investors may never receive a return on their investment.
We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. Instead, we plan to retain any earnings to maintain and expand our existing operations. In addition, our ability to pay cash dividends is currently limited by the terms of our existing loan facility,Credit Facility (as defined herein), which prohibits our payment of dividends on our capital stock without prior consent, and any future credit facility may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any return on their investment.
Anti-takeover provisions in our amended and restated certificate of incorporation and our amended and restated bylaws, as well as provisions of Delaware law, might discourage, delay or prevent a change in control of our company or changes in our board of directors or management and, therefore, depress the trading price of our common stock.
Provisions in our certificate of incorporation and bylaws, as amended and restated, , will contain provisions that may depress the market price of our common stock by acting to discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or
frustrate attempts by our stockholders to replace or
remove members of our board of directors or our management. These provisions include the following:
•our certificate of incorporation provides for a classified board of directors with staggered three-year terms so that not all members of our board of directors are elected at one time;
•directors may be removed by stockholders only for cause;
•our board of directors has the right to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
•special meetings of our stockholders may be called only by our Chief Executive Officer, our board of directors or holders of not less than the majority of our issued and outstanding capital stock limiting the ability of minority stockholders to take certain actions without an annual meeting of stockholders;
•our stockholders may not act by written consent unless the action to be effected and the taking of such action by written consent are approved in advance by our board of directors and, as a result, a holder, or holders, controlling a majority of our capital stock would generally not be able to take certain actions without holding a stockholders’ meeting;
•our certificate of incorporation prohibits cumulative voting in the election of directors. This limits the ability of minority stockholders to elect director candidates;
•stockholders must provide timely notice to nominate individuals for election to the board of directors or to propose matters that can be acted upon at an annual meeting of stockholders and, as a result, these provisions may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us; and
•our board of directors may issue, without stockholder approval, shares of undesignated preferred stock, making it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock from engaging in certain business combinations with us.
Any provision of our certificate of incorporation and bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock. The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
Pursuant to the terms of the Purchase Agreement (as defined herein), we have issued shares of our Series A Preferred Stock that ranks senior to our common stock in priority of distribution rights and rights upon our liquidation, dissolution or winding up and has additional corporate governance rights. On July 14, 2022, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Ulysses Aggregator, LP (the “Purchaser”), an affiliate of HGGC, LLC, to issue and sell at closing 115,000 shares of Series A Preferred Stock of the Company, par value $0.0001 per share, at a price of $1,000 per share (the “Initial Liquidation Preference”) for an aggregate purchase price of $115.0 million. As of December 31, 2023, we had 115,000 shares of newly designated Series A Preferred Stock outstanding. The holders of the Series A Preferred Stock are entitled to dividends payable quarterly in arrears, which may be paid, at our option, in cash or by increasing the Liquidation Preference (as defined below) of each share of Series A Preferred Stock by the amount of the applicable dividend. The holders of Series A Preferred Stock (each, a “Holder” and collectively, the “Holders”) will be entitled to dividends (i) at the rate of 4.5% per annum until but excluding the seven year anniversary of the Closing, and (ii) at the rate of 7% per annum on and after the seven year anniversary of the Closing. Our ability to pay cash dividends is subject to the restrictions under our existing credit agreement. The Series A Preferred Stock has no mandatory conversion feature and is a perpetual security. Although we have the ability to redeem the shares of Series A Preferred Stock beginning on the date that is seven years from the Closing date, we may be unable to do so at that time, and we will be forced to pay the higher dividend rate of 7% per annum until the time that the holders of Series A Preferred Stock convert their shares into shares of common stock or we obtain sufficient capital to redeem the Series A Preferred Stock.
The Series A Preferred Stock ranks senior to our common stock with respect to distribution rights and rights upon our
liquidation, dissolution or winding up, on parity with any class or series of our capital stock expressly designated as ranking on parity with the Series A Preferred Stock with respect to distribution rights and rights upon our upon liquidation, dissolution or winding up, junior to any class or series of our capital stock expressly designated as ranking senior to the Series A Preferred Stock with respect to distribution rights and rights upon our upon liquidation, dissolution or winding up and junior in right of payment to our existing and future indebtedness. Further, upon our liquidation, dissolution or winding up, holders of our Series A Preferred Stock will receive a distribution of our available assets before common stockholders in an amount equal to (i) the Initial Liquidation Preference, plus (ii) any accrued and unpaid dividends on such share of Series A Preferred Stock to, but excluding, the date of payment of such amounts (the “Liquidation Preference”).
The holders of Series A Preferred Stock generally are entitled to vote with the holders of our common stock on all matters submitted for a vote of holders of our common stock (voting together with the holders of our common stock as one class) on an as-converted basis. In addition, so long as the Purchaser and its affiliates beneficially own in the aggregate at least 5% of the shares of our common stock on a fully diluted basis including the shares of common stock issuable upon conversion of shares of Series A Preferred Stock, the holders of a majority of the outstanding shares of Series A Preferred Stock, voting as a single class, are entitled to nominate and elect one individual to serve on our board of directors. In addition, the holders of a majority of the outstanding shares of Series A Preferred Stock, voting as a separate class, will have the right to elect, for so long as the Purchaser and its affiliates own in the aggregate at least 10% of the shares of Series A Preferred Stock (or common stock into which it is convertible) outstanding as of the Closing, one non-voting observer to our board of directors. Such governance rights may grant the holders of our Series A Preferred Stock additional control rights, which may impact our ability to run our business, and may adversely affect the trading price of our common stock. Upon issuance of the Series A Preferred Stock, holders of our common stock will experience dilution of both economic and voting rights, and, because we may pay dividends in kind by increasing the liquidation value of each share of Series A Preferred Stock, holders of common stock will be further diluted at each regular dividend payment date.
The fundamental change redemption feature of our Series A Preferred Stock may make it more difficult for a party to take over our company or discourage a party from taking over our company.
Upon a “Fundamental Change” (involving a change of control as further described in the certificate of designation governing our Series A Preferred Stock), each holder of Series A Preferred Stock shall have the right to require us to redeem all or any part of the holder’s Series A Preferred Stock for an amount equal to greater of (i) the sum of 105% of the Liquidation Preference and a customary make-whole amount, and (ii) the amount that such Holder would have received had such Holder, immediately prior to such “Fundamental Change,” converted the Holder’s Series A Preferred Stock into common stock, without regard to the Issuance Limitation. The mandatory redemption option conferred to holders of our Series A Preferred Stock upon certain events constituting a Fundamental Change (involving a change of control) under the Series A Preferred Stock, may have the effect of discouraging a third party from making an acquisition proposal for our company or of delaying, deferring or preventing certain change of control transactions of our company under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-current market price or that stockholders may otherwise believe is in their best interests.
Our Board has adopted a Tax Benefit Preservation Plan, which may not protect the future availability of the Company’s tax assets in all circumstances and which could delay or discourage takeover attempts that some shareholders may consider favorable.
As of December 31, 2023, we had approximately $304.2 million of NOLs as well as other tax attributes that could be available in certain circumstances to reduce future U.S. corporate income tax liabilities. Pursuant to Section 382 (“Section 382”) of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), and the Treasury Regulations issued thereunder, a corporation that undergoes an “ownership change” is subject to limitations on its use of its existing NOL and interest expense carryforwards and certain other tax attributes (collectively, “Tax Assets”), which can be utilized in certain circumstances to offset future U.S. tax liabilities. Generally, an “ownership change” occurs if the percentage of the Company’s stock owned by one or more “five percent stockholders” increases by more than fifty percentage points over the lowest percentage of stock owned by such stockholders at any time during the prior three-year period or, if sooner, since the last “ownership change” experienced by the Company. In the event of such an “ownership change,” Section 382 imposes an annual limitation on the amount of post-change taxable income a corporation may offset with pre-change Tax Assets. Similar rules apply in various U.S. state and local jurisdictions. However, with respect to the substantial majority of our Tax Assets, while we have in recent years experienced significant changes in the ownership of our stock, we do not believe we have undergone an “ownership change” that would limit our ability to use these Tax Assets. However, there can be no assurance that the Internal Revenue Service will not challenge this position.
On May 2, 2023, our Board of Directors authorized and declared a dividend of one preferred stock purchase right for each outstanding share of Common Stock. See “Note 11. Stockholders' Equity" for additional information on the terms and
operation of the Plan. By adopting the Plan, the Board of Directors is seeking to protect the Company’s ability to use its NOLs and other tax attributes to offset potential future income tax liabilities. The Company’s ability to use such NOLs and other tax attributes would be substantially limited if the Company experiences an “ownership change,” as defined in Section 382. The Plan is intended to make it more difficult for the Company to undergo an ownership change by deterring any person from acquiring 4.9% or more of the outstanding shares of stock without the approval of the Board of Directors. However, there can be no assurance that the Plan will prevent an “ownership change” from occurring for purposes of Section 382, and events outside of our control and which may not be subject to the Plan, such as sales of our stock by certain existing shareholders, may result in such an “ownership change” in the future. While we currently have a full valuation allowance against our NOLs and other historic Tax Assets for financial accounting purposes, if we have undergone or in the future undergo an ownership change that applies to our Tax Assets, our ability to use these Tax Assets could be substantially limited after the ownership change, and this limit could have a substantial adverse effect on our cash flows and financial position. The Plan will expire on May 1, 2024, but we may adopt a new tax benefit preservation plan after the expiration of the Plan.
While the Plan is not,and a future tax benefit preservation plan will not be, principally intended to prevent a takeover, it may have an anti-takeover effect because an “acquiring person” thereunder may be diluted upon the occurrence of a triggering event. Accordingly, the Plan or a future tax benefit preservation plan may complicate or discourage a merger, tender offer, accumulations of substantial blocks of our stock, or assumption of control by a substantial holder of our securities. The Plan or a future tax benefit preservation plan should not interfere with any merger or other business combination approved by the Board of Directors. Because the Board of Directors may consent to certain transactions, the Plan gives, and a future tax benefit preservation plan is expected to give, our Board of Directors significant discretion to act in the best interests of shareholders.
We cannot guarantee that our stock repurchase program will be fully implemented or that it will enhance long-term stockholder value.
On September 1, 2023 and October 31, 2023, the Board of Directors authorized the Stock Repurchase Plan (as defined in Note 13. Stockholders' Equity) in the aggregate amount of up to $15,000,000 and $10,000,000, respectively, for a total of $25,000,000 authorized, which allows the Company to repurchase shares of its issued and outstanding Common Stock, from time to time in the open market or otherwise including pursuant to a Rule 10b5-1 trading plan and in compliance with Rule10b-18 under the Exchange Act.
Our repurchase program does not have an expiration date and we are not obligated to repurchase a specified number or dollar value of shares. Further, our stock repurchase program may be accelerated, suspended, delayed or discontinued at any time. Even if fully implemented, our stock repurchase program may not enhance long-term stockholder value. In addition, the Inflation Reduction Act, signed into law on August 16, 2022, imposes an excise tax of 1% (potentially increasing to 4% under certain U.S. tax proposals) on certain corporate stock repurchases.
As of December 31, 2023, we have repurchased 3,245,100 shares of our common stock for a total cost of $14.2 million, inclusive of commissions and excise tax.
General Risks
An epidemic, pandemic or contagious disease and measures intended to prevent the spread of such an event could adversely affect our business, results of operations and financial condition.
We face risks related to an epidemic, pandemic or contagious disease which has impacted, and in the future could impact, the markets in which we operate and could have a material adverse effect on our business, results of operations and financial condition. The impact of an epidemic, pandemic or other health crisis and measures to prevent the spread of such an event could materially and adversely affect our business in a number of ways. For example, existing and potential customers may choose to reduce or delay technology spending in response, or attempt to renegotiate contracts and obtain concessions, which could materially and negatively impact our operating results, financial condition and prospects.
Adverse economic conditions may reduce our customers’ ability to spend money on information technology or software, or our customers may otherwise choose to reduce their spending on information technology or software, which may adversely impact our business.
Our business depends on the overall demand for information technology and software spend and on the economic health of our current and prospective customers. If worldwide economic conditions become unstable, including as a result of protectionism and nationalism, other unfavorable changes in economic conditions, such as inflation, rising interest rates, a U.S. government default on its obligations or a recession, and other events beyond our control, such as economic sanctions, natural disasters, results of global epidemics, pandemics, or contagious diseases, political instability, and armed conflicts and wars, such as the Russia-Ukraine and Israeli-Hamas wars, then our existing customers and prospective customers may re-
evaluate their decision to purchase our applications. Weak global economic conditions or a reduction in information technology or software spending by our customers could harm our business in a number of ways, including longer sales cycles and lower prices for our applications.
The market price of our common stock may be volatile, which could result in substantial losses for investors.
The market price of our common stock could be subject to significant fluctuations. Some of the factors that may cause the market price of our common stock to fluctuate include:
•actual or anticipated changes in the estimates of our operating results that we provide to the public, our failure to meet these projections or changes in recommendations by securities analysts that elect to follow our common stock;
•price and volume fluctuations in the overall equity markets from time to time;
•significant volatility in the market price and trading volume of comparable companies;
•changes in the market perception of software generally or in the effectiveness of our applications in particular;
•disruptions in our services due to computer hardware, software or network problems;
•announcements of technological innovations, new products, strategic alliances or significant agreements by us or by our competitors;
•announcements of new customer agreements or upgrades and customer downgrades or cancellations or delays in customer purchases;
•litigation involving us;
•our ability to successfully consummate and integrate acquisitions;
•investors’ general perception of us;
•recruitment or departure of key personnel;
•sales of our common stock by us or our stockholders;
•fluctuations in the trading volume of our shares or the size of our public float; and
•general economic, legal, industry and market conditions and trends unrelated to our performance.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Because of the potential volatility of our stock price, we may become the target of securities litigation in the future. If we were to become involved in securities litigation, it could result in substantial costs, divert management’s attention and resources from our business and adversely affect our business.
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Item 1B. | Unresolved Staff Comments |
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Cybersecurity represents a critical component of the Company’s overall approach to risk management. Our customers expect us to protect their data and the impact of not doing so has financial, reputational, and regulatory implications. Disruptions caused by cyberattacks, data breaches, or system compromises can impact our business operations and financial performance. The Company maintains a global presence, with cybersecurity threat operations functioning 24/7 with the specific goal of identifying, preventing and mitigating cybersecurity threats and responding to cybersecurity incidents in accordance with established plans.
Cybersecurity risks are among the core enterprise risks that are subject to oversight by the Company’s Audit Committee and ultimately, the Board of Directors (the “Board”) where that oversight and review takes place at a regular cadence. The Company’s Security & Compliance Team (“S&C Team”) has established policies, procedures, and controls to protect information assets, mitigate risks, and ensure compliance with relevant laws and regulations. The S&C Team regularly reviews and updates security practices, and stays updated on emerging threats, best practices, and evolving regulatory requirements to adapt Upland’s security measures accordingly.
Risk Management and Strategy
A key part of the Company’s strategy for managing risks from cybersecurity threats is the ongoing assessment and testing of the Company’s processes and practices through auditing, assessments, tabletop exercises, threat modeling, vulnerability testing and other exercises focused on evaluating the effectiveness of our cybersecurity measures. The Company regularly engages third parties to perform assessments on our cybersecurity measures, including information security maturity assessments, audits and independent reviews of our information security control environment and operating effectiveness. The results of such assessments, audits and reviews are reported to the Audit Committee, the Board, and, if needed, the Company adjusts its cybersecurity policies, standards, processes and practices based on the information provided by the assessments, audits and reviews.
The Company’s Chief Security Officer (“CSO”) and the S&C Team, work collaboratively across the Company to implement a program designed to protect our customer’s data and the Company’s information systems from cybersecurity threats and to promptly respond to any cybersecurity incidents. To facilitate the success of this program, multidisciplinary teams throughout the Company are deployed to address cybersecurity threats and to respond to cybersecurity incidents in accordance with the Company’s incident response and recovery plans. Through the ongoing communications from these teams, the Chief Information Security Officer monitors the prevention, detection, mitigation and remediation of cybersecurity incidents in real time, and reports such incidents to Senior Leadership and the Audit Chair when appropriate.
In addition, the Company has established a Security Incident Response Team (“SIRT”) led by the CSO and consisting of (i) Chief Executive Officer, (ii) Chief Product Officer, (iii) Chief Financial Officer, (iv) President, Chief Operating Officer, and (v) Chief Legal Officer/ General Counsel and others. When any defined incident occurs, the SIRT convenes to drive a remediation plan based on its security incidence response escalation process designed to contain potential incidents, investigate the root causes and corrective action required, notify relevant stakeholders and determine reporting requirements.
Governance
The Company’s CSO is the member of the Company’s management that is principally responsible for overseeing the Company’s cybersecurity risk management program, in partnership with other business leaders across the Company. Our CSO has held leadership positions in information security for over 30 years, including serving as Chief Security Officer of large public and private organizations, with a high focus on data security. Team members that support the CSO and our information security program have relevant educational and industry experience, including holding Certified Information Systems Security Professional certifications.
The Audit Committee receives prompt and timely information regarding any cybersecurity incident that meets established reporting thresholds, as well as ongoing updates regarding such incident until it has been addressed. At least once each year, the Audit Committee discusses the Company’s approach to cybersecurity risk management with the Company’s CSO and Company management. This discussion may include reports on cybersecurity risks, which address a wide range of topics including, for example, recent developments, evolving standards, vulnerability assessments, third-party and independent reviews, the threat environment, technological trends and information security considerations arising with respect to the Company’s peers and third parties.
The Company utilizes a cross-functional approach to address the risk from cybersecurity threats, involving management personnel from the Company’s technology, operations, legal, risk management, internal audit and other key business functions, as well as the members of the Board and the Audit Committee in an ongoing dialogue regarding cybersecurity threats and incidents, while also implementing controls and procedures for the escalation of cybersecurity incidents pursuant to established thresholds so that decisions regarding the disclosure and reporting of such incidents can be made by management in a timely manner.
Item 2. Properties
Our principal corporate offices are located in Austin, Texas, where we occupy approximately 9,90015,400 square feet of space under aleases that expire in 2025. We also lease office facilities domestically, some of which we sublease, located in Massachusetts, Nebraska, North Carolina, Texas and Washington. Internationally, we lease office space in Australia, Canada, India, Ireland, Israel, Malaysia, Netherlands, Romania and the United Kingdom. We believe that expires in March 2020. We occupy additional leased facilitiesour properties are generally suitable to meet our needs for operations of approximately 16,900 square feet in Montreal, Quebec, and approximately 22,900 square feet in Lincoln, Nebraska.the foreseeable future.
Item 3. Legal Proceedings
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any legal proceedings that we believe would, individually or taken together, have a material adverse effect on our business, operating results, financial condition, or cash flows.
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Item 4. | Mine Safety Disclosures |
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the NASDAQ Global Market, or Nasdaq, under the symbol “UPLD”.
As of March 1, 2018,February 20, 2024, the last reported sales price of our common stock on the Nasdaq Global Market was $24.10$4.74 and there were 8130 stockholders of record of our common stock, including Computershare Limited,Broadridge Financial Solutions, Inc., which holds shares of our common stock on behalf of an indeterminateindeterminable number of beneficial owners.
The table below sets forth the high and low sales prices per share of our common stock as reported on the Nasdaq Global Market for the periods indicated:
|
| | | |
| 2017 |
Year Ended December 31, 2017 | Low | | High |
Fourth quarter | $20.30 | | $24.62 |
Third Quarter | $19.82 | | $25.33 |
Second Quarter | $15.54 | | $23.95 |
First Quarter | $8.90 | | $15.89 |
|
| | | |
| 2016 |
Year Ended December 31, 2016 | Low | | High |
Fourth quarter | $7.85 | | $9.74 |
Third Quarter | $7.44 | | $9.90 |
Second Quarter | $6.80 | | $7.77 |
First Quarter | $6.00 | | $7.19 |
We have never declared or paid dividends on our common stock. We do not expect to pay dividends on our common stock for the foreseeable future. Instead, we anticipate that all of our earnings will be used for the operation and growth of our business. Any future determination to declare cash dividends would be subject to the discretion of our board of directors and would depend upon various factors, including our results of operations, financial condition and liquidity requirements, restrictions that may be imposed by applicable law and our contracts, and other factors deemed relevant by our board of directors. In addition, the terms of our loan facility currently restrict our ability to pay dividends.
Performance Graph
Notwithstanding any statement to the contrary in any of our filings with the SEC, the following information shall not be deemed “filed” with the SEC or “soliciting material” under the Securities Exchange Act of 1934 and shall not be incorporated by reference into any such filings irrespective of any general incorporation language contained in such filing.
The following graph compares the total cumulative stockholder return on our common stock with the total cumulative return of the Nasdaq Computer Technology Index (the “Computer Technology Index”) and the S&P 500 Composite Index during the period commencing on November 6, 2014, the initial trading day of our common stock,December 29, 2017 and ending on December 31, 2017.29, 2023. The graph assumes a $100 investment at the beginning of the period in our common stock, the stocks represented in the S&P 500 Composite Index and the stocks represented in Nasdaq Computer Technology Index, and reinvestment of any dividends. The Computer Technology Index is designed to represent a cross section of widely-held U.S. corporations involved in various phases of the computer industry. The Computer Technology Index is market-value (capitalization) weighted, based on the aggregate market value of its 27 component stocks. Historical stock price performance should not be relied upon as an indication of future stock price performance.
Recent Sales of Unregistered Securities
In November 2016, the Company issued 24,587 shares of common stock valued at approximately $200,000 as a result of the escrow release in connection with the acquisition of Ultriva, Inc.None
Issuer Purchases of Equity Securities
None.
Equity CompensationOn September 1, 2023 and October 31, 2023, the Board of Directors authorized the Stock Repurchase Plan Information
For information regarding securities(as defined in Note 13. Stockholders' Equity) in the aggregate amount of up to $15,000,000 and $10,000,000, respectively, for a total of $25,000,000 authorized, which allows the Company to repurchase shares of its issued and outstanding Common Stock, from time to time in the open market or otherwise including pursuant to a Rule 10b5-1 trading plan and in compliance with Rule10b-18 under the Exchange Act. The authorization does not have a specified expiration date. Accordingly, unless terminated earlier by resolution of the Board, the stock repurchase program will expire when the Company has repurchased all shares authorized for issuancerepurchase. The Company is not obligated to acquire any particular amount of Common Stock and may modify or suspend the repurchases at any time in the Company’s discretion.
In September 2023, the Company purchased 783,356 shares at an average price of $4.10 under the Share Repurchase Plan. Disclosures of repurchased amounts and related average costs exclude the impact of excise taxes. The following table provides information about purchases of equity compensation plans, see Part III, Itemsecurities that are registered by the Company pursuant to Section 12 of this Annual Report on Form 10-K.
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Item 6. | Selected Financial Data |
The following selected historical consolidated financial data below should be read in conjunction with Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the related notes appearing in Item 8: “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K to fully understand factors that may affectExchange Act during the comparability of the information presented below.
The consolidated statements of operations data for the yearsthree months ended December 31,
2017, 2016, and 2015 and2023. | | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total number of shares purchased (1) | | Average price paid per share (2) | | Total number of shares purchased as part of the publicly announced plan | | Maximum approximate dollar value of shares that may yet be purchased under the plan |
10/01/2023 - 10/31/2023 | | 752,968 | | | $ | 4.07 | | | 752,968 | | | |
11/01/2023 - 11/30/2023 | | 830,915 | | | $ | 4.57 | | | 830,915 | | | |
12/01/2023 - 12/31/2023 | | 953,648 | | | $ | 4.54 | | | 877,861 | | | |
Total | | 2,537,531 | | | $ | 4.41 | | | 2,461,744 | | | $ | 10,798,936 | |
(1) The total number of shares repurchased during the selected consolidated balance sheet data as of December 31, 2017 and December 31, 2016 are derived from our audited consolidated financial statements appearing in Item 8: “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. The statement of operations data for the yearsthree months ended December 31, 2014 and 2013 and2023 includes 75,787 shares withheld from employees to satisfy either the selected consolidated balance sheet data asexercise price of December 31, 2015, 2014, and 2013 are derived from our consolidated financial statements not included in this Annual Report on Form 10-K. To obtain further information about our historical results, including our historical acquisitions, forstock options or the statutory withholding tax liability upon the vesting of share-based awards, which results of operations are included in our consolidated financial statements beginning on the dates of acquisition, you should read the following selected consolidated financial data in conjunction with our consolidated financial statements and related notes, the information in the section of this filing titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other financial information included elsewhere in this filing. Our historical results are not necessarily indicativepart of the results to be expected inShare Repurchase Program.
(2) Average price paid per share excludes costs and excise taxes associated with the future, and our interim results are not necessarily indicative of the results to be expected in the future.above mentioned repurchases.
Item 6. [Reserved]
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| | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (dollars in thousands, except share and per share data) |
Consolidated Statements of Operations Data: | | |
Revenue: | | | | | | | |
Subscription and support | $ | 85,467 |
| | $ | 65,552 |
| | $ | 57,193 |
| | $ | 48,625 |
| | $ | 30,887 |
|
Perpetual license | 4,346 |
| | 1,650 |
| | 2,805 |
| | 2,787 |
| | 2,003 |
|
Total product revenue | 89,813 |
| | 67,202 |
| | 59,998 |
| | 51,412 |
| | 32,890 |
|
Professional services | 8,139 |
| | 7,565 |
| | 9,913 |
| | 13,162 |
| | 8,303 |
|
Total revenue | 97,952 |
| | 74,767 |
| | 69,911 |
| | 64,574 |
| | 41,193 |
|
Cost of revenue: | | | | | | | | | |
Subscription and support | 28,454 |
| | 22,734 |
| | 19,586 |
| | 14,042 |
| | 7,787 |
|
Professional services | 5,193 |
| | 4,831 |
| | 7,085 |
| | 9,079 |
| | 5,680 |
|
Total cost of revenue | 33,647 |
| | 27,565 |
| | 26,671 |
| | 23,121 |
| | 13,467 |
|
Gross profit | 64,305 |
| | 47,202 |
| | 43,240 |
| | 41,453 |
| | 27,726 |
|
Operating expenses: | | | | | | | | | |
Sales and marketing | 15,307 |
| | 12,160 |
| | 12,965 |
| | 14,670 |
| | 10,625 |
|
Research and development | 15,795 |
| | 14,919 |
| | 15,778 |
| | 26,165 |
| | 10,340 |
|
Refundable Canadian tax credits | (542 | ) | | (513 | ) | | (470 | ) | | (1,094 | ) | | (583 | ) |
General and administrative | 23,291 |
| | 18,286 |
| | 18,201 |
| | 13,561 |
| | 6,832 |
|
Depreciation and amortization | 6,498 |
| | 5,291 |
| | 4,534 |
| | 4,310 |
| | 3,670 |
|
Acquisition-related expenses | 15,092 |
| | 5,583 |
| | 2,455 |
| | 2,186 |
| | 1,461 |
|
Total operating expenses | 75,441 |
| | 55,726 |
| | 53,463 |
| | 59,798 |
| | 32,345 |
|
Loss from operations | (11,136 | ) | | (8,524 | ) | | (10,223 | ) | | (18,345 | ) | | (4,619 | ) |
Other expense: | | | | | | | | | |
Interest expense, net | (6,582 | ) | | (2,781 | ) | | (1,858 | ) | | (1,951 | ) | | (2,797 | ) |
Other income (expense), net | 289 |
| | (678 | ) | | (544 | ) | | 101 |
| | (431 | ) |
Total other expense | (6,293 | ) | | (3,459 | ) | | (2,402 | ) | | (1,850 | ) | | (3,228 | ) |
Loss before provision for income taxes | (17,429 | ) | | (11,983 | ) | | (12,625 | ) | | (20,195 | ) | | (7,847 | ) |
Provision for income taxes | (1,296 | ) | | (1,530 | ) | | (1,039 | ) | | 78 |
| | (708 | ) |
Loss from continuing operations | (18,725 | ) | | (13,513 | ) | | (13,664 | ) | | (20,117 | ) | | (8,555 | ) |
Income (loss) from discontinued operations | — |
| | — |
| | — |
| | — |
| | (642 | ) |
Net loss | $ | (18,725 | ) | | $ | (13,513 | ) | | $ | (13,664 | ) | | $ | (20,117 | ) | | $ | (9,197 | ) |
Preferred stock dividends and accretion | — |
| | — |
| | — |
| | (1,524 | ) | | (98 | ) |
Net loss attributable to common shareholders | $ | (18,725 | ) | | $ | (13,513 | ) | | $ | (13,664 | ) | | $ | (21,641 | ) | | $ | (9,295 | ) |
Net loss per common share: | | | | | | | | | |
Loss from continuing operations per common share, basic and diluted | $ | (1.02 | ) | | $ | (0.82 | ) | | $ | (0.91 | ) | | $ | (4.43 | ) | | $ | (7.23 | ) |
Income (loss) from discontinued operations per common share, basic and diluted | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (0.54 | ) |
Net loss per common share, basic and diluted | $ | (1.02 | ) | | $ | (0.82 | ) | | $ | (0.91 | ) | | $ | (4.43 | ) | | $ | (7.77 | ) |
Weighted-average common shares outstanding, basic and diluted | 18,411,247 |
| | 16,472,799 |
| | 14,939,601 |
| | 4,889,901 |
| | 1,196,668 |
|
|
| | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (dollars in thousands) |
Consolidated Balance Sheet Data: | | | | | | | | | |
Cash and cash equivalents | $ | 22,326 |
| | $ | 28,758 |
| | $ | 18,473 |
| | $ | 30,988 |
| | $ | 4,703 |
|
Property and equipment, net | 2,927 |
| | 4,356 |
| | 6,001 |
| | 3,930 |
| | 3,942 |
|
Intangible assets, net | 70,043 |
| | 28,512 |
| | 31,526 |
| | 34,751 |
| | 34,747 |
|
Goodwill | 154,607 |
| | 69,097 |
| | 47,422 |
| | 45,146 |
| | 33,630 |
|
Total assets | 281,259 |
| | 150,588 |
| | 122,414 |
| | 135,686 |
| | 94,847 |
|
Deferred revenue | 45,377 |
| | 23,799 |
| | 19,939 |
| | 21,376 |
| | 17,036 |
|
Total liabilities | 189,844 |
| | 91,575 |
| | 62,144 |
| | 64,289 |
| | 60,191 |
|
Redeemable convertible preferred stock | — |
| | — |
| | — |
| | — |
| | 50,538 |
|
Total stockholders’ equity (deficit) | 91,415 |
| | 59,013 |
| | 60,270 |
| | 71,397 |
| | (15,882 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (dollars in thousands, except %) |
Other Financial Data: | | | | | | | | | |
Annualized recurring revenue value at year-end(1) | $ | 106,099 |
| | $ | 63,968 |
| | $ | 58,918 |
| | $ | 56,800 |
| | $ | 49,061 |
|
Annual net dollar retention rate(2) | 93 | % | | 95 | % | | 90 | % | | 96 | % | | 90 | % |
Adjusted EBITDA(3) | $ | 30,316 |
| | $ | 12,616 |
| | $ | 4,143 |
| | $ | 4,213 |
| | $ | 3,576 |
|
| |
(1) | Annualized recurring revenue value at year-end. The value as of December 31 equals the monthly value of our recurring revenue contracts measured as of December 31 multiplied by 12. This measure excludes the revenue value of certain uncontracted overage fees and on-demand service fees. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Key Metrics” for additional discussion of this key metric.
|
| |
(2) | Annual net dollar retention rate. We define annual net dollar retention rate as of December 31 as the aggregate annualized recurring revenue value at December 31 from those customers that were also customers as of December 31 of the prior fiscal year, divided by the aggregate annualized recurring revenue value from all customers as of December 31 of the prior fiscal year. This measure excludes the revenue value of certain uncontracted overage fees and on-demand service fees. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Key Metrics” for additional discussion of this key metric.
|
| |
(3) | Adjusted EBITDA. We monitor our Adjusted EBITDA to help us evaluate the effectiveness and efficiency of our operations. Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss), calculated in accordance with GAAP, plus net income (loss) from discontinued operations, depreciation and amortization expense, interest expense, net, other expense (income), net, provision for income taxes, stock-based compensation expense, acquisition-related expenses, non-recurring litigation costs, and purchase accounting adjustments for deferred revenue. Prior to the filing of this Annual Report on Form 10-K, we did not include purchase accounting adjustments for deferred revenue as a component of Adjusted EBITDA, and as such, the prior year Adjusted EBITDA amounts presented herein have been recast to reflect the inclusion of purchase accounting adjustments for deferred revenue.
|
The following table presents a reconciliation of net loss to Adjusted EBITDA: |
| | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (dollars in thousands) |
Net Loss | $ | (18,725 | ) | | $ | (13,513 | ) | | $ | (13,664 | ) | | $ | (20,117 | ) | | $ | (9,197 | ) |
Income (loss) from discontinued operations | — |
| | — |
| | — |
| | — |
| | 642 |
|
Depreciation and amortization expense | 11,914 |
| | 9,794 |
| | 8,451 |
| | 7,457 |
| | 5,310 |
|
Interest expense, net | 6,582 |
| | 2,781 |
| | 1,858 |
| | 1,951 |
| | 2,797 |
|
Other expense (income), net | (289 | ) | | 678 |
| | 544 |
| | (101 | ) | | 431 |
|
Provision for income taxes | 1,296 |
| | 1,530 |
| | 1,039 |
| | (78 | ) | | 708 |
|
Stock-based compensation expense | 9,977 |
| | 4,333 |
| | 2,741 |
| | 1,077 |
| | 498 |
|
Acquisition-related expense | 15,092 |
| | 5,583 |
| | 2,455 |
| | 2,186 |
| | 1,461 |
|
Stock-based compensation expense - related party vendor | — |
| | — |
| | — |
| | 11,220 |
| | — |
|
Non-recurring litigation costs | — |
| | 25 |
| | 406 |
| | 256 |
| | — |
|
Purchase accounting deferred revenue discount | 4,469 |
| | 1,405 |
| | 313 |
| | 362 |
| | 926 |
|
| | | | | | | | | |
Adjusted EBITDA | $ | 30,316 |
| | $ | 12,616 |
| | $ | 4,143 |
| | $ | 4,213 |
| | $ | 3,576 |
|
We believe that Adjusted EBITDA provides useful information to management, investors and others in understanding and evaluating our operating results for the following reasons:
Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired;
our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, in the preparation of our annual operating budget, as a measure of our operating performance, to assess the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance because Adjusted EBITDA eliminates the impact of items that we do not consider indicative of our core operating performance; and
Adjusted EBITDA provides more consistency and comparability with our past financial performance, facilitates period-to-period comparisons of our operations and also facilitates comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.
Adjusted EBITDA should not be considered as an alternative to net loss or any other measure of financial performance calculated and presented in accordance with GAAP. The use of Adjusted EBITDA as an analytical tool has limitations such as:
depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect cash requirements for such replacements; however, much of the depreciation and amortization currently reflected relates to amortization of acquired intangible assets as a result of business combination purchase accounting adjustments, which will not need to be replaced in the future;
Adjusted EBITDA may not reflect changes in, or cash requirements for, our working capital needs or contractual commitments;
Adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation;
Adjusted EBITDA does not reflect interest or tax payments that could reduce cash available for use; and
other companies, including companies in our industry, might calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as comparative measures.
Because of these limitations, you should consider Adjusted EBITDA together with other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.
The following tables present stock-based compensation, depreciation and amortization included in the respective line items in our Consolidated Statement of Operations:
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (dollars in thousands) |
Stock-based compensation: | | | | | | | | | |
Cost of revenue | $ | 436 |
| | $ | 44 |
| | $ | 42 |
| | $ | 49 |
| | $ | 16 |
|
Research and development | 796 |
| | 204 |
| | 203 |
| | 61 |
| | 12 |
|
Sales and marketing | 232 |
| | 105 |
| | 65 |
| | 39 |
| | 15 |
|
General and administrative | 8,513 |
| | 3,980 |
| | 2,431 |
| | 928 |
| | 455 |
|
Total | $ | 9,977 |
| | $ | 4,333 |
| | $ | 2,741 |
| | $ | 1,077 |
| | $ | 498 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (dollars in thousands) |
Depreciation: | | | | | | | | | |
Cost of Revenue | $ | 1,904 |
| | $ | 2,030 |
| | $ | 1,800 |
| | $ | 1,303 |
| | $ | 455 |
|
General and administrative | 712 |
| | 657 |
| | 452 |
| | 987 |
| | 348 |
|
Total | $ | 2,616 |
| | $ | 2,687 |
| | $ | 2,252 |
| | $ | 2,290 |
| | $ | 803 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (dollars in thousands) |
Amortization: | | | | | | | | | |
Cost of Revenue | $ | 3,512 |
| | $ | 2,473 |
| | $ | 2,116 |
| | $ | 1,844 |
| | $ | 1,185 |
|
General and administrative | 5,786 |
| | 4,634 |
| | 4,083 |
| | 3,323 |
| | 3,322 |
|
Total | $ | 9,298 |
| | $ | 7,107 |
| | $ | 6,199 |
| | $ | 5,167 |
| | $ | 4,507 |
|
| |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes theretothereto included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Item 1A: “Risk“Item 1A. Risk Factors.”
This section and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. Forward-looking statements may be identified by the use of forward-looking words such as “anticipate,” “believe,” “may,” “will,” “continue,” “seek,” “estimate,” “intend,” “hope,” “predict,” “could,” “should,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions, although not all forward-looking statements contain these words. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled Item 1A: “Risk“Item 1A. Risk Factors” above, which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8: “Financial“Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. For a comparison of the years ended December 31, 2022 and 2021 refer to “Item 7. Management’s Discussion and Analysis” in the Company’s Annual Report on Form 10-K for the years ended December 31, 2022 filed with the SEC on February 28, 2023. All informationinformation presented herein is based on our fiscal calendar. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended December 31 and the associated quarters of those fiscal years. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Overview
We provide cloud-based enterprise work management software. We define enterprise work management software as software applications that enable organizations to plan, manage and execute projects and work. Our family of applications enables users to manage their projects, professional workforce and IT investments, automate document-intensive business processes, and effectively engage with their customers, prospects, and community via the web and mobile technologies.
The continued growth of an information-based economy has given rise to a large and growing group of knowledge workers who operate in dynamic work environments as part of geographically dispersed and virtual teams. We believe that manual processes and legacy on- premise enterprise systems are insufficient to address the needs of the modern work environment. In order for knowledge workers to be successful, they need to interact with intuitive enterprise work systems in a collaborative way, including real-time access. Today, legacy processes and systems are being disrupted and replaced by cloud-based enterprise work management software that improves visibility, collaboration and productivity.
In response to these changes, we are providing organizations and their knowledge workers with software applications that better align resources with business objectives and increase visibility, governance, collaboration, quality of customer experience, and responsiveness to changes in the business environment. This results in increased work capacity, higher productivity, better execution, and greater levels of customer engagement. Our applications are easy-to-use, scalable, and offer real-time collaboration for knowledge workers distributed on a local or global scale. Our applications address enterprise work challenges in the following categories:
Project & Information Technology (IT) Management. Enables users to manage their organization’s projects, professional workforce and IT costs.
Workflow Automation. Enables users to streamline, optimize, automate and secure document-intensive workflow business processes across their enterprise and supply chain.
Digital Engagement. Enables users to effectively engage with their customers, prospects and community via the web and mobile technologies.
We sell our software applications primarily through a direct sales organization comprised of inside sales and field sales personnel. In addition to our direct sales organization, we have an indirect sales organization, which sells to distributors and value-added resellers. We employ a land-and-expand go-to-market strategy. After we demonstrate the value of an initial application to a customer, our sales and account management teams work to expand the adoption of that initial application across the customer, as well as cross-sell additional applications to address other enterprise work management needs of the customer. Our customer success organization supports our direct sales efforts by managing the post-sale customer lifecycle.
Our subscription agreements are typically sold either on a per-seat basis or on a minimum contracted volume basis with overage fees billed in arrears, depending on the application being sold. We service customers ranging from large global corporations and government agencies to small- and medium-sized businesses. We have more than 4,00010,000 customers with over 450,000 users across a broad range of industries, including financial services, retail,consulting services, technology, manufacturing, legal, education, consumer goods, media, telecommunications, government, insurance, non-profit, foodhealthcare, life sciences, retail and beverage, healthcare and life sciences.hospitality.
Through a series of acquisitions and integrations, we have established a library of diverse, family ofcloud-based software applications under the Upland brand and in three product categories (Project & IT Management, Workflow
Automation, and Digital Engagement), each of which addresses athat address specific enterprise work management need.digital transformation needs. Our revenue has grown from $22.8$149.9 million in fiscal 2012the year ended December 31, 2018 to $98.0$297.9 million in fiscal 2017,the year ended December 31, 2023, representing a 330% period-over-periodcompound annual growth rate. See Note 13 Domestic and Foreign Operations,rate of 15%. During each of the Notes to Consolidated Financial Statements for more information regarding ouryears ended December 31, 2023 and December 31, 2022, non-US revenue as it relates to domestic and foreign operations.a percent of total revenue was 30% .
Our operating results in a given period can fluctuate based on the mix of subscription and support, perpetual license and professional services revenue. For the years ended December 31, 2017, 20162023, 2022 and 2015,2021, our subscription and support revenue accounted for 87%represented 95%, 88%,94% and 82%, respectively95% of our total revenue, in both periods.respectively. Historically, we have sold certain of our applications under perpetual licenses, which also are paid in advance. For the years ended December 31, 2017, 20162023, 2022 and 2015,2021, our perpetual license revenue accounted for 4%2%, 2%, and 4%1% of our total revenue, respectively. The support agreements related to our perpetual licenses are one-year in duration and entitle the customer to support and unspecified upgrades. The revenue related to such support agreements is included as part of our subscription and support revenue. Professional services revenue consists of fees related to implementation, data extraction, integration and configuration and training on our applications. For the years ended December 31, 2017, 20162023, 2022 and 2015,2021, our professional services revenue accounted for 9%3%, 10%4%, and 14%,4% of our total revenue, respectively.
To support continued growth, we intend to pursue acquisitions of complementary technologies, products and businesses. This will expand our product families, customer base and market access, resulting in increased benefits of scale. We will prioritize acquisitions within our current core productenterprise solution categories including Project & IT Management, Workflow Automation, and Digital Engagement.as described in “Item 1. Business” herein. Consistent with our growth strategy, we have madecompleted a total of sixteen31 acquisitions in the six years endingfrom February 2012 through December 31, 2017.2023.
Acquisitions completed during the years ended December 31, 2023, 2022 and 2021 include the following:
Acquisitions
2023 Acquisitions
Omtool.•None
2022 Acquisitions
•BA Insight - On January 11, 2017, Upland completed its acquisition of Omtool, Ltd. ("Omtool"), an enterprise document capture, fax, and workflow solution company. The purchase price paid for Omtool was $19.3 million (net of cash acquired).
RightAnswers. On April 21, 2017,February 22, 2022, the Company acquired RightAnswers,entered into an agreement to purchase the shares comprising the entire issued share capital of BA Insight Inc. ("RightAnswers", (“BA Insight”), a cloud-based enterprise knowledge management system. The purchase price was $17.4 million, in cash at closing (net of $0.1 million cash acquired) and a $2.5 million cash holdback payable in one year (subject to indemnification claims), and excludes potential future earn-out payments valued at $4.0 million tied to additional performance-based goals, towards which $1.0 million was paid in September, 2017 and an additional $2.0 million was earned but not paid as of December 31, 2017. Revenues recorded since the acquisition date through December 31, 2017 were approximately $5.6 million.solution.
Waterfall.•Objectif Lune - On July 13, 2017,January 7, 2022, the Company acquired Waterfall Internationalentered into an agreement to purchase the shares comprising the entire issued share capital of Objectif Lune Inc., a Quebec proprietary company (“Waterfall”Objectif Lune”), a cloud-based mobile messaging platform. The purchase price consideration paid was approximately $24.4 million in cash at closing (net of $0.4 million of cash acquired) and a $1.5 million cash holdback payable in 18 months (subject to indemnification claims). The foregoing excludes an additional potential $3.0 million in earnout payments tied to performance-based conditions.document workflow product.
Qvidian.2021 Acquisitions
•Panviva - On November 16, 2017,June 24, 2021, the Company acquired Qvidian Corporationentered into an agreement to purchase the shares comprising the entire issued share capital of Panviva Pty Ltd, an Australian proprietary company (“Qvidian”), a provider of cloud-based RFP and sales-proposal automation software. The purchase price consideration paid by the Company was $50 million, of which $30 million came from cash on-hand and $20 million from the Company's credit facility.
2016 Acquisitions
LeadLander. On January 7, 2016, Upland completed its purchase of substantially all of the assets of LeadLander, Inc. ("LeadLander"), a website analytics provider. The purchase price consideration paid was approximately $8.0 million in cash payable at closing (net of $0.4 million of cash acquired) and a $1.2 million cash holdback payable in 12 months (subject to indemnification claims). In addition to the cash consideration described above, the Asset Purchase Agreement included a contingent share consideration component pursuant to which Upland issued an aggregate of $2.4 million in common stock on July 25, 2016. The Company also paid additional consideration of $2.4 million in March, 2017 in cash to the selling shareholders of LeadLander based on the achievement of certain revenue targets during fiscal years 2016 and 2017 and no further payment are expected to be made as of December 31, 2017.
HipCricket. On March 14, 2016, Upland completed its purchase of substantially all of the assets of HipCricket, Inc. ("HipCricket"Panviva”), a cloud-based mobile messaging software provider. The consideration paidenterprise knowledge management solution.
•BlueVenn - On February 28, 2021 the Company entered into an agreement to purchase the seller consistedshares comprising the entire issued share capital of BlueVenn Group Limited, a company limited by shares organized and existing under the laws of England and Wales (“BlueVenn”), a cloud-based customer data platform.
•Second Street - On January 19, 2021, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Second Street Media, Inc., a Missouri corporation (“Second Street”), an audience engagement platform.
Sunset Assets
In connection with periodic reviews of our issuancebusiness, we have decided to discontinue the availability of onecertain non-strategic product offerings and a limited number of non-strategic customer contracts (collectively referred to as “Sunset Assets”).
During the three months ended December 31, 2022, we decided to classify as Sunset Assets certain non-strategic product offerings representing an estimated $27.9 million shares of 2023 annual total revenue. During the second quarter of 2023, we determined that certain product offerings that had previously been placed in Sunset Assets did have use cases that would be strategic and, as a result, we removed them from our common stockSunset Assets. At the same time, we identified other product offerings and certain non-strategic customer contracts to include in Sunset Assets. The net effect of these actions in the transfersecond quarter of our EPM Live product business. The value2023 resulted in the estimated addition of the shares on the closing date of the transaction was approximately $5.7 million, and the fair value of our EPM Live product business was approximately $5.9 million. Prior to the transaction, HipCricket was owned by an affiliate of ESW Capital, LLC, which is a shareholder of Upland. Raymond James & Co. provided a fairness opinion to Upland in connection with the transaction.
Advanced Processing & Imaging. On April 27, 2016, Upland acquired Advanced Processing & Imaging, Inc., a content management platform driving workflow in governments and schools. The purchase price consideration consisted of $4.0$5.0 million in cash payable at closing (net of $0.2 million of cash acquired),2023 annual total revenues to our Sunset Assets. Subsequently, during the three months ended December 31, 2023, a non-strategic product offering was identified and a $0.8 million cash holdback payableincluded in 12 months (subject to indemnification claims).
2015 Acquisitions
Ultriva. On November 13, 2015, the Company acquired 100% of the outstanding capital of Ultriva, Inc. ("Ultriva") for total purchase consideration of $7.2 million, which included cash of $5.6 million, net of $0.4 million of cash acquired, 179,298 shares of the Company’s common stock with a fair value of $1.4 million, andSunset Assets adding an additional $200,000estimated $9.9 million in shares of common stock held in escrow, subject2023 annual total revenues to indemnification claims, one year from the date of the acquisition. In November 2016, the Company issued 24,587 shares of common stock valued at approximately $200,000 asour Sunset Assets. As a result of the escrow release. Ultriva provides cloud-based supply chain collaboration software.discontinuation of these Sunset Assets, the Company has established end of life targets and reduced certain expenditures related to the sales and marketing of the Sunset Assets.
Our acquisitions may have a material adverse impact on our resultsIt is possible that during future periodic reviews of operations, including a potential material adverse impact on our cost of revenue in the short term, as we seek to integrate our acquired businesses over the following six to twelve months in order to achieve additional operating efficiencies. In addition, as we grow our business we continuemay determine to face many challenges and risks. We might encounter difficulties identifying, acquiring, and integrating complementary products, technologies, and businesses. Over time, as competition increases,add additional non-strategic product offerings or non-strategic customer contracts to Sunset Assets or remove certain product offerings or customer contracts from the classification of Sunset Assets. In either case, we may experience pricing pressure. We also may experience seat downgrades or a reduction in minimum contracted volume that could negatively impact our business. Seat downgrades or reductions in minimum contracted volume could occur for several reasons, including dissatisfaction with our prices or features relativewill adjust the revenues attributable to competitive offerings, reductions in our customers’ spending levels, unused seats or minimum contracted volume, or limited adoption by our customers of our applications. Our strategic initiatives will require expenditure of capital and the attention of management, and we may not succeed in executing on our growth plan.
Key Metrics
In addition to the GAAP financial measures described below in “Components of Operating Results,” we regularly review the following key metrics to evaluate and identify trends in our business, measure our performance, prepare financial projections and make strategic decisions (in thousands of dollars, except %):
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Other Financial Data: | | | | | | | | | |
Annualized recurring revenue value at year-end(1) | $ | 106,099 |
| | $ | 63,968 |
| | $ | 58,918 |
| | $ | 56,800 |
| | $ | 49,061 |
|
Annual net dollar retention rate(2) | 93 | % | | 95 | % | | 90 | % | | 96 | % | | 90 | % |
Adjusted EBITDA(3) | $ | 30,316 |
| | $ | 12,616 |
| | $ | 4,143 |
| | $ | 4,213 |
| | $ | 3,576 |
|
| |
(1) | Annualized recurring revenue value at year-end. The value as of December 31 equals the monthly value of our recurring revenue contracts measured as of December 31 multiplied by 12. This measure excludes the revenue value of uncontracted overage fees and on-demand service fees. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Key Metrics” for additional discussion of this key metric.
|
| |
(2) | Annual net dollar retention rate. We define annual net dollar retention rate as of December 31 as the aggregate annualized recurring revenue value at December 31 from those customers that were also customers as of December 31 of the prior fiscal year, divided by the aggregate annualized recurring revenue value from all customers as of December 31 of the prior fiscal year. This measure excludes the revenue value of uncontracted overage fees and on-demand service fees. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Key Metrics” for additional discussion of this key metric.
|
| |
(3) | Adjusted EBITDA. We monitor our Adjusted EBITDA to help us evaluate the effectiveness and efficiency of our operations. Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss), calculated in accordance with GAAP, plus net income (loss) from discontinued operations, depreciation and amortization expense, interest expense, net, other expense (income), net, provision for income taxes, stock-based compensation expense, acquisition-related expenses, non-recurring litigation costs, and purchase accounting adjustments for deferred revenue. Prior to the filing of this Annual Report on Form 10-K, we did not include purchase accounting adjustments for deferred revenue as a component of Adjusted EBITDA, and as such, the prior year Adjusted EBITDA amounts presented herein have been recast to reflect the inclusion of purchase accounting adjustments for deferred revenue.
|
| |
(4) | Major Account. Upland defines major accounts as accounts with greater than or equal to $25,000 in annual recurring revenue.
|
The following table presents a reconciliation of net loss from continuing operations, the most comparable GAAP measure, to Adjusted EBITDA for each of the periods indicated (in thousands).
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Net loss | $ | (18,725 | ) | | $ | (13,513 | ) | | $ | (13,664 | ) | | $ | (20,117 | ) | | $ | (9,197 | ) |
Income (loss) from discontinued operations | — |
| | — |
| | — |
| | — |
| | 642 |
|
Depreciation and amortization expense | 11,914 |
| | 9,794 |
| | 8,451 |
| | 7,457 |
| | 5,310 |
|
Interest expense, net | 6,582 |
| | 2,781 |
| | 1,858 |
| | 1,951 |
| | 2,797 |
|
Other expense (income), net | (289 | ) | | 678 |
| | 544 |
| | (101 | ) | | 431 |
|
Provision for income taxes | 1,296 |
| | 1,530 |
| | 1,039 |
| | (78 | ) | | 708 |
|
Stock-based compensation expense | 9,977 |
| | 4,333 |
| | 2,741 |
| | 1,077 |
| | 498 |
|
Acquisition-related expense | 15,092 |
| | 5,583 |
| | 2,455 |
| | 2,186 |
| | 1,461 |
|
Stock-based compensation expense - related party vendor | — |
| | — |
| | — |
| | 11,220 |
| | — |
|
Non-recurring litigation costs | — |
| | 25 |
| | 406 |
| | 256 |
| | — |
|
Purchase accounting deferred revenue discount | 4,469 |
| | 1,405 |
| | 313 |
| | 362 |
| | 926 |
|
Adjusted EBITDA | $ | 30,316 |
| | $ | 12,616 |
| | $ | 4,143 |
| | $ | 4,213 |
| | $ | 3,576 |
|
We believe that Adjusted EBITDA provides useful information to management, investors and others in understanding and evaluating our operating resultsSunset Assets for the following reasons:
Adjusted EBITDA is widely used by investorsthen current period and securities analysts to measure a company’s operating performance without regard to items that can vary substantially from company to company depending upon their financing, capital structures andproperly reflect the method by which assets were acquired;
our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, in the preparation of our annual operating budget, as a measure of our operating performance, to assess the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance because Adjusted EBITDA eliminates the impact of items that we do not consider indicative of our core operating performance;
Adjusted EBITDA provides more consistency and comparability with our past financial performance, facilitates period-to-period comparisons of our operations and also facilitates comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and
Adjusted EBITDA should not be considered as an alternative to net loss or any other measure of financial performance calculated and presented in accordance with GAAP. The use of Adjusted EBITDA as an analytical tool has limitations such as:
depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect cash requirementsyear over year change for such replacements; however, much of the depreciation and amortization currently reflected relates to amortization of acquired intangible assets as a result of business combination purchase accounting adjustments, which will not need to be replaced in the future;addition or removal.
Adjusted EBITDA may not reflect changes in, or cash requirements for, our working capital needs or contractual commitments;
Adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation;
Adjusted EBITDA does not reflect interest or tax payments that could reduce cash available for use; and,
other companies, including companies in our industry, might calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as comparative measures.
Because of these limitations, you should consider Adjusted EBITDA together with other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.
Components of Operating Results
Revenue
Subscription and support revenue. We derive our subscription revenue from fees paid to us by our customers for use of our cloud-based applications. We recognize the revenue associated with subscription agreements ratably over the term of the agreement provided all criteria required for revenue recognition have been met.as the customer receives and consumes the benefits of the cloud services through the contract period. Our subscription agreements are typically have terms of one to three years.
Our support revenue consists of maintenance fees associated with our perpetual licenses and hosting fees paid to us by our customers. Typically, when purchasing a perpetual license, a customer also purchases maintenance for which we charge a fee, priced as a percentage of the perpetual license fee. Maintenance agreements include the right to support and unspecified upgrades. We recognize the revenue associated with maintenance ratably over the term of the contract. In limited instances, at the customer’s option, we may host the software purchased by a customer under a perpetual license on systems at our third-party data centers.
Perpetual license revenue. Perpetual license revenue reflects the revenue recognized from sales of perpetual licenses to new customers and additional perpetual licenses to existing customers. We generally recognize the license fee portion of the arrangement up-front provided all revenue recognition criteria are satisfied.at a point in time when the software is made available to the customer.
Professional services revenue. Professional services revenue consists of fees related to implementation, data extraction, integration and configuration and training on our applications. We generally recognize the revenue associated with these professional services on aover time and materials basis as we deliverservices are performed. Revenues for fixed price services are generally recognized over time applying input methods to estimate progress to completion. Revenues for consumption-based services are generally recognized as the services or provide training to our customers.are performed.
Cost of Revenue
Cost of product revenue. Cost of product revenue consists primarily of personnel and relatedhosting costs, personnel-related costs of our customer success and cloud operations teams, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, and allocated overhead, as well as software license fees, hosting costs, Internetinternet connectivity, and depreciation expenses, amortization of acquired intangible assets, specifically developed technology, as a result of business combination purchase accounting adjustments and pass-through costs directly related to delivering our applications. We expect that cost of revenues may increase in the future depending on the growth rate of our new customers and billings and our need to support the implementation, hosting and support of those new customers. We intend to continue to invest additional resources in expanding the delivery capability of our applications. As we add hosting infrastructure capacity and support personnel in advance of anticipated growth, our cost of product revenue will increase, and if such anticipated revenue growth does not occur, our product gross profit will be adversely affected both in terms of absolute dollars and as a percentage of total revenues in any particular quarterly or annual period. Our cost of product revenue is generally expensed as the costs are incurred. Developed technology is valued using a cost-to-recreate approach and is generally amortized over a four- to nine-year period.
Cost of professional services revenue. Cost of professional services revenue consists primarily of personnel and relatedpersonnel-related costs, including salaries, benefits, bonuses, payroll taxes, stock-based compensation and allocated overhead, as well as the costs of contracted third-party vendors and reimbursable expenses. As most of our personnel are employed on a full-time basis, our cost of professional services revenue is largely fixed in the short-term, while our professional services revenue may fluctuate, leading to fluctuations in professional services gross profit. We expect that cost of professional services as a percentage of total revenues could fluctuate from period to period depending on the growth of our professional services business, the timing of sales of applications, and any associated costs relating to the delivery of services. Our cost of professional services revenue is generally expensed as costs are incurred.
Operating Expenses
Our operating expenses are classified into six categories: sales and marketing, research and development, refundable Canadian tax credits, general and administrative, depreciation and amortization, acquisition-related expenses and acquisition-related expenses.impairment of goodwill. For each category, other than refundable Canadian tax credits and depreciation and amortization and impairment of goodwill, the largest expense component is personnel and relatedprimarily personnel-related costs, which includes salaries, employee benefit costs, bonuses, commissions, stock-based compensation, and payroll taxes. Operating expenses also include allocated overhead costs for facilities, which are allocated to each department based on relative department headcount. Operating expenses are generally recognized as incurred.
Sales and marketing. Sales and marketing expenses primarily consist of personnel and relatedpersonnel-related costs for our sales and marketing staff, including salaries, benefits, commissions,deferred commission amortization, bonuses, payroll taxes, stock-based compensation and allocated overhead, as well as costs of promotional events, corporate communications, online marketing, product marketing and other brand-building activities. We expenseSales commissions earned by our sales force, and related payroll taxes, are considered incremental and recoverable costs of obtaining a contract with a customer. Deferred commissions and other costs for a particular customer agreement for initial contracts are amortized over the expected life of the customer relationships while deferred commissions related to contract renewals are amortized over average renewal term. Sales commissions, and related payroll taxes, are earned when the initial customer contract is signed and upon any renewal as our obligation to pay a sales commission arises at these times. Sales and marketing expenses may fluctuate as a percentage of total revenues for a variety of reasons including due to the timing of such expenses, in any particular quarterlyquarter or annual period.
Research and development. Research and development expenses primarily consist of personnel and relatedpersonnel-related costs of our research and development staff, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, allocated overhead and costs of certain third-party contractors. Research and development costs related to the development of our software applications are generally recognized as incurred. For example, we are parties to a technology services agreement pursuant to which we generally recognize expenses for services as they are received. See Note 14 Related Party Transactions, of the Notes to Consolidated Financial Statements for more information regarding how expenses under such agreement are recognized. We have devoted our product development efforts primarily to enhancing the functionality, and expanding the capabilities, of our applications.
Refundable Canadian tax credits. Investment tax credits are accounted forincluded as a reduction of research and development costs. CreditsInvestment tax credits are accruedrecorded in the year in which the research and development costs of the capital expenditures are incurred, provided that we are reasonably certain that the credits will be received. The investment tax credit must be examined and approved by the tax authorities, and it is possible that the amounts granted will differ fromfrom the amounts recorded.
General and administrative. General and administrative expenses primarily consist of personnel and relatedpersonnel-related costs for our executive, administrative, accounting and finance, information technology, legal, accounting and human resource staff, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, allocated overhead, professional fees and other corporate expenses. We have recently incurred, and expect to continue to incur, additional expenses as we grow our operations, including potentially higher legal, corporate insurance, accounting and auditing expenses and the additional costs of enhancing and maintaining our internal control environment. General and administrative expenses may fluctuate as a percentage of revenue, and overtime we expect that general and administrative expenses will decrease as a percent of revenue due to operational efficiencies.
Depreciation and amortization. Depreciation and amortization expenses primarily consist of depreciation and amortization of acquired intangible assets, specifically customer relationships and trade names, as a result of business combination purchase accounting adjustments. The valuation of identifiable intangible assets reflects management’s estimates based on, among other factors, use of established valuation methods. Customer relationships are valued using an income approach, which estimates fair value based on the earnings and cash flow capacity of the subject asset and are amortized over a seven to ten-year period. The value of the trade name intangibles are determined using a relief from royalty method, which estimates fair value based on the value the owner of the asset receives from not having to pay a royalty to use the asset and are amortized over mostly a three-year period. Developed technology is valued using a cost-to-recreate approach and is amortized over a four- to seven-year period.
Acquisition-related expenses. Acquisition-related expenses consistare typically incurred for up to four quarters after each acquisition, with the majority of one-timethese costs in connection withbeing incurred within six to nine months, to transform the acquired business into the Company’s UplandOne platform. These expenses can vary based on the size, timing and location of each acquisition. These acquisition-related expenses include transaction related expenses such as banker fees, legal and professional fees, insurance costs and deal bonuses. These acquisition-related expenses also include transformational expenses such as severance, compensation for transitional personnel, office lease terminations and vendor cancellations. Generally these acquisition-related expenses should no longer be material if the Company has done no acquisitions after one year.
Impairment of Goodwill. Goodwill impairment is recognized on a non-recurring basis when the Carrying Value (or GAAP basis book value) of our acquisitions, including legal fees, accounting fees, financing fees, restructuring costs, integration costs, and other transactional fees and bonuses. We intend to continue executingCompany (which is our focused strategy of acquisitions to
enhanceonly reporting unit) exceeds the features and functionalityestimated fair value of our applications, expandCompany as determined by reference to a number of factors and assumptions, including the spot closing price of our customer base,Common Stock as of a certain reporting or measurement date. We assess Goodwill for impairment annually on October 1st, or more frequently when an event occurs which could cause the Carrying Value of our Company to exceed the estimated fair value of our Company. See “Note 5. Goodwill and provide accessOther Intangible Assets” in the notes to new marketsour consolidated financial statements for more information regarding our first quarter 2023 and increased benefits of scale.our fourth quarter 2022 Goodwill impairment charges. We will continue to evaluate Goodwill impairment in future periods.
Total Other Expense
Total other expense consists primarily of changes in the estimated fair value of our preferred stock warrant liabilities, amortization of deferred financingdebt issuance costs over the term of the related term loan, facility, revaluation of contingent consideration, andforeign subsidiaries, interest expense on outstanding debt, including amortizationpartially offset by interest income on our interest-bearing cash balances held in money market accounts. We participate in interest rate swap agreements for the purpose of debt discountreducing variability in interest rate payments on the Company’s outstanding term loans. These interest rate swaps fix a portion of the Company's interest rate (including the hedge premium) at 5.4% for the term of the Credit Facility (as hereinafter defined in “Liquidity and effectCapital Resources—Credit Facility”). In addition, gains/losses on divested assets that meet the definition of beneficial conversion featuresa business under ASC 805-10, Business Combination—Overall, are included in our convertible promissory notes payable.Total other expense.
Income Taxes
Because we have not generated domestic net income in any period to date, we have recorded a full valuation allowance against our domestic net deferred tax assets, exclusive of tax deductible goodwill. We have historically not recorded any material provision for federal or state income taxes, other than deferred taxes related to tax deductible goodwill and current taxes in certain separate company filing states.states and states in which loss carryforwards do not fully offset taxable income. The balance of the tax provisionbenefit for fiscalthe years ended December 31, 2017, 2016,2023, 2022 and 2015,2021, outside of tax deductible goodwill and current taxes in separate filing states, is related to foreign income taxes, primarily operations of our Canadian subsidiary.subsidiaries in Canada and Ireland, and to the release of valuation allowances associated with acquisitions of domestic entities with a benefit generated in the UK and Australia fully offset by valuation allowances. Realization of any of our domestic deferred tax assets depends upon future earnings, the timing and amount of which are uncertain. Based on analysis of acquired net operating losses, utilization of our net operating losses will be subject to annual limitations due to the ownership change rules under the Internal Revenue Code of 1986, as amended, or the Code, and similar state provisions. In the event we have subsequent changes in ownership, the availability of net operating losses and research and development credit carryovers could be further limited.
Results of Operations
Consolidated Statements of Operations Data
The following tables set forth our results of operations for the specified periods, as well as our results of operations for the specified periods as a percentage of revenue. The period-to-period comparisons of results of operations are not necessarily indicative of results for future periods (dollars in thousands, except share and per share data).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| | Amount | Percent of Revenue | | Amount | Percent of Revenue | | Amount | Percent of Revenue |
Revenue: | | | | | | | | | | | | |
Subscription and support | | $ | 281,554 | | | 95% | | $ | 297,887 | | | 94% | | $ | 287,621 | | | 95% |
Perpetual license | | 6,077 | | | 2% | | 6,948 | | | 2% | | 2,150 | | | 1% |
Total product revenue | | 287,631 | | | 97% | | 304,835 | | | 96% | | 289,771 | | | 96% |
Professional services | | 10,221 | | | 3% | | 12,468 | | | 4% | | 12,245 | | | 4% |
Total revenue | | 297,852 | | | 100% | | 317,303 | | | 100% | | 302,016 | | | 100% |
Cost of revenue: | | | | | | | | | | | | |
Subscription and support (1)(2) | | 88,894 | | | 30% | | 93,948 | | | 30% | | 92,168 | | | 31% |
Professional services and other | | 7,467 | | | 2% | | 9,793 | | | 3% | | 7,285 | | | 2% |
Total cost of revenue | | 96,361 | | | 32% | | 103,741 | | | 33% | | 99,453 | | | 33% |
Gross profit | | 201,491 | | | 68% | | 213,562 | | | 67% | | 202,563 | | | 67% |
Operating expenses: | | | | | | | | | | | | |
Sales and marketing (1) | | 64,342 | | | 22% | | 59,416 | | | 19% | | 55,097 | | | 18% |
Research and development (1) | | 49,375 | | | 17% | | 46,187 | | | 15% | | 42,693 | | | 14% |
| | | | | | | | | | | | |
General and administrative (1) | | 61,264 | | | 21% | | 70,462 | | | 22% | | 76,901 | | | 25% |
Depreciation and amortization | | 58,614 | | | 20% | | 43,669 | | | 14% | | 41,315 | | | 14% |
Acquisition-related expenses | | 3,060 | | | —% | | 21,556 | | | 6% | | 21,234 | | | 8% |
Impairment of goodwill | | 128,755 | | | 43% | | 12,500 | | | 4% | | — | | | —% |
Total operating expenses | | 365,410 | | | 123% | | 253,790 | | | 80% | | 237,240 | | | 79% |
Loss from operations | | (163,919) | | | (55)% | | (40,228) | | | (13)% | | (34,677) | | | (12)% |
Other Expense: | | | | | | | | | | | | |
Interest expense, net | | (18,684) | | | (6)% | | (29,145) | | | (9)% | | (31,626) | | | (10)% |
| | | | | | | | | | | | |
Other expense, net | | 236 | | | —% | | (781) | | | —% | | (253) | | | (1)% |
Total other expense | | (18,448) | | | (6)% | | (29,926) | | | (9)% | | (31,879) | | | (11)% |
Loss before benefit from income taxes | | (182,367) | | | (61)% | | (70,154) | | | (22)% | | (66,556) | | | (23)% |
Benefit from income taxes | | 2,493 | | | 1% | | 1,741 | | | —% | | 8,344 | | | 4% |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net loss | | (179,874) | | | (60)% | | (68,413) | | | (22)% | | (58,212) | | | (19)% |
Preferred stock dividends and accretion | | (5,347) | | | (2)% | | (1,846) | | | (1)% | | — | | | —% |
Net loss attributable to common stockholders (3) | | $ | (185,221) | | | (62)% | | $ | (70,259) | | | (22)% | | $ | (58,212) | | | (19)% |
Net loss per common share: | | | | | | | | | | | | |
Loss from continuing operations per common share, basic and diluted (3) | | $ | (5.77) | | | | | $ | (2.23) | | | | | $ | (1.92) | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Weighted-average common shares outstanding, basic and diluted (3) | | 32,074,906 | | | | | 31,528,881 | | | | | 30,295,769 | | | |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| Amount | Percent of Revenue | | Amount | Percent of Revenue | | Amount | Percent of Revenue |
Revenue: | | | | | | | | | | | |
Subscription and support | $ | 85,467 |
| | 87% | | $ | 65,552 |
| | 88% | | $ | 57,193 |
| | 82% |
Perpetual license | 4,346 |
| | 4% | | 1,650 |
| | 2% | | 2,805 |
| | 4% |
Total product revenue | 89,813 |
| | 91% | | 67,202 |
| | 90% | | 59,998 |
| | 86% |
Professional services | 8,139 |
| | 9% | | 7,565 |
| | 10% | | 9,913 |
| | 14% |
Total revenue | 97,952 |
| | 100% | | 74,767 |
| | 100% | | 69,911 |
| | 100% |
Cost of revenue: | | | | | | | | | | | |
Subscription and support (1)(2) | 28,454 |
| | 29% | | 22,734 |
| | 30% | | 19,586 |
| | 28% |
Professional services | 5,193 |
| | 5% | | 4,831 |
| | 7% | | 7,085 |
| | 10% |
Total cost of revenue | 33,647 |
| | 34% | | 27,565 |
| | 37% | | 26,671 |
| | 38% |
Gross profit | 64,305 |
| | 66% | | 47,202 |
| | 63% | | 43,240 |
| | 62% |
Operating expenses: | | | | | | | | | | | |
Sales and marketing (1) | 15,307 |
| | 16% | | 12,160 |
| | 16% | | 12,965 |
| | 19% |
Research and development (1) | 15,795 |
| | 16% | | 14,919 |
| | 20% | | 15,778 |
| | 23% |
Refundable Canadian tax credits | (542 | ) | | (1)% | | (513 | ) | | (1)% | | (470 | ) | | (1)% |
General and administrative (1) | 23,291 |
| | 24% | | 18,286 |
| | 24% | | 18,201 |
| | 26% |
Depreciation and amortization | 6,498 |
| | 7% | | 5,291 |
| | 7% | | 4,534 |
| | 6% |
Acquisition-related expenses | 15,092 |
| | 15% | | 5,583 |
| | 9% | | 2,455 |
| | 3% |
Total operating expenses | 75,441 |
| | 77% | | 55,726 |
| | 75% | | 53,463 |
| | 76% |
Loss from operations | (11,136 | ) | | (11)% | | (8,524 | ) | | (12)% | | (10,223 | ) | | (14)% |
Other Expense: | | | | | | | | | | | |
Interest expense, net | (6,582 | ) | | (7)% | | (2,781 | ) | | (4)% | | (1,858 | ) | | (3)% |
Other expense, net | 289 |
| | 1% | | (678 | ) | | (1)% | | (544 | ) | | —% |
Total other expense | (6,293 | ) | | (6)% | | (3,459 | ) | | (5)% | | (2,402 | ) | | (3)% |
Loss before provision for income taxes | (17,429 | ) | | (17)% | | (11,983 | ) | | (17)% | | (12,625 | ) | | (17)% |
Provision for income taxes | (1,296 | ) | | (2)% | | (1,530 | ) | | (1)% | | (1,039 | ) | | (3)% |
Loss from continuing operations | (18,725 | ) | | (19)% | | (13,513 | ) | | (18)% | | (13,664 | ) | | (20)% |
Income (loss) from discontinued operations | — |
| | | | — |
| | | | — |
| | —% |
Net loss | $ | (18,725 | ) | | (19)% | | $ | (13,513 | ) | | (18)% | | $ | (13,664 | ) | | (20)% |
Preferred stock dividends and accretion | — |
| | —% | | — |
| | —% | | — |
| | —% |
Net loss attributable to common stockholders (3) | $ | (18,725 | ) | | (19)% | | $ | (13,513 | ) | | (18)% | | $ | (13,664 | ) | | (20)% |
Net loss per common share: | | | | | | | | | | | |
Loss from continuing operations per common share, basic and diluted | $ | (1.02 | ) | | | | $ | (0.82 | ) | | | | $ | (0.91 | ) | | |
Weighted-average common shares outstanding, basic and diluted (3) | 18,411,247 |
| | | | 16,472,799 |
| | | | 14,939,601 |
| | |
| |
(1) | Includes stock-based compensation. |
| |
(2) | Includes depreciation and amortization of $5,416,000, $4,503,000, and $3,916,000 in 2017, 2016, and 2015, respectively. |
| |
(3) | See Note 8 Net Loss Per Share, of the Notes to Consolidated Financial Statements included elsewhere in this 10-K for a discussion and reconciliation of historical net loss attributable to common stockholders and weighted average shares outstanding for historical basic and diluted net loss per share calculations.
|
| | | | | | | | | | | | | | | | | | | | | |
(1) Includes stock-based compensation. See table below for stock-based compensation by operating expense line item. | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 | | | | |
| (dollars in thousands) |
Stock-based compensation: | | | | | | | | | |
Cost of revenue | $ | 952 | | | $ | 1,984 | | | $ | 2,088 | | | | | |
Research and development | 2,463 | | | 2,733 | | | 3,085 | | | | | |
Sales and marketing | 2,059 | | | 4,239 | | | 5,957 | | | | | |
General and administrative | 17,400 | | | 32,646 | | | 42,743 | | | | | |
Total | $ | 22,874 | | | $ | 41,602 | | | $ | 53,873 | | | | | |
| | | | | | | | | |
(2) Includes depreciation and amortization of $13.4 million, $12.5 million and $11.6 million in the years ended December 31, 2023, 2022 and 2021, respectively.
(3) See “Note 8 Net Loss Per Share”, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion and a reconciliation of historical net loss attributable to common stockholders and weighted average shares outstanding for historical basic and diluted net loss per share calculations.
Comparison of Fiscal Years Ended December 31, 20172023 and December 31, 20162022
Revenue
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 |
| 2016 |
| Change |
| Amount |
| Percent of Revenue |
| Amount |
| Percent of Revenue |
| Amount |
| % Change |
| (dollars in thousands) |
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
Subscription and support | $ | 85,467 |
|
| 87% |
| $ | 65,552 |
|
| 88% |
| $ | 19,915 |
|
| 30% |
Perpetual license | 4,346 |
|
| 4% |
| 1,650 |
|
| 2% |
| 2,696 |
|
| 163% |
Total product revenue | 89,813 |
|
| 91% |
| 67,202 |
|
| 90% |
| 22,611 |
|
| 34% |
Professional services | 8,139 |
|
| 9% |
| 7,565 |
|
| 10% |
| 574 |
|
| 8% |
Total revenue | $ | 97,952 |
|
| 100% |
| $ | 74,767 |
|
| 100% |
| $ | 23,185 |
|
| 31% |
Total revenue was $98.0 million in 2017, compared to $74.8 million in 2016, an increase of $23.2 million, or 31%. Of the increase in total revenue, $23.6 million was due to the acquisitions we closed in 2017 and 2016. Total revenue declined by $0.8 million due to the divestiture of the EPM Live product line at the end of February 2016 and increased by $0.4 million from organic total revenues, or 1% in 2017 compared to 2016. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | Change |
| | Amount | | Percent of Revenue | | Amount | | Percent of Revenue | | Amount | | % Change |
| | (dollars in thousands) |
Revenue: | | | | | | | | | | | | |
Subscription and support | | $ | 281,554 | | | 95% | | $ | 297,887 | | | 94% | | $ | (16,333) | | | (5)% |
Perpetual license | | 6,077 | | | 2% | | 6,948 | | | 2% | | (871) | | | (13)% |
Total product revenue | | 287,631 | | | 97% | | 304,835 | | | 96% | | (17,204) | | | (6)% |
Professional services | | 10,221 | | | 3% | | 12,468 | | | 4% | | (2,247) | | | (18)% |
Total revenue | | $ | 297,852 | | | 100% | | $ | 317,303 | | | 100% | | $ | (19,451) | | | (6)% |
Subscription and support revenue was $85.5$281.6 million in 2017,the year ended December 31, 2023, compared to $65.6$297.9 million in 2016, an increasethe year ended December 31, 2022, a decrease of $19.9$16.3 million, or 30%5%. Of$13.9 million of the increasedecrease relates to declining revenue from Sunset Assets as a result of reduced sales and marketing focus on those assets. Subscription and support revenues related to overage charges decreased by $1.1 million as a result of variable demand fluctuations in the year ended December 31, 2023. The subscription and support revenue $19.1decline includes a negative impact of $0.3 million was due to the acquisitions we closedfrom changes in 2017 and 2016.foreign currency exchange rates. Additional decreases in Subscription and support revenue declined by $0.5of $4.6 million are due to decreases in customer renewals across product lines and industries. These decreases are offset by revenue of $3.7 million from prior year acquisitions not fully reflected in the divestiture of the EPM Live product line at the end of February 2016. The organic subscription and support revenue increased by $1.3 million, or 2%.year ended December 31, 2022.
Perpetual license revenue was $4.3$6.1 million in 2017,the year ended December 31, 2023, compared to $1.7$6.9 million in 2016, an increasethe year ended December 31, 2022, a decrease of $2.7$0.8 million, or 163%13%. The acquisitions we closeddecrease is attributable to decreases in 2017 and 2016 contributed a $2.9 million increase in perpetual license revenue. Perpetual license revenue declined by $0.1 million due to the divestiturecustomer purchases of the EPM Live product line at the end of February 2016 . The organic perpetual revenue declined by $0.1 million, or 8%.on-premise software.
Professional services revenue was $8.1$10.2 million in 2017,the year ended December 31, 2023, compared to $7.6$12.5 million in 2016, an increasethe year ended December 31, 2022, a decrease of $0.6$2.3 million, or 8%18%. The acquisitions we closed in 2017 and 2016 contributed a $1.6 million increase to professional services revenue. Professional services revenue declinedrelated to our Sunset Assets decreased by $0.2 million due to the divestiture of the EPM Live product line at the end of February 2016.$0.4 million. The organicremaining decrease in professional services revenue declined by $0.8, or 11%.is attributable to fewer implementation projects in the year ended December 31, 2023.
Cost of Revenue and Gross Profit PercentageMargin
| |
| Year Ended December 31, |
| 2017 |
| 2016 |
| Change |
| Amount |
| Percent of Revenue |
| Amount |
| Percent of Revenue |
| Amount |
| % Change |
| (dollars in thousands) |
| | Year Ended December 31, | |
| | Year Ended December 31, | |
| | Year Ended December 31, | |
| | 2023 | | | | 2023 | | 2022 | | Change |
| | Amount | | | | Amount | | Percent of Revenue | | Amount | | Percent of Revenue | | Amount | | % Change |
| | (dollars in thousands) | | | | (dollars in thousands) |
Cost of revenue: |
|
|
|
|
|
|
|
Subscription and support (1) | |
Subscription and support (1) | |
Subscription and support (1) | $ | 28,454 |
|
| 29% |
| $ | 22,734 |
|
| 30% |
| $ | 5,720 |
|
| 25% | | $ | 88,894 | | | 30% | | 30% | | $ | 93,948 | | | 30% | | 30% | | $ | (5,054) | | | (5)% | | (5)% |
Professional services | 5,193 |
|
| 5% |
| 4,831 |
|
| 7% |
| 362 |
|
| 7% | Professional services | | 7,467 | | | 2% | | 2% | | 9,793 | | | 3% | | 3% | | (2,326) | | | (24)% | | (24)% |
Total cost of revenue | 33,647 |
|
| 34% |
| 27,565 |
|
| 37% |
| 6,082 |
|
| 22% | Total cost of revenue | | 96,361 | | | 32% | | 32% | | 103,741 | | | 33% | | 33% | | (7,380) | | | (7)% | | (7)% |
Gross profit | $ | 64,305 |
|
| 66% |
| $ | 47,202 |
|
| 63% |
| $ | 17,103 |
|
| 36% | Gross profit | | $ | 201,491 | | | 68% | | 68% | | $ | 213,562 | | | 67% | | 67% | | $ | (12,071) | | | (6)% | | (6)% |
| (1) Includes depreciation and amortization expense as follows: | (1) Includes depreciation and amortization expense as follows: |
|
|
|
|
(1) Includes depreciation and amortization expense as follows: | |
(1) Includes depreciation and amortization expense as follows: | |
Depreciation | |
Depreciation | |
Depreciation | $ | 1,904 |
| | 2% | | $ | 2,030 |
| | 3% | | $ | (126 | ) | | (6)% | | $ | 5 | | | —% | | —% | | $ | 8 | | | —% | | —% | | $ | (3) | | | (38)% | | (38)% |
Amortization | $ | 3,512 |
| | 4% | | $ | 2,473 |
| | 3% | | $ | 1,039 |
| | 42% | Amortization | | $ | 13,366 | | | 4% | | 4% | | $ | 12,469 | | | 4% | | 4% | | $ | 897 | | | 7% | | 7% |
Cost of subscription and support revenue was $28.5$88.9 million in 2017,the year ended December 31, 2023, compared to $22.7$93.9 million in 2016, an increasethe year ended December 31, 2022, a decrease of $5.7$5.0 million, or 25%5%. The 2017 and 2016 acquisitions contributed to aVariable telecom carrier costs decreased $6.5 million increase in costas a result of subscriptionreduced customer demand and support revenue. Of the $6.5 million increase, $2.4 million was due to mobile messaging costsnon-cash stock based compensation decreased $1.1 million. These decreases were offset by increased hosting expenses for all of our products and increased non-cash amortization of intangible assets associated with the Waterfall acquisition, $1.5 million increase in personnel and related costs, $1.1 million increase in depreciation and amortization costs, $0.5 million was due to cloud hosting and infrastructure, $0.4 million was due to third party software and equipment costs, and the remaining $0.6 million from miscellaneous costs. The divestiture of the EPM Live product line in Q1 2016 contributed to $0.3 million decrease in cost of subscription and support revenue, which was driven by a $0.1 million decrease to personnel and related costs, $0.1 million from depreciation and amortization, and $0.1 million from reduced third party software and equipment costs. The organic portion of our business contributed to a $0.5 million decrease, related to personnel and related costs, most of which were the result of our planned operating efficiencies.Sunset Assets.
Cost of professional services revenue was $5.2 million in 2017, compared to $4.8 million in 2016, an increase of $0.4 million, or 7%. The acquisitions we closed in 2017 and 2016 contributed a $1.3 million increase in cost of professional services revenue. Of the $1.3 million increase, $1.2 million was attributable to personnel and related costs and $0.1 million is attributable to contractor fees. The divestiture of the EPM Live product line at the end of February 2016 contributed to $0.3 million decrease in cost of professional services, which was attributable to reduced personnel and related costs. Cost of professional services revenue for organic business decreased $0.6 million driven by a $0.3 million reduction in personnel and related costs, $0.2 million attributable to the reduction of contractor fees and a $0.1 million reduction in miscellaneous expenses, most of which are the result of our planned operating efficiencies.
Operating Expenses
Sales and Marketing Expense
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 |
| 2016 |
| Change |
| Amount |
| Percent of Revenue |
| Amount |
| Percent of Revenue |
| Amount |
| % Change |
| (dollars in thousands) |
Sales and marketing | $ | 15,307 |
|
| 16% |
| $ | 12,160 |
|
| 16% |
| $ | 3,147 |
|
| 26% |
Sales and marketing expense was $15.3 million in 2017, compared to $12.2 million in 2016, an increase of $3.1 million, or 26%. The acquisitions we closed in 2017 and 2016 contributed an increase of $4.4 million in sales and marketing expense comprised of $2.3 million of personnel and related costs, $1.4 million of commission expense, $0.3 million of increased general marketing spend, and the remaining $0.4 million was driven by
miscellaneous costs. The divestiture of the EPM Live product line in Q1 2016 contributed to a decrease of $0.1 million in sales and marketing expense comprised of personnel and related expenses. The organic business contributed a $1.1 million decrease to sales and marketing expense, which was attributable primarily to a decrease in commission expense of $0.7 million and marketing program expenses of $0.4 million.
Research and Development Expense
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 |
| 2016 |
| Change |
| Amount |
| Percent of Revenue |
| Amount |
| Percent of Revenue |
| Amount |
| % Change |
| (dollars in thousands) |
Research and development: |
|
|
|
|
|
|
|
|
|
|
|
Research and development | $ | 15,795 |
|
| 16% |
| $ | 14,919 |
|
| 20% |
| $ | 876 |
|
| 6% |
Refundable Canadian tax credits | (542 | ) |
| —% |
| (513 | ) |
| (1)% |
| (29 | ) |
| 6% |
Total research and development | $ | 15,253 |
|
| 16% |
| $ | 14,406 |
|
| 19% |
| $ | 847 |
|
| 6% |
Research and development expense was $15.8 million in 2017, compared to $14.9 million in 2016, an increase of $0.9 million, or 6%. The $2.6 million increase from acquisitions closed in 2017 and 2016 was comprised of $2.0 million in personnel and related costs, $0.3 million in contractor fees, and $0.3 million of miscellaneous expenses. The divestiture of the EPM Live product in February 2016 contributed a decrease of $0.2 million in research and development expense comprised of $0.1 million of personnel and related costs and $0.1 million of contractor fees. The organic portion of our business contributed to a $1.5 million decrease in research and development costs from reduced personnel and related costs as a result of our planned operating efficiencies.
Refundable Canadian tax credits were $0.5 million in 2017, or flat compared to $0.5 million in 2016.
General and Administrative Expense
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 |
| 2016 |
| Change |
| Amount |
| Percent of Revenue |
| Amount |
| Percent of Revenue |
| Amount |
| % Change |
| (dollars in thousands) |
General and administrative | $ | 23,291 |
|
| 24% |
| $ | 18,286 |
|
| 24% |
| $ | 5,005 |
|
| 27% |
General and administrative expense was $23.3 million in 2017, compared to $18.3 million in 2016, an increase of $5.0 million, or 27%. The acquisitions we closed in 2017 and 2016 contributed a $0.6 million dollar increase to general and administrative expense, which $0.6 million was related to personnel and related expense , which were the result of our planned operating efficiencies. The divestiture of the EPM Live product in February 2016 contributed had minimal impact in general and administrative expense. General and administrative costs for the organic portion of our business increased by $4.4 million which was primarily related to an increase in non-cash stock compensation expense.
Depreciation and Amortization Expense
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 |
| 2016 |
| Change |
| Amount |
| Percent of Revenue |
| Amount |
| Percent of Revenue |
| Amount |
| % Change |
| (dollars in thousands) |
Depreciation and amortization: | | | | | | | | | | | |
Depreciation | $ | 712 |
| | 1% | | $ | 657 |
| | 1% | | $ | 55 |
| | 8% |
Amortization | 5,786 |
| | 6% | | 4,634 |
| | 6% | | 1,152 |
| | 25% |
Total depreciation and amortization | $ | 6,498 |
| | 7% | | $ | 5,291 |
| | 7% | | $ | 1,207 |
| | 23% |
Depreciation and amortization expense was $6.5 million in 2017, compared to $5.3 million in 2016, an increase of $1.2 million, or 23%. The acquisitions we closed in 2017 and 2016 contributed a $2.3 million increase with the majority resulting from amortization of acquired intangible assets created from our purchase business combinations accounting. The organic portion of our business saw a $1.1 million decrease in depreciation and amortization cost primarily due to a decrease in amortization expense of acquired intangible assets created from our purchase business combinations accounting. This divestiture of the EPM Live product in February 2016 did not have a significant impact to depreciation and amortization expense.
Acquisition-related Expense
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 |
| 2016 |
| Change |
| Amount |
| Percent of Revenue |
| Amount |
| Percent of Revenue |
| Amount |
| % Change |
| (dollars in thousands) |
Acquisition-related expense | $15,092 |
| 15% |
| $5,583 |
| 7% |
| $9,509 |
| 170% |
One-time acquisition-related expense was $15.1 million in 2017, compared to $5.6 million in 2016, an increase of $9.5 million, or 170%. The Company made four acquisitions during 2017, this acquisition activity was substantially more than the three acquisitions closed in 2016. As a result, year-over-year comparisons of these expenses are not necessarily meaningful due to their one-time nature.
Other Expense, net
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 |
| 2016 |
| Change |
| Amount |
| Percent of Revenue |
| Amount |
| Percent of Revenue |
| Amount |
| % Change |
| (dollars in thousands) |
Other Expense: |
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net | $ | (6,582 | ) |
| (7)% |
| $ | (2,781 | ) |
| (4)% |
| $ | (3,801 | ) |
| 137% |
Other income (expense), net | 289 |
|
| 1% |
| (678 | ) |
| (1)% |
| 967 |
|
| (143)% |
Total other expense | $ | (6,293 | ) |
| (6)% |
| $ | (3,459 | ) |
| (5)% |
| $ | (2,834 | ) |
| 82% |
Interest expense was $6.6 million in 2017, compared to $2.8 million for 2016, an increase of $3.8 million, or 137%. The increase is attributable to increased borrowing under our expanded debt facility to support acquisitions.
Other income was $0.3 million in 2017, compared to other expense of $0.7 million in 2016, a decrease of $1.0 million, or 143%. The decrease in expenses was driven by the loss on the sale of EPM Live of $0.7$7.5 million in the first quarter of 2016.
(Provision for) Benefit from Income Taxes
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 |
| 2016 |
| Change |
| Amount |
| Percent of Revenue |
| Amount |
| Percent of Revenue |
| Amount |
| % Change |
| (dollars in thousands) |
(Provision for) Benefit from Income Taxes | $ | (1,296 | ) |
| (1)% |
| $ | (1,530 | ) |
| (2)% |
| $ | 234 |
|
| (15)% |
Provision for income taxes was $1.3year ended December 31, 2023, compared to $9.8 million in 2017, compared to $1.5 million in 2016, an decrease in provision for income taxes of $0.2 million, or 15%. In 2017 we recorded income taxes that were principally attributable to state and foreign taxes, other than deferred taxes related to tax deductible goodwill. The foreign provision for income taxes in 2017 is principally attributable to net income generated in Canada after reduction for tax credits generated and carried forward. Because we have not generated domestic net income in any period to date, we have recorded a full valuation allowance against our domestic net deferred tax assets, exclusive of tax deductible goodwill. Realization of any of our domestic deferred tax assets depends upon future earnings, the timing and amount of which are uncertain. Based on analysis of acquired net operating losses, utilization of our net operating losses will be subject to annual limitations due to the ownership change rules under the Code and similar state provisions. In the event we have subsequent changes in ownership, the availability of net operating losses and research and development credit carryovers could be further limited. See Note 6 Income Taxes, of the Notes to Consolidated Financial Statements for more information regarding our income taxes as they relate to foreign and domestic operations.
Comparison of Fiscal Years Endedyear ended December 31, 2016 and December 31, 2015
Revenue
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2016 | | 2015 | | Change |
| Amount | | Percent of Revenue | | Amount | | Percent of Revenue | | Amount | | % Change |
| (dollars in thousands) |
Revenue: | | | | | | | | | | | |
Subscription and support | $ | 65,552 |
| | 88% | | $ | 57,193 |
| | 82% | | $ | 8,359 |
| | 15% |
Perpetual license | 1,650 |
| | 2% | | 2,805 |
| | 4% | | (1,155 | ) | | (41)% |
Total product revenue | 67,202 |
| | 90% | | 59,998 |
| | 86% | | 7,204 |
| | 12% |
Professional services | 7,565 |
| | 10% | | 9,913 |
| | 14% | | (2,348 | ) | | (24)% |
Total revenue | $ | 74,767 |
| | 100% | | $ | 69,911 |
| | 100% | | $ | 4,856 |
| | 7% |
Total revenue was $74.8 million in 2016, compared to $69.9 million in 2015, an increase of $4.9 million, or 7%. Of the increase in total revenue, $11.7 million was due to the acquisitions we closed in 2015 and 2016. Total revenue also declined by $6.0 million due to the divestiture of the EPM Live product line at the end of February 2016 and by $0.7 million from organic total revenues, or 1% in 2016 compared to 2015 due the change in the foreign currency exchange rate between the Canadian dollar versus the U.S. dollar for those periods of $0.6 million. Therefore, on a constant currency basis, our organic total revenue decreased by $0.1 million.
Subscription and support revenue was $65.6 million in 2016, compared to $57.2 million in 2015, an increase of $8.4 million, or 15%. Of the increase in subscription and support revenue, $10.6 million was due to the acquisitions we closed in 2015 and 2016. Subscription and support revenue declined by $2.9 million due to the divestiture of the EPM Live product line at the end of February 2016. The organic subscription and support revenue increased by $0.7 million, which includes a negative impact of $0.6 million in 2016 compared to 2015 due to the change in the foreign currency exchange rate between the Canadian dollar versus the U.S. dollar. Therefore, on a constant currency basis, our organic subscription and support revenue increased by $1.3 million, or 2%.
Perpetual license revenue was $1.7 million in 2016, compared to $2.8 million in 2015, a decrease of $1.1 million, or 41%. The acquisitions we closed in 2015 and 2016 contributed a $0.1 million increase in perpetual license revenue. Perpetual license revenue declined by $0.6 million due to the divestiture of the EPM Live product line at the end of February 2016 . The organic perpetual revenue declined by $0.6 million, or 2% with an immaterial impact from changes in the foreign currency exchange rate between the Canadian dollar versus the U.S. dollar on perpetual license revenue.
Professional services revenue was $7.6 million in 2016, compared to $9.9 million in 2015,2022, a decrease of $2.3 million, or 24%. The acquisitions we closed in 2015 and 2016 contributed a $1.0 million increase to professional services revenue. Professional services revenue declined by $2.5 million due to the divestiture of the EPM Live product line at the end of February 2016. The organic professional services revenue declined by $0.8 million which included a decline of $0.1 million due to the change in the foreign currency exchange rate between the Canadian dollar versus the U.S. dollar in 2016 compared to 2015. Therefore, on a constant currency basis, our organic professional services revenue decreased by $0.7 million, or 7%.
Cost of Revenue and Gross Profit Percentage
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2016 | | 2015 | | Change |
| Amount | | Percent of Revenue | | Amount | | Percent of Revenue | | Amount | | % Change |
| (dollars in thousands) |
Cost of revenue: | | | | | | | | | | | |
Subscription and support (1) | $ | 22,734 |
| | 30% | | $ | 19,586 |
| | 28% | | $ | 3,148 |
| | 16% |
Professional services | 4,831 |
| | 7% | | 7,085 |
| | 10% | | (2,254 | ) | | (32)% |
Total cost of revenue | 27,565 |
| | 37% | | 26,671 |
| | 38% | | 894 |
| | 3% |
Gross profit | $ | 47,202 |
| | 63% | | $ | 43,240 |
| | 62% | | $ | 3,962 |
| | 9% |
| | | | | | | | | | | |
(1) Includes depreciation and amortization expense as follows: | | | | | | | |
Depreciation | $ | 2,030 |
| | 3% | | $ | 1,800 |
| | 3% | | $ | 230 |
| | 13% |
Amortization | $ | 2,473 |
| | 3% | | $ | 2,116 |
| | 3% | | $ | 357 |
| | 17% |
Cost of subscription and support revenue was $22.7 million in 2016, compared to $19.6 million in 2015, an increase of $3.1 million, or 16%. The organic portion of our business contributed to a $3.8 million increase. Of the $3.8 million increase, $3.5 million was due to mobile messaging and short code leasing costs driven by higher mobile messaging volume and activity with the remaining $0.3 million increase from one-time charges related to the remaining unused portion of certain data center contracts as our cloud infrastructure was consolidated. The divestiture of the EPM Live product line in Q1 2016 contributed to $1.7 million decrease in cost of subscription and support revenue. Of the $1.7 million decrease, $0.7 million was attributable to reduced personnel and related costs, $0.2 million from depreciation and amortization, $0.2 million from reduced third party software and equipment costs and the remaining $0.2 million from miscellaneous costs. The 2015 and 2016 acquisitions contributed to a $1.2 million increase in cost of subscription and support revenue. Of the $1.2 million increase, $0.4 million was due to higher amortization of intangibles, $0.4 million increase in personnel and related costs, $0.3 million increase in data center and hosting costs and the remaining $0.2 million from miscellaneous costs.
Cost of professional services revenue was $4.8 million in 2016, compared to $7.1 million in 2015, a decrease of $2.3 million, or 32%. Cost of professional services revenue for organic business decreased $1.0 million driven by a $0.7 million reduction in personnel and related costs, $0.2 million reduction in contractor fees and $0.1 million reduction in miscellaneous costs which are the result of our planned operating efficiencies. The divestiture of the EPM Live product line at the end of February 2016 contributed to $1.8 million decrease in cost. Of the $1.8 million decrease, $1.4 million was attributable to reduced personnel and related costs, $0.2 million from reduced facility expenses and $0.3 million from miscellaneous costs. The acquisitions we closed in 2015 and 2016 contributed a $0.6 million increase in cost of professional services revenue. Of the $0.6 million increase, $0.3 million was attributablerevenue is primarily related to personnel and relateda decrease in personnel-related costs $0.1 million attributable to contractor fees, and $0.2 million attributable to miscellaneous costs.resulting from decreased professional services delivered.
Operating Expenses
Sales and Marketing Expense
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2016 | | 2015 | | Change |
| Amount | | Percent of Revenue | | Amount | | Percent of Revenue | | Amount | | % Change |
| (dollars in thousands) |
Sales and marketing | $ | 12,160 |
| | 16% | | $ | 12,965 |
| | 19% | | $ | (805 | ) | | (6)% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | Change |
| | Amount | | Percent of Revenue | | Amount | | Percent of Revenue | | Amount | | % Change |
| | (dollars in thousands) |
Sales and marketing | $ | 64,342 | | | 22% | | $ | 59,416 | | | 19% | | $ | 4,926 | | | 8% |
Sales and marketing expense was $12.2$64.3 million in 2016,the year ended December 31, 2023, compared to $13.0$59.4 million in 2015,the year ended December 31, 2022, an increase of $4.9 million, or 8%. Sales and marketing expense increased approximately $8.8 million as a direct result of our intentional investment in our go to market strategy, including increased marketing spend and increased sales headcount and personnel-related costs to strengthen our marketing and demand generation. This increase is partially offset by a $2.1 million decrease in stock based compensation expense and a decrease of $0.8 million, or 6%. Of the decrease in sales and marketing expense, $1.5 million was attributable to the organic
business primarily due to a decrease in sales and solution consultant personnel and related cost of $1.2 million which is the result of our planned operating efficiencies, and reduced spend of $0.3 million for general marketing. The divestiture of the EPM Live product line in Q1 2016 contributed to a decrease of $1.4$1.8 million in sales and marketing expense comprised of $0.5 million reduction in personnel and related expenses, $0.3 million of bad debt, $0.2 million of commissions, $0.2 million of marketing program spend and $0.3 million of miscellaneous expenses. The acquisitions we closed in 2015 and 2016 contributed an increase of $2.1 million in sales and marketing expense comprised of $1.4 million of sales commission, $0.4 million of personnel and related costs, and $0.4 million of miscellaneous expenses.to our Sunset Assets.
Research and Development Expense
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2016 | | 2015 | | Change |
| Amount | | Percent of Revenue | | Amount | | Percent of Revenue | | Amount | | % Change |
| (dollars in thousands) |
Research and development: | | | | | | | | | | | |
Research and development | $ | 14,919 |
| | 20% | | $ | 15,778 |
| | 23% | | $ | (859 | ) | | (5)% |
Refundable Canadian tax credits | (513 | ) | | (1)% | | (470 | ) | | (1)% | | (43 | ) | | 9% |
Total research and development | $ | 14,406 |
| | 19% | | $ | 15,308 |
| | 22% | | $ | (902 | ) | | (6)% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | Change |
| | Amount | | Percent of Revenue | | Amount | | Percent of Revenue | | Amount | | % Change |
| | (dollars in thousands) |
| | | | | | | | | | | | |
Research and development | | $ | 49,375 | | | 17% | | $ | 46,187 | | | 15% | | $ | 3,188 | | | 7% |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Research and development expense was $14.9$49.4 million in 2016,2023, compared to $15.8$46.2 million in 2015, a decrease2022, an increase of $0.9$3.2 million, or 5%7%. The organic portion of our business contributed to a $0.9 million decrease in research and development costs from reduced personnel and related costs as a result of our planned operating efficiencies. The divestiture of the EPM Live product in February 2016 contributed a decrease of $0.9 million in researchResearch and development expense comprised of $0.6increased approximately $5.4 million of personnel and related costs and $0.3 million of contractor fees. The $0.9 million reduction in research and development from the divestiture of the EPM Livedue to product line was offset by $0.9 million increase in research and development from the acquisitions we closed in 2015 and 2016. This increase from acquisitions was comprised of $0.6 million in personnel and related costs, $0.1 million in contractor fees, and $0.2 million of miscellaneous expenses.
Refundable Canadian tax credits were $0.5 million in 2016, or flat compared to $0.5 million in 2015.
General and Administrative Expense
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2016 | | 2015 | | Change |
| Amount | | Percent of Revenue | | Amount | | Percent of Revenue | | Amount | | % Change |
| (dollars in thousands) |
General and administrative | $ | 18,286 |
| | 24% | | $ | 18,201 |
| | 26% | | $ | 85 |
| | —% |
General and administrative expense was $18.3 million in 2016, were flat compared to $18.2 million in 2015. General and administrative costs for the organic portioninvestments as part of our business was flat and included increases due to a $1.4 million increase in stock compensation expense and $0.2 million from facility costs, related to costsgrowth initiative by building our India Center of closure for office locations acquired in acquisitions, offset by decreases of $0.5 million from lower use of third parties, $0.5 million reductions in people-related costs, a $0.4 million reduction in non-recurring litigation costs, and $0.2 million from other factors. The divestiture of the EPM Live product in February 2016 contributed a decrease of $0.3 million in general and administrative expense, which was offset by a $0.3 million increase in general and administrative expense from the acquisitions we closed in 2015 and 2016.
Depreciation and Amortization Expense
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2016 | | 2015 | | Change |
| Amount | | Percent of Revenue | | Amount | | Percent of Revenue | | Amount | | % Change |
| (dollars in thousands) |
Depreciation and amortization: | | | | | | | | | | | |
Depreciation | $ | 657 |
| | 1% | | $ | 452 |
| | 1% | | $ | 205 |
| | 45% |
Amortization | 4,634 |
| | 6% | | 4,082 |
| | 6% | | 552 |
| | 14% |
Total depreciation and amortization | $ | 5,291 |
| | 7% | | $ | 4,534 |
| | 7% | | $ | 757 |
| | 17% |
Depreciation and amortization expense was $5.3 million in 2016, compared to $4.5 million in 2015, an increase of $0.8 million, or 17%. The acquisitions we closed in 2015 and 2016 contributed a $0.7 million increase with the majority resulting from amortization of acquired intangible assets created from our purchase business combinations. The organic businesses saw a $0.5 million increase in depreciation primarily due to hardware and software additions.Excellence. This increase was partially offset by a $0.4decrease of $2.2 million of research and development costs related to our Sunset Assets.
General and Administrative Expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | Change |
| | Amount | | Percent of Revenue | | Amount | | Percent of Revenue | | Amount | | % Change |
| | (dollars in thousands) |
General and administrative | | $ | 61,264 | | | 21% | | $ | 70,462 | | | 22% | | $ | (9,198) | | | (13)% |
General and administrative expense was $61.3 million in 2023, compared to $70.5 million in 2022, a decrease of $9.2 million, or 13%. This decrease was driven primarily by $15.2 million in lower non-cash stock compensation expense due to lower grant date fair values partially offset by an increase in general and administrative expense of $3.7 million due to higher personnel-related costs and an increase in legal and professional fees of $2.3 million, which includes $1.1 million in non-recurring litigation costs.
Depreciation and Amortization Expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | Change |
| | Amount | | Percent of Revenue | | Amount | | Percent of Revenue | | Amount | | % Change |
| | (dollars in thousands) |
Depreciation and amortization: | | | | | | | | | | | | |
Depreciation | | $ | 1,414 | | | 1% | | $ | 1,529 | | | 1% | | $ | (115) | | | (8)% |
Amortization | | 57,200 | | | 19% | | 42,140 | | | 13% | | 15,060 | | | 36% |
Total depreciation and amortization | | $ | 58,614 | | | 20% | | $ | 43,669 | | | 14% | | $ | 14,945 | | | 34% |
Depreciation and amortization expense was $58.6 million in 2023, compared to $43.7 million in 2022, an increase of $14.9 million, or 34%. The increase in amortization relates to the reduced useful life expected for the acquired intangible assets such as customer relationships and tradenames for our Sunset Assets. The offsetting decrease in depreciation and amortization fromis due to assets becoming fully depreciated during the divestitureperiod.
Acquisition-related Expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | Change |
| | Amount | | Percent of Revenue | | Amount | | Percent of Revenue | | Amount | | % Change |
| | (dollars in thousands) |
Acquisition-related expense | | $ | 3,060 | | | —% | | $ | 21,556 | | | 6% | | $ | (18,496) | | | (86)% |
Acquisition-related expense was $3.1 million in 2023, compared to $21.6 million for 2022, a decrease of $18.5 million, or 86%. The decrease in expense was a result of no acquisitions in 2023 compared to two acquisitions in 2022. Expense in 2023 primarily related to final settlements of the 2022 acquisitions.
Impairment of goodwill
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | Change |
| | Amount | | Percent of Revenue | | Amount | | Percent of Revenue | | Amount | | % Change |
| | (dollars in thousands) |
Impairment of goodwill | | $ | 128,755 | | | 43% | | $ | 12,500 | | | 4% | | $ | 116,255 | | | 930% |
Impairment of goodwill was $128.8 million in 2023, compared to $12.5 million for 2022. This increase was a result of the goodwill impairment evaluation we performed as of March 31, 2023 due to the decline of our EPM Live product in February 2016.stock price.
Acquisition-related Expense
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2016 | | 2015 | | Change |
| Amount | | Percent of Revenue | | Amount | | Percent of Revenue | | Amount | | % Change |
| (dollars in thousands) |
Acquisition-related expense | $5,583 | | 7% | | $2,455 | | 4% | | $3,128 | | 127% |
One-time acquisition-related expense was $5.6 million in 2016, compared to $2.5 million in 2015, an increase of $3.1 million, or 127%. The Company made three acquisitions during 2016 and signed a fourth acquisition in December 2016 which subsequently closed in January 2017. This acquisition activity was substantially more than the one acquisition closed in 2015.. As a result, year-over-year comparisons of these expenses are not necessarily meaningful due to their one-time nature.
Other Expense, net
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2016 | | 2015 | | Change |
| Amount | | Percent of Revenue | | Amount | | Percent of Revenue | | Amount | | % Change |
| (dollars in thousands) |
Other Expense: | | | | | | | | | | | |
Interest expense, net | $ | (2,781 | ) | | (4)% | | $ | (1,858 | ) | | (3)% | | $ | (923 | ) | | 50% |
Other income (expense), net | (678 | ) | | (1)% | | (544 | ) | | —% | | (134 | ) | | 25% |
Total other expense | $ | (3,459 | ) | | (5)% | | $ | (2,402 | ) | | (3)% | | $ | (1,057 | ) | | 44% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | Change |
| | Amount | | Percent of Revenue | | Amount | | Percent of Revenue | | Amount | | % Change |
| | (dollars in thousands) |
Other Expense: | | | | | | | | | | | | |
Interest expense, net | | $ | (18,684) | | | (6)% | | $ | (29,145) | | | (9)% | | $ | 10,461 | | | (36)% |
| | | | | | | | | | | | |
Other expense, net | | 236 | | | —% | | (781) | | | —% | | 1,017 | | | (130)% |
Total other expense | | $ | (18,448) | | | (6)% | | $ | (29,926) | | | (9)% | | $ | 11,478 | | | (38)% |
Interest expense, net was $18.7 million in 2023, compared to $29.1 million for 2022, a change of $10.4 million, or 36%, due primarily to higher interest income on our interest-bearing cash balances, a decrease in outstanding borrowings on our Credit Facility and the $2.5 million amortization of the deferred gain on the liquidation of a portion of our interest rate swaps as well as a $2.8 million in 2016, comparedbenefit related to $1.9the deferred gain recognized immediately into earnings upon the $35 million for 2014, an increase of $0.9 million, or 50%. The increase is attributable to increased borrowing underprepayment on our expanded debt facility to support acquisitions.Term Loans.
Other expenseincome, net was $0.7$0.2 million in 2016,2023, compared to other expense of $0.5$0.8 million in 2015,2022, a change $1.0 million. The difference in other expense is primarily due to an increase of $0.1 million, or 25%. Increases in expense were a loss on the sale of EPM Live of $0.7 million and a loss of $0.2 million from asset retirements over the prior period, offset by a $0.5 million gain associated with the reduction of earnout obligations to sellers and of $0.2 million from foreign currency exchange gains from non-base currency assets and liabilities.compared to 2022.
(Provision for) Benefit from Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | Change |
| | Amount | | Percent of Revenue | | Amount | | Percent of Revenue | | Amount | | % Change |
| | (dollars in thousands) |
| | | | | | | | | | | | |
Benefit from (provision for) income taxes | | $ | 2,493 | | | 1% | | $ | 1,741 | | | —% | | $ | 752 | | | 43% |
Effective income tax rate | | (1.4) | % | | | | (2.5) | % | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2016 | | 2015 | | Change |
| Amount | | Percent of Revenue | | Amount | | Percent of Revenue | | Amount | | % Change |
| (dollars in thousands) |
(Provision for) Benefit from Income Taxes | $ | (1,530 | ) | | (2)% | | $ | (1,039 | ) | | (1)% | | $ | (491 | ) | | 47% |
Provision forBenefit from income taxes was $1.5$2.5 million in 2016,2023, compared to $1.0 million in 2015, an increase in provisiona benefit for income taxes of $0.5$1.7 million in 2022, an increase in the benefit from income taxes of $0.8 million, or 47%43%. In 2016 we recordedThis increased benefit was related primarily to the reduction of uncertain tax positions due to expiration of related statute of limitation for a Canadian exposure and foreign income taxes that were principally attributable to stateassociated with our combined non-U.S. operations which is offset in Australia and foreign taxes, other thanthe UK by valuation allowances. These tax benefits are offset by the impact of a material goodwill impairment in 2023, changes in deferred taxes related totax liabilities associated with amortization of U.S. tax deductible goodwill. The foreign provision for incomegoodwill and U.S. state taxes in 2016 is attributable to net income generatedcertain states in excess ofwhich the Company does not file on a consolidated basis or have net operating loss carryforwardscarryforwards.
Comparison of Years Ended December 31, 2022 and reductionDecember 31, 2021
For a comparison of tax credit carryforwardsthe years ended December 31, 2022 and 2021 refer to “Item 7. Management’s Discussion and Analysis” in Canada. Becausethe Company’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 28, 2023.
Key Metrics and Non-GAAP Financial Measures
In addition to the GAAP financial measures described in “Results of Operations” above, we regularly review the following key metrics and non-GAAP financial measures to evaluate and identify trends in our business, measure our performance, prepare financial projections and make strategic decisions (in thousands, except percentages): | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 | | 2021 | | | | |
| |
Other Financial Data (unaudited): | | | | | | | | | |
Annualized recurring revenue value at year-end | $ | 242,136 | | $ | 266,278 | | $ | 257,056 | | | | |
Annual net dollar retention rate | 95% | | 95% | | 94% | | | | |
Adjusted EBITDA | $ | 64,438 | | $ | 97,105 | | $ | 96,657 | | | | |
Annualized recurring revenue value at year-end
We define annualized recurring revenue (“ARR”) as the value as of December 31 that equals the monthly value of our recurring revenue under support and subscription contracts excluding month-to-month contracts measured as of December 31 multiplied by 12. This measure excludes the revenue value of uncontracted overage fees, on-demand or monthly usage service fees and Sunset Assets. As a metric, ARR mitigates fluctuations in revenue recognition due to certain factors, including contract term and the sales mix of recurring revenue contracts and perpetual licenses. ARR does not have any standardized meaning and may not generated domesticbe comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenues and deferred revenues and is not intended to be combined with or to replace either of those elements of our financial statements. ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our clients. Refer to “Note 3 Acquisitions” and “Note 5 Goodwill and Other Intangible Assets” in the notes to the consolidated financial statements for further discussion.
Our ARR was $242.1 million, $266.3 million and $257.1 million as of December 31, 2023, 2022 and 2021, respectively.
Annual net dollar retention rate
We measure our ability to grow and retain ARR from existing clients using a metric we refer to as our annual net dollar retention rate. We define annual net dollar retention rate as of December 31 as the aggregate ARR as of December 31 from those customers that were also customers as of December 31 of the prior fiscal year, divided by the aggregate ARR value from all customers as of December 31 of the prior fiscal year. This measure excludes the revenue value of uncontracted overage fees, on-demand service fees and our Sunset Assets.
Our annual net dollar retention rate was 95%, 95% and 94% as of December 31, 2023, 2022 and 2021.
Adjusted EBITDA
We monitor Adjusted EBITDA to help us evaluate the effectiveness and efficiency of our operations. We define Adjusted EBITDA as net income (loss), calculated in any periodaccordance with GAAP, adjusted for depreciation and amortization expense, net interest expense, loss on debt extinguishment, net other expense, benefit from income taxes, stock-based compensation expense, acquisition-related expense, purchase accounting deferred revenue discount and impairment of goodwill.
Adjusted EBITDA is a non-GAAP financial measure that our management believes provides useful information to date, we have recordedmanagement, investors and others in understanding and evaluating our operating results for the following reasons:
•Adjusted EBITDA is widely used by our investors and securities analysts to measure a full valuation allowance against our domestic net deferred taxcompany’s operating performance without regard to items that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets exclusive of tax deductible goodwill. Realization of anywere acquired;
•Our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, in the preparation of our domestic deferred tax assets depends upon future earnings,annual operating budget, as a measure of our operating performance, to assess the timingeffectiveness of our business strategies and amountto communicate with our board of directors concerning our financial performance because Adjusted EBITDA eliminates the impact of items that we do not consider indicative of our core operating performance;
•Adjusted EBITDA provides more consistency and comparability with our past financial performance, facilitates period-to-period comparisons of our operations and also facilitates comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and
•Adjusted EBITDA should not be considered as an alternative to net loss or any other measure of financial performance calculated and presented in accordance with GAAP.
The use of Adjusted EBITDA as an analytical tool has limitations such as:
•Adjusted EBITDA should not be considered as an alternative to net loss or any other measure of financial performance calculated and presented in accordance with GAAP.
•Impairment of goodwill and depreciation and amortization are uncertain. Based on analysisnon-cash charges, and the assets being depreciated or amortized, which contribute to the generation of revenue, will often have to be replaced in the future and Adjusted EBITDA does not reflect cash requirements for such replacements; however, much of the depreciation and amortization relates to amortization of acquired intangible assets as well as the goodwill as a result of business combination purchase accounting adjustments, which will not need to be replaced in the future;
•Adjusted EBITDA may not reflect changes in, or cash requirements for, our working capital needs or contractual commitments;
•Adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation;
•Adjusted EBITDA does not reflect interest or tax payments that could reduce cash available for use; and,
•other companies, including companies in our industry, might calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as comparative measures.
Because of these limitations, you should consider Adjusted EBITDA together with other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.
The following table presents a reconciliation of Net loss from continuing operations to Adjusted EBITDA for each of the periods indicated (in thousands). | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 | | | | |
| |
Net loss | $ | (179,874) | | | $ | (68,413) | | | $ | (58,212) | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Depreciation and amortization expense | 71,985 | | | 56,146 | | | 52,928 | | | | | |
Interest expense, net | 18,684 | | | 29,145 | | | 31,626 | | | | | |
| | | | | | | | | |
Other expense, net | (236) | | | 781 | | | 253 | | | | | |
Benefit from income taxes | (2,493) | | | (1,741) | | | (8,344) | | | | | |
Stock-based compensation expense | 22,874 | | | 41,602 | | | 53,873 | | | | | |
Acquisition-related expense | 3,060 | | | 21,556 | | | 21,234 | | | | | |
| | | | | | | | | |
Non-recurring litigation costs | 1,126 | | | 33 | | | — | | | | | |
Purchase accounting deferred revenue discount | 557 | | | 5,496 | | | 3,299 | | | | | |
Impairment of goodwill | 128,755 | | | 12,500 | | | — | | | | | |
Adjusted EBITDA | $ | 64,438 | | | $ | 97,105 | | | $ | 96,657 | | | | | |
| | | | | | | | | |
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Core Organic Growth Rate
Beginning with the three months ended June 30, 2023, we began disclosing our Core Organic Growth Rate, a non-GAAP financial measure. We use Core Organic Growth Rate as a key performance measure to assess our consolidated operating losses, utilizationperformance over time and for planning and forecasting purposes. Core Organic Growth Rate is the percentage change between two reported periods in subscription and support revenue, excluding subscription and support revenue from Sunset Assets and Overage Charges, as defined below. We calculate our year-over-year Core Organic Growth Rate as though all acquisitions or dispositions closed as of the end of the latest period were closed as of the first day of the prior year period presented. Core Organic Growth Rate does not represent actual organic revenue generated by our business as it stood at the beginning of the respective period.
For the three-month period ended December 31, 2023, our Core Organic Growth Rate was negative 0.9%.
Core Organic Growth Rates are not necessarily indicative of either future results of operations or actual results that might have been achieved had certain Sunset Asset classifications not been made or had certain acquisitions or dispositions been consummated on the first day of the prior year period presented. We believe that this metric is useful to management and investors in analyzing our financial and operational performance period-over-period along with evaluating the growth of our net operating losses will be subject
business normalized for the impact of acquisitions and dispositions, as well as adjusting for the exclusion of non-core Sunset Assets and non-committed Overage Charges. For example, by including pre-acquisition revenue, Core Organic Growth Rate allows us to annual limitations due tomeasure the ownership change rules under the Code and similar state provisions. In the event we have subsequent changes in ownership, the availabilityunderlying revenue growth of net operating losses and research and development credit carryovers could be further limited. See Note 6 Income Taxes,our business as of the Notesend of the period presented, which we believe provides insight into our current performance.
Related Defined Terms
Overage Charges are subscription and support revenues earned in addition to Consolidated Financial Statementscontractual minimum customer commitments as a result of the usage volume of services including text and e-mail messaging and third-party pass-through costs that exceed the levels stipulated in contracts with the Company.
The following table represents a reconciliation of total revenue, the most comparable GAAP measure, to core organic revenue for more information regarding our income taxes as they relate to foreign and domestic operations.each of the periods indicated. | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| 2023 | | 2022 | | | | |
| | | | | | | |
| (dollars in thousands) |
Reconciliation of total revenue to core organic revenue: | | | | | | | |
Total revenue | $ | 72,178 | | | $ | 78,811 | | | | | |
Less: | | | | | | | |
| | | | | | | |
Perpetual license revenue | 1,760 | | | 1,628 | | | | | |
Professional services revenue | 2,234 | | | 3,035 | | | | | |
Subscription and support revenue from Sunset Assets | 10,211 | | | 14,982 | | | | | |
Overage Charges | 1,422 | | | 2,089 | | | | | |
Core organic revenue | $ | 56,551 | | | $ | 57,077 | | | | | |
Liquidity and Capital Resources
To date, we have financed our operations primarily through cash generated from operating activities, the raising of capital raising including sales of our common stock and our convertible preferred stock, and borrowings under our Credit Facility (as hereinafter defined). We believe that current cash and cash equivalents, cash flows from operating activities borrowingand availability under our existing Credit Facility will be sufficient to fund our operations for at least the next twelve months. In addition, we intend to utilize the sources of capital available to us under our Revolver to support our continued growth via acquisitions.
The following table summarizes our liquidity for the periods indicated: | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 |
| | (dollars in thousands) |
| | | |
Cash and cash equivalents | $ | 236,559 | | | $ | 248,653 | |
Available borrowings from our Revolving Credit Facility (1) | 60,000 | | | 60,000 | |
Total Liquidity | $ | 296,559 | | | $ | 308,653 | |
(1) Loans under the Revolver may be borrowed, repaid and reborrowed until August 6, 2024.
The $12.1 million decrease in cash and cash equivalents from December 31, 2022 to December 31, 2023 was due primarily to the $35 million pay down on our outstanding borrowings and the $14.1 million paid to repurchase shares of the Company’s Common Stock, partially offset by the cash gain of $20.5 million from the sale of a portion of our interest rate swaps and other cash flows from operations.
Our cash and cash equivalents held by our foreign subsidiaries was $29.2 million as of December 31, 2023. If these funds held by our foreign subsidiaries are needed for our domestic operations, we would be required to accrue and pay U.S. taxes to repatriate these funds to the U.S. However, our intent is to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate them to fund our domestic operations. We do not provide for federal income taxes on the undistributed earnings of our foreign subsidiaries.
As of December 31, 2023 and 2022, we had a working capital surplus of $169.6 million and $170.1 million, respectively.
Series A Convertible Preferred Stock
In August of 2022, we issued Series A Preferred Stock as discussed in “Note 12. Series A Convertible Preferred Stock” which provided us an additional $110.4 million in liquidity, net of issuance costs of $4.6 million, that we are using for general corporate purposes and intend to use for future acquisitions.
Credit Facility
Our Credit Facility, as defined and described in “Note 7. Debt”, is comprised of fully drawn Term Loans as of December 31, 2023 and a $60.0 million revolving credit facility and the issuancewhich was fully available as of notes to sellers in some of our acquisitions.December 31, 2023.
2022 S-3
On May 12, 2017, the CompanyOctober 21, 2022 we filed a resale registration statement on Form S-3 (File No. 333-217977)333-267973) (the "S-3"“2022 S-3”), to register Upland securities in an aggregate amounton behalf of up to $75.0 million for offerings from time to time. The S-3 was amended on May 22, 2017,the Purchaser and declared effective on May 26, 2017. On June 6, 2017, pursuant to the S-3,Registration Rights Agreement, which became effective on November 1, 2022 and covers (i) the Company entered into an underwriting agreement (the "Underwriting Agreement") with Needham & Company, LLCissued Series A Convertible Preferred Stock and William Blair & Company, L.L.C., as representatives(ii) the number of the several underwriters named therein, relating to the sale and issuance of 2,139,534 common shares of the Company for an offering price toCompany’s common stock issuable upon conversion of such Series A Convertible Preferred Stock, which amount includes and assumes that dividends on the public of $21.50 per share. The net proceedsSeries A Preferred Stock are paid by increasing the Liquidation Preference of the registered public offering were approximately $42.7 million, net of issuance costs, in exchange for 2,139,534 shares of common stock.
As of December 31, 2017, we had cash and cash equivalents of $22.3 million, $30.0 million of available borrowings under our loan facility, and $113.8 million of borrowings outstanding under our loan and security agreements, and $49.4 million as of December 31, 2016.
Fifth Amendment to Credit Facility
On August 2, 2017, the Company entered into a credit facility with Wells Fargo Capital Finance and CIT Bank, N.A. as joint lead arrangers, and including Goldman Sachs Bank USA, Regions Bank, and Citizens Bank, N.A., with a Fifth Amendment to Credit Agreement (the “Fifth Amendment”) that amends that certain Credit Agreement dated as of May 14, 2015 (the “Credit Facility”) among inter alia the Company, certain of its subsidiaries, and each of the lenders named in the Credit Facility.
The Credit Facility now providesSeries A Convertible Preferred Stock for a $200.0 million credit facility, including a $113.8 million outstanding term loan, a $40.0 million delayed draw term loan commitment ($20.0 millionperiod of which was drawn in conjunction withsixteen dividend payment periods from the acquisition of Qvidian in November, 2017), a $10.0 million revolving loan commitment, and a $55.0 million uncommitted accordion.initial issuance date. See “Note 12. Series A Convertible Preferred Stock” for further details.
Specifically, the Fifth Amendment provides for, among other things, (i) the expansion of the Company’s delayed draw term facility from $10.0 million to $40.0 million, (ii) an increase in the Company’s uncommitted accordion amount from $20.0 million to $55.0 million, (iii) reduces principal installments to 2.5% per annum on or before June 30, 2019 with the existing 5.0% per annum due thereafter until the facility’s maturity date of August 2, 2022, (iv) a favorable adjustment to the leverage ratio such that funded indebtedness used in the leverage ratio is reduced by qualified cash in excess of $2.5 million, not to exceed $15.0 million, and (v) an increase in the maximum amount of purchase consideration payable in respect of an individual permitted acquisition from $20.0 million to $25.0 million, and in respect of all permitted acquisitions from $75.0 million to $175.0 million.
As of December 31, 2017 and December 31, 2016, we had a working capital deficit of $23.5 million and a surplus of $7.6 million, respectively, which included $43.8 million and $23.6 million of deferred revenue recorded as a current liability as of December 31, 2017 and December 31, 2016, respectively. This deferred revenue will be recognized as revenue in accordance with our revenue recognition policy.
The following table summarizes our cash flows for the periods indicated (including cash flows from discontinued operations): |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (dollars in thousands) |
Consolidated Statements of Cash Flow Data: | | | | | |
Net cash provided by (used in) operating activities | $ | 7,716 |
| | $ | 3,875 |
| | $ | (1,503 | ) |
Net cash used in investing activities | (110,775 | ) | | (13,229 | ) | | (9,411 | ) |
Net cash provided by (used in) financing activities | 96,178 |
| | 19,525 |
| | (1,221 | ) |
Effect of exchange rate fluctuations on cash | 449 |
| | 114 |
| | (380 | ) |
Change in cash and cash equivalents | (6,432 | ) | | 10,285 |
| | (12,515 | ) |
Cash and cash equivalents, beginning of period | 28,758 |
| | 18,473 |
| | 30,988 |
|
Cash and cash equivalents, end of period | $ | 22,326 |
| | $ | 28,758 |
| | $ | 18,473 |
|
indicated: | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | |
| | (dollars in thousands) |
Consolidated Statements of Cash Flow Data: | | | | | |
Net cash provided by operating activities | $ | 49,943 | | | $ | 29,979 | | | |
Net cash used in investing activities | (1,220) | | | (63,222) | | | |
Net cash provided by (used in) financing activities | (61,384) | | | 94,151 | | | |
Effect of exchange rate fluctuations on cash | 567 | | | (1,413) | | | |
Change in cash and cash equivalents | (12,094) | | | 59,495 | | | |
Cash and cash equivalents, beginning of period | 248,653 | | | 189,158 | | | |
Cash and cash equivalents, end of period | $ | 236,559 | | | $ | 248,653 | | | |
Cash Flows from Operating Activities
Cash used inprovided by operating activities is significantly influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business. Included in net cash provided by operations are one-time acquisition related expenses incurred for up to four quarters after each acquisition to transact and transform the acquired business into the Company's UplandOne platform. Additionally, operating cash flows includes the impact of earnout payments in excess of original purchase accounting estimates. Our operating assets and liabilities consistworking capital consists primarily of cash, receivables from clients andcustomers, prepaid assets, unbilled professional services, deferred commissions, accounts payable, accrued compensation and other accrued expenses, acquisition related earnout and holdback liabilities, lease liabilities and deferred revenues. The timing of our subscription and support billings, the volume of professional services rendered, the amountvolume and timing of perpetual licenses sold,customer bookings and contract renewals, and the related timing of collections and renewals on those bookings, as well as the timing of spending commitments and payments of our accounts payable, andaccrued expenses, accrued payroll and related benefits, all affect these account balances.
Our cashCash provided by operating activities was $49.9 million for 2023 compared to $30.0 million for 2022, an increase of $20.0 million. This increase in operating cash flow is generally attributable to the year ended 2017 primarily reflects our net lossworking capital sources of $18.7 million, partially offset by non-cash expenses that included $11.9 millioncash outweighing the working capital uses of depreciation and amortization, $0.3 million of deferred income taxes, $0.6 million of non-cash interest expense, and $10.0 million of non-cash stock compensation expense.cash outlined below. Working capital sources of cash included a $1.6 million decrease in Prepaids and other, a $1.3 million increase in accounts payable, a $3.7 million increase in accrued expenses and other liabilities and a $2.8 million increase in deferred revenue. These sources of cash were partially offset by a $4.7 million increase in accounts receivable.
Our cash provided by operating activities for the year ended 2016 primarily reflectsDecember 31, 2023 included a one-time $20.5 million cash gain on the sale of a portion of our net loss of $13.5 million, offset by non-cash expenses that included $9.8 million of depreciation and amortization, $0.5 million of deferred income taxes, $0.1 million of foreign currency re-measurement loss, $0.3 million of non-cash interest expense, and $4.3 million of non-cash stock compensation expense. Working capital sourcesrate swaps in August 2023.
A substantial source of cash is invoicing for subscriptions and support fees in advance, which is recorded as deferred revenue, and is included on our consolidated balance sheet as a $0.4 million decreaseliability. Deferred revenue consists of the unearned portion of booked fees for our software subscriptions and support and for professional services, which is amortized into revenue in accounts receivable, a $0.6 million decreaseaccordance with our revenue recognition policy. We assess our liquidity, in prepaidspart, through an analysis of new subscriptions invoiced, expected cash receipts on new and other assets, a $0.4 million decrease in accrued expensesexisting subscriptions, and other liabilities and a $2.2 million decrease in deferred revenue. These sources of cash were offset by a $0.4 million decrease in accounts receivable and a $1.5 million increase in accounts payable.our ongoing operating expense requirements.
Our cash provided by operating activities for the year ended 2015 primarily reflects our net loss of $13.7 million, offset by non-cash expenses that included a $0.0 million charge for the 1,803,574 shares of common stock issued to DevFactory, $8.5 million of depreciation and amortization, $0.4 million of non-cash interest expense, and $2.7 million of non-cash stock compensation expense offset by $0.2 million in deferred income tax benefit. Working capital sources of cash included a $0.7 million decrease in accounts receivable, a $1.9 million decrease in prepaids and other assets, and a $0.2 million increase in accounts payable. These sources of cash were offset by a $2.8 million decrease in accrued expenses and other liabilities, and a $0.6 million decrease in deferred revenue.
Cash Flows from Investing Activities
Our primary investing activities have consisted of acquisitions of complementary technologies, products and businesses. As our business grows, we expect our primary investing activities to continue to further expand our family of software applications and infrastructure and support additional personnel. For fiscal 2017, 2016 and 2015, cash
Cash used in investing activities for business combinations consisteddecreased $62.0 million in 2023 compared to 2022 primarily as a result of $110.3 million, $12.2 million and $7.7 million, respectively. In addition, for fiscal 2017, 2016 and 2015, we used $0.4 million, $0.7 million and $1.0 million, respectively, forclosing no acquisitions during the purchases of property and equipment. Further, for fiscal 2017, 2016 and 2015, we used $0.1 million, $0.4 million, and $0.8 million, respectively, forperiod compared to two acquisition in the purchases of customer relationships.comparable prior year period.
Cash Flows from Financing Activities
Our primary financing activities have consisted of capital raised to fund our operations as well asacquisitions, proceeds from debt obligations entered intoincurred to finance our operations. For fiscal 2017,acquisitions, repayments of our debt obligations, and share based tax payment activity.
Cash from financing activities decreased $155.5 million in 2023 compared to 2022. The decrease in cash provided by financing activities consistedrelates primarily to 2022 net cash proceeds of $74.5$110.4 million related to our Series A Preferred Stock, which did not reoccur in proceeds from debt, partially offset2023, and by $11.9the use of $35 million for repaymentused to pay down our Credit Facility in 2023 and $14.1 million of debt and $43.8 million for proceeds from issuance of common stock, net of issuance costs. For fiscal 2016, cash provided by financing activities consisted primarily of $31.0 million in proceeds from debt, partially offset by $7.2 million for repayment of debt. For fiscal 2015, cash provided by financing activities consisted primarily of $24.1 million in proceeds from debt, offset by $23.9 million for repayment of debt. For fiscal 2017, 2016 and 2015 cash used for additional consideration to sellers of businesses was $5.4 million, $2.1 million, and $0.4 million, respectively, and payments on capital leases was $1.5 million, $1.7 million, and $1.0 million, respectively.Common Stock repurchases in 2023.
Loan and Security Agreements
See Note 7 - Debt, of the Notes to Consolidated Financial Statements for more information regarding our Loan and Security Agreements and outstanding debt as of December 31, 2017.
Contractual Payment Obligations
The following table summarizes our future contractual obligations as of December 31, 20172023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Next 12 Months | | Beyond 12 Months | | Total |
Debt Obligations (1) | | | | $ | 5,400 | | | $ | 476,650 | | | $ | 482,050 | |
Interest on Debt Obligations (2) | | | | 35,240 | | | 54,994 | | | 90,234 | |
| | | | | | | | |
Operating Lease Obligations (3) | | | | 2,540 | | | 1,719 | | | 4,259 | |
Purchase Commitments (4) | | | | 22,852 | | | 7,326 | | | 30,178 | |
Total | | | | $ | 66,032 | | | $ | 540,689 | | | $ | 606,721 | |
|
| | | | | | | | | | | | | | | | | | | |
Contractual Obligations | Payment Due by Period |
| Total | | Less than 1 Year | | 1-3 Years | | >3-5 Years | | More Than 5 Years |
Debt Obligations | $ | 113,813 |
| | $ | 3,000 |
| | $ | 15,813 |
| | $ | 95,000 |
| | $ | — |
|
Capital Lease Obligations | $ | 1,844 |
| | $ | 1,150 |
| | $ | 694 |
| | $ | — |
| | $ | — |
|
Operating Lease Obligations | $ | 9,105 |
| | $ | 3,103 |
| | $ | 5,994 |
| | $ | 8 |
| | $ | — |
|
Purchase Commitments | $ | 3,238 |
| | $ | 3,238 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Total | $ | 128,000 |
| | $ | 10,491 |
| | $ | 22,501 |
| | $ | 95,008 |
| | $ | — |
|
(1)Consists of contractual principal payments on our Credit Facility. See “Liquidity and Capital Resources” above for further discussion regarding our Credit Facility.(2)Future interest on debt maturitiesobligations is calculated using the interest rate effective as of long-term debt exclude debt discountsDecember 31, 2023. We have entered into floating-to-fixed interest rate swap agreements to limit exposure to interest rate risk related to a portion of our debt. See “Item 7A. Quantitative and consist of obligations under the Company's U.S. Loan Agreement, Canadian Loan Agreement, and seller notes.Qualitative Disclosures About Market Risk—Interest Rate Risk” for further discussion.
The Company leases(3)We lease office space under operating leases that expire between 20182024 and 2022. The Company also leases computer equipment2029. Operating lease obligations above do not include the impact of future rental income related to agreements we have entered into to sublet excess office space as a result of our transformation activities.
(4)We define a purchase commitment as an agreement that is enforceable and software under capital leases.
The Company leases cloud infrastructure with Amazon Web Serviceslegally binding and that specifies all significant terms, including: fixed or minimum services to support its cloud infrastructure in conjunction with the consolidation and elimination of a substantial portion of its physical cloud infrastructure formerly maintained around the United States, Canadabe used; fixed, minimum or variable price provisions; and the UK.approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included. In addition, purchase orders are not included as they represent authorizations to purchase rather than binding agreements.
The Company has an outstanding purchase commitment in 2018 for software developmentcommitments related to hosting services, from DevFactory FZ-LLC ("DevFactory") pursuant to athird-party technology services agreementused in the amount of $3.2 million. See Note 14 - Related Party Transactions, of the Notes to Consolidated Financial StatementsCompany’s solutions and for more information
regarding our purchase commitment to this related party.
The agreement has an initial term that expired on December 31, 2017, with an option for either party to renew annually for up to five years. On March 28, 2017,other services the Company and DevFactory executed an amendment to extend the initial term to December 31, 2021. Additionally, the Company amended the option for either party to renew annually for one additional year. The effective datepurchases as part of the amendment was January 1, 2017. For years after 2018, thenormal operations. In certain cases these arrangements require a minimum annual purchase commitment amount for software development services will be equal to the prior year purchase commitment increased (decreased) by the percentage change in total revenue for the prior year as compared to the preceding year. For example, if 2018 total revenues increase by 10% as compared to 2017 total revenues, then the 2019 purchase commitment will increase by approximately $400,000 from the 2018 purchase commitment amount to approximately $3.6 million.commitment.
Off-Balance Sheet Arrangements
During the years ended December 31, 2017, 2016, and 2015, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special-purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and the Use of Estimates
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States.GAAP. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial
statement presentation, financial condition, results of operations and cash flows will be affected. We
While our significant accounting policies are more fully described in “Note 2. Basis of Presentation and Summary of Significant Accounting Policies” in the notes to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
The following critical accounting policies reflect significant judgments and estimates usedIncome Taxes
We are subject to income taxes in the preparation ofUnited States and several foreign jurisdictions. Significant judgment is required in evaluating and estimating our consolidated financial statements:
•revenue recognition and deferred revenue;
•stock-based compensation;
•income taxes; and
•business combinations and the recoverability of goodwill and long-lived assets.
Revenue Recognition
The Company derives revenue from product revenue, consisting of subscription, support and perpetual licenses, and professional services revenues. The Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery of the product or services has occurred, no Company obligations with regard to implementation considered essential to the functionality remain, the fee is fixed or determinable and collectability is probable.
Subscription and Support Revenue
The Company derives subscription revenues by providing its software-as-a-service solution to customers in which the customer does not have the right to take possession of the software, but can use the software for the contracted term. The Company accountsprovision for these arrangements as service contracts. Subscription and support revenuestaxes. There are recognized on a straight-line basis overmany transactions that occur during the termordinary course of the contractual arrangement, typically one to three years. Amounts that have been invoiced and that are due are recorded in deferred revenue or revenue, depending on when
the criteria for revenue recognition are met. Revenue from usage-based services are recognized in the month in which such usage is reported.
The Company may provide hosting services to customers who purchased a perpetual license. Such hosting services are recognized ratably over the applicable term of the arrangement. These hosting arrangements are typically for a period of one to three years.
Software maintenance agreements provide technical support and the right to unspecified upgrades on an if-and-when-available basis. Revenue from maintenance agreements is recognized ratably over the life of the related agreement, which is typically one year.
Perpetual License Revenue
The Company also records revenue from the sales of proprietary software products under perpetual licenses. For license agreements in which customer acceptance is a condition to earning the license fees, revenue is not recognized until acceptance occurs. The Company’s products do not require significant customization. Perpetual licenses are sold along with software maintenance and, sometimes, hosting agreements. When vendor specific objective evidence (VSOE) of fair value exists for the software maintenance and hosting agreement, the perpetual license is recognized under the residual method whereby the fair value of the undelivered software maintenance and hosting agreement is deferred and the remaining contract value is recognized immediately for the delivered perpetual license. When VSOE of fair value does not exist for the either the software maintenance or hosting agreement, the entire contract value is recognized ratably over the underlying software maintenance and/or hosting period.
Professional Services Revenue
Professional services provided with perpetual licenses consist of implementation fees, data extraction, configuration, and training. The Company’s implementation and configuration services do not involve significant customization of the software and are not considered essential to the functionality. Revenues from professional services are recognized as such services are provided when VSOE of fair value exists for such services and all undelivered elements such as software maintenance and/or hosting agreements. VSOE of fair value for services is based upon the price charged when these services are sold separately, and is typically an hourly rate. When VSOE of fair value does not exist for software maintenance and/or hosting agreements, revenues from professional services are recognized ratably over the underlying software maintenance and/or hosting period.
Professional services, when sold with the subscription arrangements, are accounted for separately when these services have value to the customer on a standalone basis and there is objective and reliable evidence of fair value for each deliverable. When accounted for separately, revenues are recognized as the services are rendered for time and material contracts. For those arrangements where the elements do not qualify as a separate unit of accounting, the Company recognizes professional services ratably over the contractual life of the related application subscription arrangement. Currently, all professional services are accounted for separately as all have value to the customer on a standalone basis.
Multiple Element Arrangements
The Company enters into arrangements with multiple-element that generally include subscriptions and implementation and other professional services.
For multiple-element arrangements, arrangement consideration is allocated to deliverables based on their relative selling price. In order to treat deliverables in a multiple-element arrangement as separate units of accounting, the elements must have standalone value upon delivery. If the elements have standalone value upon delivery, each element must be accounted for separately. The Company’s subscription services have standalone value as such services are often sold separately. In determining whether implementation and other professional services have standalone value apart from the subscription services, the Company considers various factors including the availability of the services from other vendors. The Company has concluded that the implementation services included in multiple-element arrangements have standalone value. As a result, when implementation and other professional services are sold in a multiple-element arrangement, the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. The selling price for a element is based on its VSOE of selling price, if available, third-party evidence of selling price, or TPE, if VSOE is not available or best
estimate of selling price, or BESP, if neither VSOE nor TPE is available. The Company has not established VSOE for its subscription services due to lack of pricing consistency, the introduction of new services and other factors. The Company has determined that TPE is not a practical alternative due to differences in its service offerings compared to other parties and the availability of relevant third-party pricing information. Accordingly, the Company uses BESP to determine the relative selling price.
The Company determined BESP by considering its overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the Company’s discounting practices, the size and volume of its transactions, customer characteristics, price lists, go-to-market strategy, historical standalone sales and agreement prices. As the Company’s go-to-market strategies evolve, it may modify its pricing practices in the future, which could result in changes in relative selling prices, and include both VSOE and BESP.
Deferred Revenue
Deferred revenue represents either customer advance payments or billingsbusiness for which the aforementioned revenue recognition criteriaultimate tax determination is uncertain. The Tax Act has provisions that require additional guidance on specific interpretations of the tax law changes. Our provision for income taxes could be adversely affected by our earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, losses incurred in jurisdictions for which we are not yet been met.
Stock-Based Compensation
Stock options awardedable to employeesrealize the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and directors are measured at fair value at each grant date. The Company accounts for stock-based compensationgeographies and changes to our existing businesses, acquisitions and investments, changes in accordance with authoritative accounting principles which require all share-based compensation to employees,our deferred tax assets and liabilities including grantschanges in our assessment of employee stock options, to be recognizedvaluation allowances, changes in the financial statements based on their estimated fair value. Compensation expense is determined under the fair value method using the Black-Scholes option pricing modelrelevant tax laws or interpretations of these tax laws, and recognized ratably over the period the awards vest. The Black-Scholes option pricing model used to compute share-based compensation expense requires extensive use of accounting judgmentdevelopments in current and financial estimates. Items requiring estimation include the expected term option holders will retain their vested stock options before exercising them, the estimated volatility of the Company’s common stock price over the expected term of each stock option, and the number of stock options that will be forfeited prior to the completion of their vesting requirements. Application of alternative assumptions could result in significantly different share-based compensation amounts being recorded in the financial statements. The following table summarizes the weighted-average grant-date fair value of options granted in 2017, 2016, and 2015 and the assumptions used to develop their fair values. As there was no public market for its common stock prior to November 2014, the Company estimates the volatility of its common stock based on the volatility of publicly traded shares of comparable companies' common stock. The Company's decision to use the volatility of comparable stock was based upon the Company's assessment that this information is more representative of future stock price trends than the Company's historical volatility. The Company estimates the expected term using the simplified method, which calculates the expected term as the midpoint between the vesting date and the contractual termination date of each award. The dividend yield assumption is based on historical and expected future dividend payouts. The risk-free interest rate is based on observed market interest rates appropriate for the term of each options.
|
| | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Weighted average grant-date fair value of options | $7.47 | | $3.23 | | $3.01 |
Expected volatility | 35.0% | | 42.5% | | 42.5% - 44.0% |
Risk-free interest rate | 1.1% - 2.0% | | 1.2% | | 1.7% - 1.9% |
Expected life in years | 5.00 | | 5.93 | | 5.93 |
Dividend yield | — | | — | | — |
Income Taxestax examinations.
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities will be recognized in the period that includes the enactment date. We make significant estimates in determining the value of our deferred tax assets. These estimates include, but are not limited to, the expected reversal periods of deferred tax assets and liabilities, the availability of net operating losses and other carryovers and consideration of the future ability to generate taxable income. These estimates are inherently uncertain and unpredictable, and if different estimates were used, it would impact the value of our deferred tax assets and the income tax benefit recognized in fiscal 2023 and in future periods when the deferred taxes are realized.
A valuation allowance is established against theour deferred tax assets to reduce their carrying value to an amount that is more likely than not to be realized. As of December 31, 2023 we recorded a valuation allowance of $41.3 million against our deferred tax assets. If, in the future, we evaluate that our deferred tax assets are not more likely than not to be realized, an increase in the related valuation allowance could result in a material income tax expense in the period such determination is made.
The Company has adopted an indefinite reinvestment position whereby foreign earnings for foreign subsidiaries are expected to be reinvested and future earnings are not expected to be repatriated. As a result of this policy, no deferred tax liability has been accrued in anticipation of future dividends from foreign subsidiaries.
The Company accounts for the uncertainty of income taxes based on a “more likely than not” threshold for the recognition and derecognition of tax positions, which includes the accountingpositions. The Company’s policy is to account for interest and penalties.penalties as a component of income tax expense.
Goodwill and Other IntangiblesImpairment
We assess Goodwill arises from business combinations and is measured as the excess of the cost of the business acquired over the sum of the acquisition-date fair value of tangible and identifiable intangible assets acquired, less any liabilities assumed.
Goodwill is evaluated for impairment annually on October 1st, or more frequently when an event occurs or circumstances change that indicatewhich could cause the carrying value may not be recoverable. The events and circumstances considered byCarrying Value (or GAAP basis book value) of our Company to exceed the Company include the business climate, legal factors, operating performance indicators and competition.
The excess purchase price over theestimated fair value of assets acquired is recorded as goodwill. We test goodwill for impairment annually in October, or whenever events or changes in circumstances indicate an impairment may have occurred. Becauseour Company.
As we operate in a singleas one reporting unit, the Goodwill impairment testevaluation is performed at the consolidated entity level by comparing the estimated fair value of the companyCompany to the carrying value of the company.its Carrying Value. We estimate the fair value of the reporting unit using a "step one" analysis using a fair-value-based approach based on the market capitalization or a discounted cash flow analysis of projected future resultsfirst assess qualitative factors to determine ifwhether it is more likely than not that the fair value of aour single reporting unit is less than its carrying amount. DeterminingCarrying Value. qualitative factors considered include: industry and market considerations; macroeconomic conditions; and other relevant events and factors. Based on the qualitative assessment, if it is determined that it is more likely than not that the Company's fair value is less than its Carrying Value, then we perform a quantitative analysis using a fair-value-based approach to determine if the fair value of goodwillour reporting unit is subjective in nature and often involves the use of estimates and assumptions including, without limitation, use of estimates of future prices and volumes for our products, capital needs, economic trends and other factors which are inherently difficult to forecast. If actual results, or the plans and estimates used in future impairment analyses are lowerless than the original estimates used to assess the recoverability of these assets, we could incur impairment charges inits Carrying Value. Performing a future period. The annualquantitative goodwill impairment test was performed asincludes the determination of October 31, 2017. No impairment of goodwill was identified during the years ended December 31, 2017, 2016, or 2015.
Identifiable intangible assets consist of customer relationships, marketing-related intangible assets and developed technology. Intangible assets with definite lives are amortized over their estimated useful lives on a straight-line basis. The straight-line method of amortization represents the Company’s best estimate of the distribution of the economic value of the identifiable intangible assets.
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of intangible assets may not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable. The Company evaluates the recoverability of intangible assets by comparing their carrying amounts to the future net undiscounted cash flows expected to be generated by the intangible assets. If such intangible assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the intangible assets exceeds the fair value of the assets.
The Company determines fair value based on discounteda reporting unit and involves significant estimates and assumptions. These estimates and assumptions include, among others, revenue growth rates and operating margins used to calculate projected future cash flows, using arisk-adjusted discount rate commensuraterates, future economic and market conditions, and the determination of appropriate market comparables. See “Note 5. Goodwill and Other Intangible Assets” for more information regarding our 2022 and 2023 Goodwill impairments.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements and the risk inherent in the Company’s current business model for the specific intangible asset being valued. There were no such impairments during 2017, 2016,impact of these pronouncements on our consolidated financial statements, refer to “Note 2. Basis of Presentation and 2015.
Other Key Accounting Policies
We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. See Note 2 Summary of Significant Accounting Policies of” in the Notesnotes to Consolidatedthe consolidated financial statements included in “Part II—Item 8. Financial Statements included inand Supplementary Data” of this Annual Report. Of those policies, we believe that the accounting policies enumerated above involve the greatest degree of complexity and exercise of judgment by our management.Report on Form 10-K.
We evaluate our estimates, judgments and assumptions on an ongoing basis, and while we believe that our estimates, judgments and assumptions are reasonable, they are based upon information available at the time. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.
Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We are choosing to “opt out” of such extended transition period, however, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. See Note 2 Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statement for more information.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange and inflation risks, as well as risks relating to changes in the general economic conditions in the countries where we conduct business. The statement of operations impact is mitigated by having an offsetting liability in deferred revenue to partially or completely offset against the outstanding receivable if an account should become uncollectible. Our cash balances are kept in customary operating accounts, a portion of which are insured by the Federal Deposit Insurance Corporation, and uninsured money market accounts. The majority of our cash balances are with top tier banks held in investment grade money market accounts are with Wells Fargo, our lender under our loan facility.and short term US treasury bills. To date, we have not used derivative instruments to mitigate the impact of our market risk exposures. We also have not used, nor do we intend to use, derivatives for trading or speculative purposes.
Interest Rate Risk
Our exposure to market risk for changes in interest rates primarily relates to our cash equivalents in money market funds and any variable rate indebtedness.
The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This objective is accomplished currently by making diversified investments, consisting only of money market mutual funds and certificates of deposit.
Any draws under our loan and security agreements bear interest at a variable rate tied to the prime rate. As of December 31, 2017,2023, we had a principal$211.7 million in money market mutual funds. Based on the Company’s balance of $108.5money market mutual funds at December 31, 2023, a hypothetical change of 100 basis point could have resulted in a $2.1 million change in interest income.
In conjunction with our Term Loans under the Credit Facility, we had entered into interest rate swaps for the total outstanding Term Loans for the full seven-year term, effectively fixing the interest rate of our U.S. Loan AgreementTerm Loans at 5.4% prior to August 2023. On August 24, 2023, the Company sold a portion of their interest rate swaps with a total notional amount of $259.9 million and $5.3received $20.5 million underof net cash proceeds. After giving effect to such sale and principal payments on the Term Loans, $258.5 million of the Term Loans has an effective annualized fixed interest rate of 5.4%, and the remaining principal outstanding at December 31, 2023 of $223.5 million has a floating interest rate of 9.2% based on the interest rate as described in “Note 7. Debt.
The interest rate associated with our Canadian Loan Agreement. $60 million, 5 year, revolving credit facility remains floating.
As of December 31, 2016,2023, we had a principalan outstanding balance of $43.8$482.1 million under our U.S. Loan Agreement and $5.6Credit Facility. Based on the Company’s outstanding balance of variable rate debt at December 31, 2023, a hypothetical change of 100 basis points could have resulted in a $1.0 million under our Canadian Loan Agreement.increase to total interest expense for the year ended December 31, 2023.
Foreign Currency Exchange Risk
Our resultscustomers are generally invoiced in the currency of operations and cash flowsthe country in which they are subject to fluctuations due to changes in foreign currency exchange rates.located. In addition, we incur a portion of our operating expenses in foreign currencies, including CanadianAustralian dollars, British pounds, Canadian dollars, Indian Rupees, Euros and Euros,Israeli New Shekels, and in the future, as we expand into other foreign countries, we expect to incur operating expenses in other foreign currencies. In addition, our customers are generally invoiced in the currency of the country in which they are located. WeAs a result, we are exposed to foreign exchange rate fluctuations as the financial results of our international operations are translated from the local functional currency into U.S. dollars upon consolidation. A decline in the U.S. dollar relative to foreign functional currencies would increaseand our non-U.S. revenue and improve our operating results. Conversely, if the U.S. dollar strengthens relative to foreign functional currencies, our revenue
and operating results wouldcould be adversely affected. We have not previously engaged in foreign currency hedging. If we decide to hedge our foreign currency exchange rate exposure, we may not be able to hedge effectively due to lack of experience, unreasonable costs, or illiquid markets. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would have resulted in a change in revenue of $2.1$7.3 million for the year ended December 31, 2017.2023. To date, we have not engaged in any hedging strategies. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in foreign currency exchange rates.
InflationThe non-financial assets and liabilities of our foreign subsidiaries are translated into USD using the exchange rates in effect at the balance sheet date. The related translation adjustments are recorded in a separate component of stockholders' equity in accumulated other comprehensive loss. In addition, we have intercompany loans that were used to fund the acquisition of foreign subsidiaries. Due to the long-term nature of these loans, the foreign currency gains (losses) resulting from remeasurement are recognized as a component of accumulated other comprehensive loss.
We do not believe that inflation had a material effect on our business, financial condition or results of operations in the last three fiscal years. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
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Item 8. | Financial Statements and Supplementary Data |
Item 8. Financial Statements and Supplementary Data UPLAND SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the StockholdersShareholders and the Board of Directors of Upland Software, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Upland Software, Inc. (the “Company“)Company) as of December 31, 20172023 and 2016,2022, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017,2023, and the related notes (collectively referred to as the “financial statements““consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as ofat December 31, 20172023 and 2016,2022, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 22, 2024, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company‘sCompany’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB“)PCAOB and are required to be independent with respect to the Company in accordance with the USU.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have servedCritical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the Company‘s auditor since 2013.critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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| Evaluation of goodwill for impairment |
Description of the Matter | At December 31, 2023, the Company’s goodwill balance was $354 million. As discussed in Note 2 to the consolidated financial statements, goodwill is tested at least annually for impairment and more frequently when indicators of impairment are identified. Estimating fair values in connection with this impairment evaluation involves the utilization of the discounted cash flow and guideline public company approaches. As described in Note 5 to the consolidated financial statements, the Company recorded a goodwill impairment charge of $129 million during the year ended December 31, 2023. |
| Auditing management’s goodwill impairment assessment was complex and required auditor judgment because the estimation of fair values involves subjective management assumptions, including estimation of future cash flows, the long-term rate of growth for the Company’s business and weighted average cost of capital. Assumptions used in these valuation models are forward-looking, and changes in these assumptions can have a material effect on the determination of fair value. |
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of certain controls over the Company’s impairment assessment process, including controls over management’s review of the valuation models and its determination of the significant assumptions described above. |
| To test the Company’s impairment evaluation, our audit procedures included, among others, assessing the valuation methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its evaluation. For example, we compared the significant assumptions to current industry, market, and economic trends, to historical results of the Company and to other guideline companies within the same industry. We also performed independent sensitivity analyses to evaluate the changes in the fair value of the reporting unit that would result from changes in the significant assumptions. We involved our valuation specialists to assist in evaluating the methodologies and auditing the significant assumptions used to calculate the estimated fair values. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2013.
Austin, Texas
March 8, 2018February 22, 2024
Upland Software, Inc.
Consolidated Balance Sheets | | | | | | | | | | | | | | | | |
(in thousands, except share and per share amounts) | | December 31, | | |
| | 2023 | | 2022 | | |
| | | | | | |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 236,559 | | | $ | 248,653 | | | |
Accounts receivable, net of allowance for credit losses | | 38,765 | | | 47,594 | | | |
Deferred commissions, current | | 10,429 | | | 10,961 | | | |
Unbilled receivables | | 2,701 | | | 5,313 | | | |
Income tax receivable, current | | 3,775 | | | 542 | | | |
| | | | | | |
Prepaid expenses and other current assets | | 8,004 | | | 8,232 | | | |
Total current assets | | 300,233 | | | 321,295 | | | |
Tax credits receivable | | 1,657 | | | 2,411 | | | |
Property and equipment, net | | 1,932 | | | 1,830 | | | |
Operating lease right-of-use asset | | 2,929 | | | 5,719 | | | |
Intangible assets, net | | 182,349 | | | 248,851 | | | |
Goodwill | | 353,778 | | | 477,043 | | | |
Deferred commissions, noncurrent | | 12,568 | | | 13,794 | | | |
Interest rate swap assets | | 14,270 | | | 41,168 | | | |
| | | | | | |
Other assets | | 308 | | | 1,348 | | | |
Total assets | | $ | 870,024 | | | $ | 1,113,459 | | | |
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | 8,137 | | | $ | 14,939 | | | |
Accrued compensation | | 7,174 | | | 7,393 | | | |
Accrued expenses and other current liabilities | | 7,050 | | | 10,644 | | | |
Deferred revenue | | 102,763 | | | 106,465 | | | |
Liabilities due to sellers of businesses | | — | | | 5,429 | | | |
Operating lease liabilities, current | | 2,351 | | | 3,205 | | | |
Current maturities of notes payable (includes unamortized discount of $2,228 and $2,264 at December 31, 2023 and December 31, 2022, respectively) | | 3,172 | | | 3,136 | | | |
Total current liabilities | | 130,647 | | | 151,211 | | | |
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Notes payable, less current maturities (includes unamortized discount of $3,148 and $5,203 at December 31, 2023 and December 31, 2022, respectively) | | 473,502 | | | 511,847 | | | |
Deferred revenue, noncurrent | | 3,860 | | | 4,707 | | | |
Operating lease liabilities, noncurrent | | 1,597 | | | 4,947 | | | |
Noncurrent deferred tax liability, net | | 16,025 | | | 18,416 | | | |
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Other long-term liabilities | | 461 | | | 1,170 | | | |
Total liabilities | | 626,092 | | | 692,298 | | | |
Series A Convertible Preferred stock, 0.0001 par value; 5,000,000 shares authorized: 115,000 shares issued and outstanding as of December 31, 2023 and December 31, 2022, respectively | | 117,638 | | | 112,291 | | | |
Stockholders’ equity: | | | | | | |
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Common stock, $0.0001 par value; 75,000,000 and 50,000,000 shares authorized as of December 31, 2023 and December 31, 2022, respectively; 29,908,407 and 32,221,855 shares issued and outstanding as of December 31, 2023 and December 31, 2022, respectively | | 3 | | | 3 | | | |
Additional paid-in capital | | 608,995 | | | 606,755 | | | |
Accumulated other comprehensive income | | 6,168 | | | 11,110 | | | |
Accumulated deficit | | (488,872) | | | (308,998) | | | |
Total stockholders’ equity | | 126,294 | | | 308,870 | | | |
Total liabilities, convertible preferred stock and stockholders’ equity | | $ | 870,024 | | | $ | 1,113,459 | | | |
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| December 31, |
(in thousands, except share and per share amounts) | 2017 | | 2016 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 22,326 |
| | $ | 28,758 |
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Accounts receivable (net of allowance of $1,069 and $658 at December 31, 2017 and December 31, 2016, respectively) | 26,504 |
| | 15,254 |
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Prepaid and other | 2,856 |
| | 3,287 |
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Total current assets | 51,686 |
| | 47,299 |
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Canadian tax credits receivable | 1,196 |
| | 978 |
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Property and equipment, net | 2,927 |
| | 4,356 |
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Intangible assets, net | 70,043 |
| | 28,512 |
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Goodwill | 154,607 |
| | 69,097 |
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Other assets | 800 |
| | 346 |
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Total assets | $ | 281,259 |
| | $ | 150,588 |
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Liabilities and stockholders’ equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 3,887 |
| | $ | 1,268 |
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Accrued compensation | 5,157 |
| | 2,541 |
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Accrued expenses and other | 12,148 |
| | 5,505 |
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Deferred revenue | 43,807 |
| | 23,552 |
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Due to sellers | 7,839 |
| | 4,642 |
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Current maturities of notes payable (includes unamortized discount of $699 and $329 at December 31, 2017 and December 31, 2016, respectively) | 2,301 |
| | 2,190 |
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Total current liabilities | 75,139 |
| | 39,698 |
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Canadian tax credit liability to sellers | — |
| | 361 |
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Notes payable, less current maturities (includes unamortized discount of $1,969 and $1,113 at December 31, 2017 and December 31, 2016, respectively) | 108,843 |
| | 45,739 |
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Deferred revenue | 1,570 |
| | 247 |
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Noncurrent deferred tax liability, net | 3,262 |
| | 3,404 |
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Other long-term liabilities | 1,030 |
| | 2,126 |
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Total liabilities | 189,844 |
| | 91,575 |
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Stockholders’ equity: | | | |
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding as of December 31, 2017; no shares issued and outstanding as of December 31, 2016, respectively | — |
| | — |
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Common stock, $0.0001 par value; 50,000,000 shares authorized: 20,768,401 and 17,785,288 shares issued and outstanding as of December 31, 2017 and December 31, 2016, respectively | 2 |
| | 2 |
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Additional paid-in capital | 174,944 |
| | 124,566 |
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Accumulated other comprehensive loss | (2,403 | ) | | (3,152 | ) |
Accumulated deficit | (81,128 | ) | | (62,403 | ) |
Total stockholders’ equity | 91,415 |
| | 59,013 |
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Total liabilities and stockholders’ equity | $ | 281,259 |
| | $ | 150,588 |
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See accompanying notes.
Upland Software, Inc.
Consolidated Statements of Operations | | | | | | | | | | | | | | | | | | | | |
(in thousands, except share and per share amounts) | | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
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Revenue: | | | | | | |
Subscription and support | | $ | 281,554 | | | $ | 297,887 | | | $ | 287,621 | |
Perpetual license | | 6,077 | | | 6,948 | | | 2,150 | |
Total product revenue | | 287,631 | | | 304,835 | | | 289,771 | |
Professional services | | 10,221 | | | 12,468 | | | 12,245 | |
Total revenue | | 297,852 | | | 317,303 | | | 302,016 | |
Cost of revenue: | | | | | | |
Subscription and support | | 88,894 | | | 93,948 | | | 92,168 | |
Professional services | | 7,467 | | | 9,793 | | | 7,285 | |
Total cost of revenue | | 96,361 | | | 103,741 | | | 99,453 | |
Gross profit | | 201,491 | | | 213,562 | | | 202,563 | |
Operating expenses: | | | | | | |
Sales and marketing | | 64,342 | | | 59,416 | | | 55,097 | |
Research and development | | 49,375 | | | 46,187 | | | 42,693 | |
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General and administrative | | 61,264 | | | 70,462 | | | 76,901 | |
Depreciation and amortization | | 58,614 | | | 43,669 | | | 41,315 | |
Acquisition-related expenses | | 3,060 | | | 21,556 | | | 21,234 | |
Impairment of goodwill | | 128,755 | | | 12,500 | | | — | |
Total operating expenses | | 365,410 | | | 253,790 | | | 237,240 | |
Loss from operations | | (163,919) | | | (40,228) | | | (34,677) | |
Other expense: | | | | | | |
Interest expense, net | | (18,684) | | | (29,145) | | | (31,626) | |
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Other income (expense), net | | 236 | | | (781) | | | (253) | |
Total other expense | | (18,448) | | | (29,926) | | | (31,879) | |
Loss before benefit from income taxes | | (182,367) | | | (70,154) | | | (66,556) | |
Benefit from income taxes | | 2,493 | | | 1,741 | | | 8,344 | |
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Net loss | | $ | (179,874) | | | $ | (68,413) | | | $ | (58,212) | |
Preferred stock dividends | | (5,347) | | | (1,846) | | | — | |
Net loss attributable to common shareholders | | $ | (185,221) | | | $ | (70,259) | | | $ | (58,212) | |
Net loss per common share: | | | | | | |
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Net loss per common share, basic and diluted | | $ | (5.77) | | | $ | (2.23) | | | $ | (1.92) | |
Weighted-average common shares outstanding, basic and diluted | | 32,074,906 | | | 31,528,881 | | | 30,295,769 | |
See accompanying notes.
Upland Software, Inc.
Consolidated Statements of Comprehensive Loss | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
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Net loss | | $ | (179,874) | | | $ | (68,413) | | | $ | (58,212) | |
Other comprehensive income (loss): | | | | | | |
Foreign currency gain (loss) translation adjustment | | 2,685 | | | (16,975) | | | (6,301) | |
Unrealized translation gain (loss) on intercompany loans with foreign subsidiaries | | 4,096 | | | (9,978) | | | (602) | |
Interest rate swaps | | (11,723) | | | 49,577 | | | 21,623 | |
Other comprehensive income (loss): | | $ | (4,942) | | | $ | 22,624 | | | $ | 14,720 | |
Comprehensive loss | | $ | (184,816) | | | $ | (45,789) | | | $ | (43,492) | |
See accompanying notes.
Upland Software, Inc.
Consolidated Statements of OperationsEquity
(in thousands, except share amount) |
| | | | | | | | | | | |
(in thousands, except share and per share amounts) | Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Revenue: | | | | | |
Subscription and support | $ | 85,467 |
| | $ | 65,552 |
| | $ | 57,193 |
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Perpetual license | 4,346 |
| | 1,650 |
| | 2,805 |
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Total product revenue | 89,813 |
| | 67,202 |
| | 59,998 |
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Professional services | 8,139 |
| | 7,565 |
| | 9,913 |
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Total revenue | 97,952 |
| | 74,767 |
| | 69,911 |
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Cost of revenue: | | | | | |
Subscription and support | 28,454 |
| | 22,734 |
| | 19,586 |
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Professional services | 5,193 |
| | 4,831 |
| | 7,085 |
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Total cost of revenue | 33,647 |
| | 27,565 |
| | 26,671 |
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Gross profit | 64,305 |
| | 47,202 |
| | 43,240 |
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Operating expenses: | | | | | |
Sales and marketing | 15,307 |
| | 12,160 |
| | 12,965 |
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Research and development | 15,795 |
| | 14,919 |
| | 15,778 |
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Refundable Canadian tax credits | (542 | ) | | (513 | ) | | (470 | ) |
General and administrative | 23,291 |
| | 18,286 |
| | 18,201 |
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Depreciation and amortization | 6,498 |
| | 5,291 |
| | 4,534 |
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Acquisition-related expenses | 15,092 |
| | 5,583 |
| | 2,455 |
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Total operating expenses | 75,441 |
| | 55,726 |
| | 53,463 |
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Loss from operations | (11,136 | ) | | (8,524 | ) | | (10,223 | ) |
Other expense: | | | | | |
Interest expense, net | (6,582 | ) | | (2,781 | ) | | (1,858 | ) |
Other income (expense), net | 289 |
| | (678 | ) | | (544 | ) |
Total other expense | (6,293 | ) | | (3,459 | ) | | (2,402 | ) |
Loss before provision for income taxes | (17,429 | ) | | (11,983 | ) | | (12,625 | ) |
Provision for income taxes | (1,296 | ) | | (1,530 | ) | | (1,039 | ) |
Net loss attributable to common shareholders | $ | (18,725 | ) | | $ | (13,513 | ) | | $ | (13,664 | ) |
Net loss per common share: | | | | | |
Net loss per common share, basic and diluted | $ | (1.02 | ) | | $ | (0.82 | ) | | $ | (0.91 | ) |
Weighted-average common shares outstanding, basic and diluted | 18,411,247 |
| | 16,472,799 |
| | 14,939,601 |
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| | Preferred Stock | | Common Stock | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders’ Equity |
| | Shares | | Amount | | Shares | | Amount | | | | | |
Balance at December 31, 2020 | | — | | | — | | | 29,987,114 | | | $ | 3 | | | | | | | $ | 515,219 | | | $ | (26,234) | | | $ | (182,373) | | | $ | 306,615 | |
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Issuance of stock under Company plans, net of shares withheld for tax | | — | | | — | | | 1,109,434 | | | — | | | | | | | (708) | | | — | | | — | | | (708) | |
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Stock-based compensation | | — | | | — | | | — | | | — | | | | | | | 53,873 | | | — | | | — | | | 53,873 | |
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Foreign currency translation adjustment | | — | | | — | | | — | | | — | | | | | | | — | | | (6,301) | | | — | | | (6,301) | |
Unrealized translation loss on foreign currency denominated intercompany loans | | — | | | — | | | — | | | — | | | | | | | — | | | (602) | | | — | | | (602) | |
Interest rate swaps | | — | | | — | | | — | | | — | | | | | | | — | | | 21,623 | | | — | | | 21,623 | |
Net loss | | — | | | — | | | — | | | — | | | | | | | — | | | — | | | (58,212) | | | (58,212) | |
Balance at December 31, 2021 | | — | | | — | | | 31,096,548 | | | $ | 3 | | | | | | | $ | 568,384 | | | $ | (11,514) | | | $ | (240,585) | | | $ | 316,288 | |
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Issuance of Convertible Preferred Stock | | 115,000 | | | $ | 110,445 | | | — | | | — | | | | | | | — | | | — | | | — | | | — | |
Dividends accrued - Convertible Preferred Stock | | — | | | 1,846 | | | — | | | — | | | | | | | (1,846) | | | — | | | — | | | (1,846) | |
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Issuance of stock under Company plans, net of shares withheld for tax | | — | | | — | | | 1,125,307 | | | — | | | | | | | (1,385) | | | — | | | — | | | (1,385) | |
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Stock-based compensation | | — | | | — | | | — | | | — | | | | | | | 41,602 | | | — | | | — | | | 41,602 | |
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Foreign currency translation adjustment | | — | | | — | | | | | | | | | | | | | (16,975) | | | | | (16,975) | |
Unrealized translation loss on intercompany loans with foreign subsidiaries | | — | | | — | | | | | | | | | | | | | (9,978) | | | | | (9,978) | |
Interest rate swaps | | — | | | — | | | | | | | | | | | | | 49,577 | | | | | 49,577 | |
Net loss | | — | | | — | | | — | | | — | | | | | | | — | | | — | | | (68,413) | | | (68,413) | |
Balance at December 31, 2022 | | 115,000 | | | $ | 112,291 | | | 32,221,855 | | | $ | 3 | | | | | | | $ | 606,755 | | | $ | 11,110 | | | $ | (308,998) | | | $ | 308,870 | |
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Dividends accrued - Convertible Preferred Stock | | — | | | 5,347 | | | — | | | — | | | | | | | (5,347) | | | — | | | — | | | (5,347) | |
Issuance of stock under Company plans, net of shares withheld for tax | | — | | | — | | | 931,652 | | | — | | | | | | | (1,086) | | | — | | | — | | | (1,086) | |
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Stock repurchases and retirements | | | | | | (3,245,100) | | | | | | | | | (14,201) | | | | | | | (14,201) | |
Stock-based compensation | | — | | | — | | | — | | | — | | | | | | | 22,874 | | | — | | | — | | | 22,874 | |
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Foreign currency translation adjustment | | | | — | | | — | | | — | | | | | | | — | | | 2,685 | | | — | | | 2,685 | |
Unrealized translation loss on foreign currency denominated intercompany loans | | | | — | | | — | | | — | | | | | | | — | | | 4,096 | | | — | | | 4,096 | |
Interest rate swaps | | | | — | | | — | | | — | | | | | | | — | | | (11,723) | | | — | | | (11,723) | |
Net loss | | — | | | — | | | — | | | — | | | | | | | — | | | — | | | (179,874) | | | (179,874) | |
Balance at December 31, 2023 | | 115,000 | | | $ | 117,638 | | | 29,908,407 | | | $ | 3 | | | | | | | $ | 608,995 | | | $ | 6,168 | | | $ | (488,872) | | | $ | 126,294 | |
See accompanying notes.
Upland Software, Inc.
Consolidated Statements of Comprehensive Loss
|
| | | | | | | | | | | |
(in thousands) | Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Net loss | $ | (18,725 | ) | | $ | (13,513 | ) | | $ | (13,664 | ) |
Foreign currency translation adjustment | 749 |
| | 137 |
| | (1,573 | ) |
Comprehensive loss | $ | (17,976 | ) | | $ | (13,376 | ) | | $ | (15,237 | ) |
See accompanying notes.
Upland Software, Inc.
Consolidated Statement of Stockholders’ Equity |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except share amounts) | Common Stock | | Preferred Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Stockholders’ Equity |
| Shares | | Amount | | Shares | | Amount | |
Balance at December 31, 2015 | 15,746,288 |
| | $ | 2 |
| | — |
| | $ | — |
| | $ | 112,447 |
| | $ | (3,289 | ) | | $ | (48,890 | ) | | $ | 60,270 |
|
Issuance of common stock in business combination | 1,344,463 |
| | — |
| | — |
| | — |
| | 8,300 |
| | — |
| | — |
| | 8,300 |
|
Issuance of stock under Company plans, net of shares withheld for tax | 694,537 |
| | — |
| | — |
| | — |
| | (514 | ) | | — |
| | — |
| | (514 | ) |
Stock-based compensation | — |
| | — |
| | — |
| | — |
| | 4,333 |
| | — |
| | — |
| | 4,333 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | 137 |
| | — |
| | 137 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (13,513 | ) | | (13,513 | ) |
Balance at December 31, 2016 | 17,785,288 |
| | $ | 2 |
| | — |
| | $ | — |
| | $ | 124,566 |
| | $ | (3,152 | ) | | $ | (62,403 | ) | | $ | 59,013 |
|
Issuance of stock under Company plans, net of shares withheld for tax | 843,579 |
| | | | — |
| | — |
| | (2,163 | ) | | — |
| | — |
| | (2,163 | ) |
Issuance of stock, net of issuance costs | 2,139,534 |
| | | | — |
| | — |
| | 42,564 |
| | — |
| | — |
| | 42,564 |
|
Stock-based compensation | — |
| | | | — |
| | — |
| | 9,977 |
| | — |
| | — |
| | 9,977 |
|
Other comprehensive loss | — |
| | | | — |
| | — |
| | — |
| | 749 |
| | — |
| | 749 |
|
Net loss | — |
| | | | — |
| | — |
| | — |
| | — |
| | (18,725 | ) | | (18,725 | ) |
Balance at December 31, 2017 | 20,768,401 |
| | 2 |
| | — |
| | — |
| | 174,944 |
| | (2,403 | ) | | (81,128 | ) | | 91,415 |
|
See accompanying notes.
Upland Software, Inc.
Consolidated Statements of Cash Flows | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
(in thousands) | | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| | | | | | |
Operating activities | | | | | | |
Net loss | | $ | (179,874) | | | $ | (68,413) | | | $ | (58,212) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | | 71,985 | | | 56,146 | | | 52,928 | |
Change in fair value of liabilities due to sellers of businesses | | — | | | (75) | | | (4,510) | |
Deferred income taxes | | (4,209) | | | (7,075) | | | (11,179) | |
Amortization of deferred costs | | 13,170 | | | 12,198 | | | 8,948 | |
Foreign currency re-measurement loss | | (538) | | | (12) | | | 25 | |
Non-cash interest, net and other income, net | | (2,976) | | | 2,256 | | | 2,249 | |
Non-cash stock-based compensation expense | | 22,874 | | | 41,602 | | | 53,873 | |
| | | | | | |
| | | | | | |
Non-cash loss on impairment of goodwill | | 128,755 | | | 12,500 | | | — | |
Non-cash loss on retirement of fixed assets | | 47 | | | 79 | | | — | |
| | | | | | |
Changes in operating assets and liabilities, net of purchase business combinations: | | | | | | |
Accounts receivable | | 8,916 | | | 9,691 | | | (1,665) | |
Prepaid expenses and other current assets | | (471) | | | 10,070 | | | 5,761 | |
Other assets | | 10,866 | | | (12,811) | | | (13,260) | |
Accounts payable | | (6,896) | | | (7,175) | | | 10,865 | |
Accrued expenses and other liabilities | | (6,188) | | | (14,013) | | | (9,660) | |
Deferred revenue | | (5,518) | | | (4,989) | | | 5,575 | |
Net cash provided by operating activities | | 49,943 | | | 29,979 | | | 41,738 | |
Investing activities | | | | | | |
Purchase of property and equipment | | (1,220) | | | (866) | | | (1,115) | |
| | | | | | |
Purchase business combinations, net of cash acquired | | — | | | (62,356) | | | (92,417) | |
| | | | | | |
Net cash used in investing activities | | (1,220) | | | (63,222) | | | (93,532) | |
Financing activities | | | | | | |
Payments on finance leases | | — | | | — | | | (12) | |
Payments of debt costs | | (221) | | | (203) | | | (122) | |
Payments on notes payable | | (40,400) | | | (5,400) | | | (5,400) | |
| | | | | | |
Stock repurchases and retirement | | (14,060) | | | — | | | — | |
Issuance of Series A Convertible Preferred stock, net of issuance costs | | — | | | 110,445 | | | — | |
| | | | | | |
Taxes paid related to net share settlement of equity awards | | (1,091) | | | (1,576) | | | (982) | |
Issuance of common stock, net of issuance costs | | 5 | | | 191 | | | 274 | |
Additional consideration paid to sellers of businesses | | (5,617) | | | (9,306) | | | (1,938) | |
Net cash provided by (used in) financing activities | | (61,384) | | | 94,151 | | | (8,180) | |
Effect of exchange rate fluctuations on cash | | 567 | | | (1,413) | | | (897) | |
Change in cash and cash equivalents | | (12,094) | | | 59,495 | | | (60,871) | |
Cash and cash equivalents, beginning of period | | 248,653 | | | 189,158 | | | 250,029 | |
Cash and cash equivalents, end of period | | $ | 236,559 | | | $ | 248,653 | | | $ | 189,158 | |
Supplemental disclosures of cash flow information: | | | | | | |
Cash paid for interest, net of interest rate swaps | | $ | 32,137 | | | $ | 29,120 | | | $ | 29,427 | |
Cash paid for taxes | | $ | 7,106 | | | $ | 3,876 | | | $ | 2,846 | |
| | | | | | |
Non-cash investing and financing activities: | | | | | | |
| | | | | | |
Business combination consideration including holdbacks and earnouts | | $ | — | | | $ | 8,126 | | | $ | 11,670 | |
| | | | | | |
| | | | | | |
| | | | | | |
|
| | | | | | | | | | | |
(in thousands) | Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Operating activities | | | | | |
Net loss | $ | (18,725 | ) | | $ | (13,513 | ) | | $ | (13,664 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 11,914 |
| | 9,794 |
| | 8,451 |
|
Deferred income taxes | (262 | ) | | 529 |
| | 207 |
|
Foreign currency re-measurement (gain) loss | (382 | ) | | (64 | ) | | 981 |
|
Non-cash interest and other expense | 592 |
| | 327 |
| | 376 |
|
Non-cash stock compensation expense | 9,977 |
| | 4,333 |
| | 2,741 |
|
Loss on disposal of business | — |
| | 746 |
| | — |
|
Non-cash loss on retirement of fixed assets | (19 | ) | | 276 |
| | — |
|
Changes in operating assets and liabilities, net of purchase business combinations: | | | | | |
Accounts receivable | (4,710 | ) | | (361 | ) | | 741 |
|
Prepaids and other | 1,555 |
| | 648 |
| | 1,873 |
|
Accounts payable | 1,254 |
| | (1,453 | ) | | 157 |
|
Accrued expenses and other liabilities | 3,715 |
| | 413 |
| | (2,796 | ) |
Deferred revenue | 2,807 |
| | 2,200 |
| | (570 | ) |
Net cash provided by (used in) operating activities | 7,716 |
| | 3,875 |
| | (1,503 | ) |
Investing activities | | | | | |
Purchase of property and equipment | (396 | ) | | (670 | ) | | (956 | ) |
Purchase of customer relationships | (55 | ) | | (408 | ) | | (791 | ) |
Purchase business combinations, net of cash acquired | (110,324 | ) | | (12,151 | ) | | (7,664 | ) |
Net cash used in investing activities | (110,775 | ) | | (13,229 | ) | | (9,411 | ) |
Financing activities | | | | | |
Payments on capital leases | (1,497 | ) | | (1,683 | ) | | (1,020 | ) |
Proceeds from notes payable, net of issuance costs | 74,538 |
| | 30,992 |
| | 24,083 |
|
Payments on notes payable | (11,912 | ) | | (7,190 | ) | | (23,907 | ) |
Taxes paid related to net share settlement of equity awards | (3,387 | ) | | (726 | ) | | — |
|
Issuance of common stock, net of issuance costs | 43,797 |
| | 211 |
| | (18 | ) |
Additional consideration paid to sellers of businesses | (5,361 | ) | | (2,079 | ) | | (359 | ) |
Net cash provided by (used in) financing activities | 96,178 |
| | 19,525 |
| | (1,221 | ) |
Effect of exchange rate fluctuations on cash | 449 |
| | 114 |
| | (380 | ) |
Change in cash and cash equivalents | (6,432 | ) | | 10,285 |
| | (12,515 | ) |
Cash and cash equivalents, beginning of period | 28,758 |
| | 18,473 |
| | 30,988 |
|
Cash and cash equivalents, end of period | $ | 22,326 |
| | $ | 28,758 |
| | $ | 18,473 |
|
Supplemental disclosures of cash flow information: | | | | | |
Cash paid for interest | $ | 6,012 |
| | $ | 2,455 |
| | $ | 1,523 |
|
Cash paid for taxes | $ | 1,782 |
| | $ | 488 |
| | $ | 314 |
|
Noncash investing and financing activities: | | | | | |
Equipment acquired pursuant to capital lease obligations | $ | 50 |
| | $ | 1,293 |
| | $ | 3,428 |
|
Issuance of common stock in business combination | $ | — |
| | $ | 8,300 |
| | $ | 1,386 |
|
See accompanying notes.
Upland Software, Inc.
Notes to Consolidated Financial Statements
1. Organization and Nature of Operations
Upland Software, Inc. (“Upland”Upland,” “we,” “us,” “our,” or the “Company”), a Delaware corporation, is a provider of cloud-based enterprise work management software.software that enables organizations to plan, manage and execute projects and work. Upland’s software applications help organizations better optimize the allocation and utilization of their people, time, and money. Upland provides a family of cloud-based enterprise work management software applications for the information technology, process excellence, finance, professional services, and marketing functions within organizations. Upland’s software applicationscloud offerings address a broad range of enterprise work managementsoftware needs, from strategic planning to task execution.execution in the following functional areas: Sales, Marketing, Contact Center, Knowledge Management, Project Management, Information Technology, Business Operations, and Human Resources and Legal.
To support continued growth, Upland intends to pursue acquisitions within its cloud offerings of complementary technologies and businesses. Upland expects that this will expand its product offerings, customer base and market access, resulting in increased benefits of scale. Consistent with Upland’s growth strategy, Upland has made a total of 31 acquisitions in the 12 years ended December 31, 2023. 2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of PresentationPresentation
These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States or GAAP.(“GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amountsThere have been reclassified to confirm to the current period presentation.
During the third quarter of 2017, we identified and corrected an immaterial chargeno significant changes in the reported non-cash loss on debt extinguishment and interest expense recorded in the second quarter 2017 in our Condensed Consolidated Statements of Operations. The Fourth Amendment to the Company’s Credit Agreement should have been accounted for as a modification rather than an extinguishment in accordance with the accounting literature under ASC 470, Debt. The unaudited Consolidated Statements of Operations for the three months ended September 30, 2017, reflect a reversal of the immaterial non-cash net $1.4 million charge to loss on debt extinguishment and interest expense. This matter had no effect on the reported revenue, gross profit, or the Condensed Consolidated Statement of Cash Flows and had no material effect on the Condensed Consolidated Balance Sheet, or Condensed Consolidated Statements of Comprehensive Loss. See Note 7 - Debt, of the Notes to Consolidated Financial Statements for more information related to the Company’s Credit Agreement.policies since December 31, 2022.
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make, on an ongoing basis, estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses. Significant items subject to such estimates include those related to revenue recognition, deferred commissions, allowance for doubtful accounts,credit losses, stock-based compensation, contingent consideration, acquired intangible assets, the useful lives of intangible assets and property and equipment, and income taxes. In accordance with GAAP, management bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Management regularly evaluates its estimates and assumptions using historical experience and other factors; however, actual results could differ from those estimates.
Upland is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of February 22, 2024, the date of issuance of this Annual Report on Form 10-K. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash deposits and liquid investments with original maturities of three months or less when purchased. Cash equivalents are stated at cost, which approximates market value, because of the short maturity of these instruments.
Accounts Receivable and Allowance for Doubtful AccountsCredit Losses
The Company extends credit to the majority of its customers. Issuance of credit is based on ongoing credit evaluations by the Company of customers’ financial condition and generally requires no collateral. Trade accounts
receivable are recorded at the invoiced amount and do not bear interest. Invoices generally require payment within 30 days from the invoice date.due upon receipt of invoice. The Company generally does not charge interest on past due payments, although the Company's contracts with its customers usually allow it to do so.
TheTo manage accounts receivable credit risk, the Company performs periodic credit evaluations of its customers and maintains an allowance for doubtful accounts to reserve for potential uncollectible receivables. The allowance is based upon the creditworthinesscurrent expected credit losses which considers such factors as historical loss information, geographic location of the Company’s customers, the customers’ historical payment experience, the age of the receivables and current market conditions. Provisions for potentially uncollectible accounts are recorded in salesconditions, and marketing expenses. The Company writes off accounts receivable balances to the allowance for doubtful accounts when it becomes likely that they will not be collected.reasonable and supportable forecasts.
The following table presents the changes in the allowance for doubtful accountscredit losses (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
Balance at beginning of year | $ | 1,158 | | | $ | 1,107 | | | $ | 1,465 | |
| | | | | |
Provision for credit losses | (569) | | | 556 | | | 694 | |
| | | | | |
| | | | | |
Writeoffs, net of recoveries and other | (17) | | | (505) | | | (1,052) | |
Balance at end of year | $ | 572 | | | $ | 1,158 | | | $ | 1,107 | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Balance at beginning of year | $ | 658 |
| | $ | 581 |
| | $ | 890 |
|
Provision | 1,069 |
| | 863 |
| | 412 |
|
Divestitures | — |
| | (230 | ) | | — |
|
Writeoffs, net of recoveries | (658 | ) | | (556 | ) | | (721 | ) |
Balance at end of year | $ | 1,069 |
| | $ | 658 |
| | $ | 581 |
|
ConcentrationsConcentration of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents and accounts receivable. The Company’s cash and cash equivalents are placed with high-quality financial institutions, which, at times, may exceed federally insured limits. The Company has not experienced any losses in these accounts, and the Company does not believe it is exposed to any significant credit risk related to cash and cash equivalents. The Company provides credit, in the normal course of business, to a number of its customers. The Company performs periodic credit evaluations of its customers and generally does not require collateral. No individual customer represented more than 10% of total revenues noror more than 10% of accounts receivable in the years ended December 31, 2017, 2016,2023, 2022 or 2015.2021.
Property and Equipment
Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over each asset’s useful life. Leasehold improvements are amortized over the shorter of the lease term or of the estimated useful lives of the related assets. Upon retirement or disposal, the cost of each asset and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income. Repairs, maintenance, and minor replacements are expensed as incurred. The estimated useful lives of property and equipment are as follows: | | | | | |
| |
Computer hardware and equipment | 3 - 5 years |
Purchased software and licenses | 3 - 5 years |
Furniture and fixtures | 7 years |
Leasehold improvements | Lesser of estimated useful life or lease term |
GoodwillBusiness Combinations
We apply the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations, in accounting for our acquisitions which requires the acquisition purchase price to be allocated to the tangible and Other Intangibles
Goodwill arises from business combinationsintangible assets acquired and is measured asliabilities assumed based on their estimated fair values at the acquisition dates. The excess of the cost of the business acquiredpurchase price over the sum of the acquisition-datethese estimated fair values is recorded to goodwill.
Significant estimates and assumptions, including fair value of tangible and identifiable intangible assets acquired, less any liabilities assumed.
Goodwill is evaluated for impairment annually or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. The events and circumstances considered by the Company include the business climate, legal factors, operating performance indicators and competition.
The excess purchase price overestimates, are used to determine the fair value of assets acquired, liabilities assumed, and contingent consideration transferred as well as the useful lives of long-lived assets acquired. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill based on changes to our initial estimates and assumptions. Upon conclusion of the measurement period or final determination of the values of assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments are recorded to Acquisition-related expenses on our consolidated statement of operations.
Tangible assets are valued at their respective carrying amounts, which approximates their estimated fair value. The valuation of identifiable intangible assets reflects management’s estimates based on, among other factors, use of established valuation methods. Customer relationships are valued using the multi-period excess earnings method income approach, which estimates fair value based on the earnings and cash flow capacity of the subject asset. Developed technology and trade names are valued using the relief-from-royalty method, which estimates fair value based on the value the owner of the asset receives from not having to pay a royalty to use the asset.
The purchase price transferred in our acquisitions often contain holdback and contingent consideration provisions. Holdbacks are subject to reduction for indemnification claims and are typically payable within 12 to 18 months of the acquisition date and are recorded in Liabilities due to sellers of businesses on our consolidated balance sheets. Contingent consideration typically includes earnout payments payable within 6 to 18 months of the date of acquisition based on attainment of certain performance goals. Contingent consideration liabilities are recorded at fair value on the acquisition date and are remeasured periodically based on the then assessed fair value and adjusted, if necessary. Holdback and contingent consideration liabilities are recorded in Liabilities due to sellers of businesses on our consolidated balance sheet based on their estimated fair values. The estimated fair value of contingent consideration related to potential earnout payments is calculated utilizing a binary option model, and this amount is recorded in Liabilities due to sellers of businesses on our consolidated balance sheets. The fair value of contingent consideration is estimated on a quarterly basis through a collaborative effort by our sales and finance departments. Changes in the fair value of contingent consideration subsequent to the purchase price finalization are recorded as Acquisition-related expenses or Other income (expense), net on our consolidated statements of operations based on management’s assessment of the nature of the liability. In the event a holdback is reduced subsequent to the finalization of purchase accounting, the reduction is recorded as goodwill.a gain in Acquisition-related expenses or Other income (expense), net on our consolidated statements of operations based on management’s assessment of the nature of the liability.
Goodwill Intangible Assets and Impairment Assessments
Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. We test goodwillassess Goodwill for impairment annually inon October 1st, or whenevermore frequently when events or changes in circumstances indicate an impairment may have occurred. Becauseoccur which could cause the Carrying Value (or GAAP basis book value) of our Company to exceed the estimated fair value of our Company.
As we operate as one reporting unit, the Goodwill impairment testevaluation is performed at the consolidated entity level by comparing the estimated fair value of the companyCompany to the carrying value of the company.its Carrying Value. We estimate the fair value of the reporting unit using a "step one" analysis using a fair-value-based approach based on the market capitalization or a discounted cash flow analysis of projected future resultsfirst assess qualitative factors to determine ifwhether it is more likely than not that the fair value of aour single reporting unit is less than its carrying amount. DeterminingCarrying Value. Based on the qualitative assessment, if it is determined that it is more likely than not that the Company's fair value is less than its Carrying Value, then we perform a quantitative analysis using a fair-value-based approach to determine if the fair value of goodwillour reporting unit is subjective in natureless than its Carrying Value. See “Note 5. Goodwill and often involves the use of estimatesOther Intangible Assets” for more information regarding our 2023 and assumptions including, without limitation, use of estimates of future prices and volumes for our products, capital needs, economic trends and other factors which are inherently difficult to forecast. If actual results, or the plans and estimates used in future impairment analyses are lower than the original estimates used to assess the recoverability of these assets, we could incur impairment charges in a future period. The annual impairment test was performed as of October 31, 2017. No impairment of goodwill was identified during the years ended December 31, 2017, 2016, or 2015.2022 Goodwill impairments.
Identifiable intangible assets consist of customer relationships, marketing-related intangible assets and developed technology. Intangible assets with definite lives are amortized over their estimated useful lives on a straight-line basis. The straight-line method of amortization represents the Company’s best estimate of the distribution of the economic value of the identifiable intangible assets. Each period the Company evaluates the estimated remaining useful lives of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization.
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of intangible assets may not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable. The Company evaluates the recoverability of intangible assets by comparing their carrying amounts to the future net undiscounted cash flows expected to be generated by the intangible assets. If such intangible assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the intangible assets exceeds the fair value of the assets.
The Company determines fair value based on discounted cash flows using a discount rate commensurate with the risk inherent in the Company’s current business model for the specific intangible asset being valued. There were no impairments during 2017, 2016, and 2015.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or circumstances indicate their carrying value may not be recoverable. When such events or circumstances arise, an estimate of future undiscounted cash flows produced by the asset, or the appropriate grouping of assets, is compared to the asset's carrying value to determine whether impairment exists. If the asset is determined to be impaired, the impairment loss is measured based on the excess of its carrying value over its fair value. Assets to be disposed of are reported at the lower of the carrying value or net realizable value. No indicators of impairment were identified during the years ended December 31, 2017, 2016,2023, 2022 or 2015. 2021.
Software Development Costs
Software development costs for software to be sold are expensed as incurred until the point the Company establishes technological feasibility. Technological feasibility is established upon the completion of a working model. Costs incurred by the Company between establishment of technological feasibility and the point at which the product is ready for general release are capitalized, subject to their recoverability, and amortized over the economic life of the related products. Because the Company believes its current process for developing its software products essentially results in the completion of a working product concurrent with the establishment of technological feasibility, no software development costs have been capitalized to date. There were no software development costs required to be
capitalized under ASC 985-20, Costs of Software to be Sold, Leased or Marketed. Software development costs associated with internal use software are incurred in three stages of development: the preliminary project stage, the application development stage, and the post-implementation stage. Costs incurred during the preliminary project and post-implementation stages are expensed as incurred. Eligible internal and external costs associated with significant upgrades and enhancements incurred during the application development stage are capitalized as property and equipment. During the years ended December 31, 2023, 2022 or 2021, there were no internal use software development costs capitalized under ASC 350-40, Internal-Use Software.Software.
Canadian Tax Credits
Canadian tax creditsASC 350-40 also requires hosting arrangements that are service contracts to follow the guidance for internal-use software to determine which implementation costs can be capitalized. In accordance with ASC 350-40, (i) capitalized implementation costs are classified in the same balance sheet line item as the amounts prepaid for the related hosting arrangement; (ii) amortization of capitalized implementation costs are presented in the same income statement line item as the service fees for the related hosting arrangement; and (iii) cash flows related to current expensescapitalized implementation costs are accountedpresented within the same category of cash flow activity as the cash flows for as a reductionthe related hosting arrangement (i.e. operating activity).
As of December 31, 2023 and 2022, the net carrying value of capitalized implementation costs related to hosting arrangements that were incurred during the application development stage were not material. Capitalized implementation costs are amortized over the expected term of the research and development costs. Such credits relate to the Company's operations in Canadaarrangement and are not dependent upon taxable income. Credits are accruedamortized in the year in whichsame line item on our consolidated statements of operations as the research and development costs orexpense for fees for the capital expenditures are incurred, provided the Company is reasonably certain that the credits will be received. The government credit must be examined and approved by the tax authorities, and it is possible that the amounts granted will differ from the amounts recorded.associated hosting arrangement.
Debt Issuance Costs
The Company capitalizes underwriting, legal, and other direct costs incurred related to the issuance of debt, which are recorded as a direct deduction from the carrying amount of the related debt liability and amortized to interest expense, net over the term of the related debt using the effective interest rate method. Upon the extinguishment of the related debt, any unamortized capitalized deferred financingdebt issuance costs are recorded to interest expense.Interest expense, net on our consolidated statement of operations. In 2015, the Company wrote off approximately $0.2 million of deferred financing costs associated with its Comerica facility replaced by the new Wells Fargo facility. In 2017,2023 and 2022, the Company had no write offs of deferred financing costs and in 2016debt issuance costs.
Derivatives
In 2019, the Company wrote off approximately $0.1entered into floating-to-fixed interest rate swap agreements to limit exposure to interest rate risk related to our debt. Until the termination of a portion of the interest rate swaps as described in “Note 7. Debt”, these interest rate swaps effectively converted $258.5 million and $522.5 million of our term loans as of December 31, 2023 and 2022, respectively, from variable interest payments to fixed interest rate payments, based on an annualized fixed rate of 5.4%, for the remaining term of the debt.
ASC 815, Derivatives and Hedging, requires entities to recognize derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. The Company assessed the effectiveness of the hedging relationship under the hypothetical derivative method and noted that all of the critical terms of the hypothetical derivative and hedging instrument were the same. The hedging relationship continues to limit the Company’s exposure to the variability in interest rates under the Company’s term loans and related cash outflows. As such, the Company has deemed this hedging relationship as highly effective in offsetting cash flows attributable to hedged risk (variability in forecasted monthly interest payments) for the term of the term loans and interest rate swap agreements. All derivative financial instruments are recorded at fair value as a net asset or liability on our consolidated balance sheets. As of December 31, 2023, the fair value of interest rate swaps included in Interest rate swap assets on our consolidated balance sheets was $14.3 million. As of December 31, 2022, the fair value of interest rate swaps included in Interest rate swap assets was $41.2 million.
The change in the fair value of the hedging instruments is recorded in Interest Rate Swaps on our consolidated statements of comprehensive loss. Amounts deferred financing costs associated withon interest rate swaps in our consolidated statements of comprehensive income will be reclassified to Interest expense, net on our consolidated statements of operations in the expansionperiod in which the hedged item affects earnings. Cash flows from hedging instruments are classified in the same category as the cash flows for the underlying item being hedged within "Net cash provided by operating activities" on the consolidated statements of its Wells Fargo facility.cash flows.
Fair Value of Financial Instruments
The Company accounts forrecognizes financial instruments in accordance with the authoritative guidance on fair value measurements and disclosures for financial assets and liabilities. This guidance defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. The guidance also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.
These tiers include Level 1, defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.
Preferred Stock
In August 2022, the Company closed on the issuance and sale of its Series A Convertible Preferred Stock (the “Series A Preferred Stock”). The Company’s financial instruments consist principallyCompany issued 115,000 shares of cash and cash equivalents, accounts receivable, and accounts payable, long–term debt and warrant liabilities. The carryingSeries A Preferred Stock, par value $0.0001 per share, at a price of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value, primarily due$1,000 per share, for an initial investment amount of $115.0 million. Pursuant to short maturities. The carrying valuesthe Certification of Designation, cumulative preferred dividends accrue quarterly on the Series A Preferred Stock at a rate of (i) 4.5% per annum until but excluding the seven year anniversary of the closing, and (ii) 7.0% per annum on and after the seven year anniversary of the closing. See “Note 12. Series A Convertible Preferred Stock—Series A Convertible Preferred Stock” for further details.
The Series A Preferred Stock and cumulative preferred dividends, net of preferred issuance costs, is presented as Mezzanine Equity of $117.6 million as of December 31, 2023 in the Company’s debt instruments approximated their fair value based on rates currently available toconsolidated balance sheets. The Series A Preferred Stock is classified as Mezzanine Equity because it is redeemable at the Company. The carrying valuesoption of warrant liabilities are marked toits holders (upon a deemed liquidation event as defined in “Note 12. Series A Convertible Preferred Stock—Series A Convertible Preferred Stock—Deemed Liquidation Event Redemption”) and has a condition for redemption that is not solely within the market at each reporting period.control of the issuer.
Revenue Recognition
The Company derivesRefer to “Note 14 Revenue Recognition” for a detailed discussion of accounting policies related to revenue from product revenue, consisting of subscription, support and perpetual licenses, and professional services revenues. The Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery of the product or services has occurred, no Company obligations with regard to implementation considered essential to the functionality remain, the fee is fixed or determinable and collectability is probable.
Subscription and Support Revenue
The Company derives subscription revenues by providing its software-as-a-service solution to customers in which the customer does not have the right to take possession of the software, but can use the software for the contracted term. The Company accounts for these arrangements as service contracts. Subscription and support revenues are
recognized on a straight-line basis over the term of the contractual arrangement, typically one to three years. Amounts that have been invoiced and that are due are recorded inrecognition, including deferred revenue or revenue, depending on when the criteria for revenue recognition are met. Revenue from usage-based services are recognized in the month in which such usage is reported.
The Company may provide hosting services to customers who purchased a perpetual license. Such hosting services are recognized ratably over the applicable term of the arrangement. These hosting arrangements are typically for a period of one to three years.
Software maintenance agreements provide technical support and the right to unspecified upgrades on an if-and-when-available basis. Revenue from maintenance agreements is recognized ratably over the life of the related agreement, which is typically one year.
Perpetual License Revenue
The Company also records revenue from the sales of proprietary software products under perpetual licenses. For license agreements in which customer acceptance is a condition to earning the license fees, revenue is not recognized until acceptance occurs. The Company’s products do not require significant customization. Perpetual licenses are sold along with software maintenance and, sometimes, hosting agreements. When vendor specific objective evidence (VSOE) of fair value exists for the software maintenance and hosting agreement, the perpetual license is recognized under the residual method whereby the fair value of the undelivered software maintenance and hosting agreement is deferred and the remaining contract value is recognized immediately for the delivered perpetual license. When VSOE of fair value does not exist for the either the software maintenance or hosting agreement, the entire contract value is recognized ratably over the underlying software maintenance and/or hosting period.
Professional Services Revenue
Professional services provided with perpetual licenses consist of implementation fees, data extraction, configuration, and training. The Company’s implementation and configuration services do not involve significant customization of the software and are not considered essential to the functionality. Revenues from professional services are recognized as such services are provided when VSOE of fair value exists for such services and all undelivered elements such as software maintenance and/or hosting agreements. VSOE of fair value for services is based upon the price charged when these services are sold separately, and is typically an hourly rate. When VSOE of fair value does not exist for software maintenance and/or hosting agreements, revenues from professional services are recognized ratably over the underlying software maintenance and/or hosting period.
Professional services, when sold with the subscription arrangements, are accounted for separately when these services have value to the customer on a standalone basis and there is objective and reliable evidence of fair value for each deliverable. When accounted for separately, revenues are recognized as the services are rendered for time and material contracts. For those arrangements where the elements do not qualify as a separate unit of accounting, the Company recognizes professional services ratably over the contractual life of the related application subscription arrangement. Currently, all professional services are accounted for separately as all have value to the customer on a standalone basis.
Multiple Element Arrangements
The Company enters into arrangements with multiple-element that generally include subscriptions and implementation and other professional services.
For multiple-element arrangements, arrangement consideration is allocated to deliverables based on their relative selling price. In order to treat deliverables in a multiple-element arrangement as separate units of accounting, the elements must have standalone value upon delivery. If the elements have standalone value upon delivery, each element must be accounted for separately. The Company’s subscription services have standalone value as such services are often sold separately. In determining whether implementation and other professional services have standalone value apart from the subscription services, the Company considers various factors including the availability of the services from other vendors. The Company has concluded that the implementation services included in multiple-element arrangements have standalone value. As a result, when implementation and other professional services are sold in a multiple-element arrangement, the arrangement consideration is allocated to the
identified separate units based on a relative selling price hierarchy. The selling price for a element is based on its VSOE of selling price, if available, third-party evidence of selling price, or TPE, if VSOE is not available or best estimate of selling price, or BESP, if neither VSOE nor TPE is available. The Company has not established VSOE for its subscription services due to lack of pricing consistency, the introduction of new services and other factors. The Company has determined that TPE is not a practical alternative due to differences in its service offerings compared to other parties and the availability of relevant third-party pricing information. Accordingly, the Company uses BESP to determine the relative selling price.
The Company determined BESP by considering its overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the Company’s discounting practices, the size and volume of its transactions, customer characteristics, price lists, go-to-market strategy, historical standalone sales and agreement prices. As the Company’s go-to-market strategies evolve, it may modify its pricing practices in the future, which could result in changes in relative selling prices, and include both VSOE and BESP.
Deferred Revenue
Deferred revenue represents either customer advance payments or billings for which the aforementioned revenue recognition criteria have not yet been met.
Messaging-related Revenue
The Company recognizes subscription revenue for its digital engagement application which provides short code connectivity for its two-way SMS programs and campaigns. The Company evaluates whether it is appropriate to recognize revenue based on the gross amount billed to its customers for these services. Since the Company is primarily obligated in these transactions, has latitude in establishing prices associated with its messaging program management services, is responsible for fulfillment of the transaction, and has credit risk, revenue is recorded on a gross basis. While none of the factors individually are considered presumptive or determinative, in reaching conclusions on gross versus net revenue recognition, the Company places the most weight on the analysis of whether or not it is the primary obligor in the arrangement.commissions.
Cost of Revenue
Cost of revenue primarily consists of salaries and related expenses (e.g. bonuses, employee benefits, and payroll taxes) for personnel directly involved in the delivery of services and products directly to customers. Cost of revenue also includes the amortization of acquired technology.
Customer Contract Acquisition Costs
Costs associated withtechnology, and hosting and infrastructure costs related to the acquisition or originationdelivery of customer contracts are expensed as incurred.the Company’s products and services.
Customer Relationship Acquisition Costs
Costs associated with the acquisition or origination of customer relationships are capitalized as customer relationship assets as incurred and amortized over the estimated life of the customer relationship. Refer to “Note 14. Revenue Recognition” for further discussion regarding deferred commissions.
Advertising Costs
Advertising costs are expensed in the period incurred. Advertising expenses were $33,000, $59,000$2.0 million, $0.8 million and $347,000$0.9 million for the years ended December 31, 2017, 2016,2023, 2022 or 2015,2021, respectively. Advertising costs are recorded in salesSales and marketing expenses in the accompanyingon our consolidated statement of operations.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities will be recognized
in the period that includes the enactment date.
A valuation allowance is established against the deferred tax assets to reduce their carrying value to an amount that is more likely than not to be realized.
The Company has adopted a permanent reinvestment position whereby foreign earnings for foreign subsidiaries are expected to be reinvested and future earnings are not expected to be repatriated. As a result of this policy, no tax liability has been accrued in anticipation of future dividends from foreign subsidiaries.
The Company accounts for uncertainty of income taxes based on a “more likely than not” threshold for the recognition and derecognition of tax positions, whichpositions. Interest and penalties are recorded as a component of income tax expense.
Leases
The Company determines if an arrangement is a lease at inception. This determination includes the accountingreview of contracts with third parties to identify the existence of potential embedded leases. Operating leases are included in operating lease right-of-use (“ROU”) assets, current and noncurrent operating lease liabilities on the Company’s consolidated balance sheets. Finance leases are included in property and equipment, accrued expenses and other liabilities, and other noncurrent liabilities on the Company’s consolidated balance sheets.
ROU assets represent the Company's right to use an underlying asset for interestthe lease term and penalties.the corresponding lease liabilities represent its obligation to make lease payments arising from the lease. Lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The lease ROU asset includes any initial direct costs incurred and is reduced for any tenant incentives. As the Company’s leases do not provide an implicit rate, the net present value of future minimum lease payments is determined using the Company’s incremental borrowing rate. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
Stock-Based Compensation
Stock options awarded to employees and directors are measured at fair value at each grant date. The Company accounts for stock-based compensation in accordance with authoritative accounting principles which requireWe measure all share-based compensation to employees,payments, including grants of employee stock options to bepurchase common stock and the issuance of restricted stock or restricted stock units to employees, service providers and board members, using the fair-value at grant date. We record forfeitures as they occur. The cost of services received from employees and non-employees in exchange for awards of equity instruments is recognized in the financial statementson our consolidated statement of operations based on theirthe estimated fair value. Compensation expense is determined undervalue of those awards on the fairgrant date and amortized on a straight-line basis over the requisite service period. We value methodrestricted stock and restricted stock units at the closing price of our common stock on the grant date. We value stock option awards using the Black-Scholes option pricing modeloption-pricing model. For the years ended December 31, 2023, 2022 and 2021, stock-based compensation awards consisted primarily of restricted stock and restricted stock units.
From time to time, we grant restricted stock units that also include performance or market-based conditions (“PRSUs”). For PRSUs granted with a market condition, we use a Monte Carlo simulation analysis to value the award. Compensation expense for awards with marked-based conditions is recognized ratably over the required service period the awards vest. The Black-Scholes option pricing model used to compute share-based compensation expense requires extensive use of accounting judgment and financial estimates. Items requiring estimation include the expected term option holders will retain their vested stock options before exercising them, the estimated volatility of the Company’s common stock price overgrant based on the expected term of each stock option, and the number of stock options that will be forfeited prior to the completion of their vesting requirements. Application of alternative assumptions could result in significantly different share-based compensation amounts being recorded in the financial statements. The following table summarizes the weighted-average grant-dategrant date fair value of options granted in 2017, 2016,the award and 2015 andis not subject to fluctuation due to achievement of the assumptions used to develop their fair values. As there was no public market for its common stock prior to November 2014, the Company estimates the volatility of its common stock based on the volatility of publicly traded shares of comparable companies' common stock. The Company's decision to use the volatility of comparable stock was based upon the Company's assessment that this information is more representative of future stock price trends than the Company's historical volatility. The Company estimates the expected term using the simplified method, which calculates the expected term as the midpoint between the vesting date and the contractual termination date of each award. The dividend yield assumption is based on historical and expected future dividend payouts. The risk-free interest rate is based on observed market interest rates appropriate for the term of each options.
|
| | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Weighted average grant-date fair value of options | $7.47 | | $3.23 | | $3.01 |
Expected volatility | 35.0% | | 42.5% | | 42.5% - 44.0% |
Risk-free interest rate | 1.1% - 2.0% | | 1.2% | | 1.7% - 1.9% |
Expected life in years | 5.00 | | 5.93 | | 5.93 |
Dividend yield | — | | — | | — |
underlying market-based condition.Comprehensive LossIncome (Loss)
The Company utilizes the guidance in Accounting Standards Codification (ASC) TopicASC 220, Income Statement—Reporting Comprehensive Income, for the reporting and display of comprehensive lossincome (loss) and its components in the consolidated financial statements. Comprehensive loss comprisesincome (loss) consists of net loss, and cumulative foreign currency translation adjustments. Theadjustments for subsidiaries with functional currencies other than the United States dollar (“USD”), unrealized translation gains (losses) on foreign currency denominated intercompany loans, and unrealized gains (losses) on interest rate swaps. Refer to “Note 13. Stockholders' Equity—Accumulated Other Comprehensive Income (Loss)” for further discussion of the components of accumulated other comprehensive loss as ofincome (loss) for the years ended December 31, 2017, 2016, and 2015 was due to foreign currency translation adjustments.2023, 2022 or 2021.
Foreign Currency Transactions
The functional currency of our foreign subsidiaries are generally the local currencies. Results of operations for foreign subsidiaries are translated in United State dollarsinto USD using the average exchange rates on a monthly basis during the year. The assets and liabilities of those subsidiaries are translated into United States dollarsUSD using the exchange rates in effect at the balance sheet date. The related translation adjustments are recorded inas a separate component of the Company’s consolidated statements of stockholders' equity in accumulated other comprehensive loss. ForeignAssets and liabilities denominated in currencies other than the functional currency transaction gainsare remeasured using the current exchange rate for monetary accounts and losses arehistorical exchange rates for non-monetary accounts, with exchange differences on remeasurement included in other expense, net in the accompanying statements of operations and include the impact of revaluation of certain foreign currency denominated net assets or liabilities held internationally.operations. For the years ended December 31, 2017, 2016,2023, 2022 and 2015,2021, net gains of $0.3 million, net losses of $1.0 million and net gains of $48.6 thousand, respectively, were recorded in Other expense, net on our consolidated statements of operations, related to remeasurement of foreign currency transaction lossestransactions.
We have foreign currency denominated intercompany loans that were $178,000, $271,000,used to fund the acquisition of foreign subsidiaries. Due to the long-term nature of the loans, the foreign currency gains (losses) resulting from remeasurement are recognized as a separate component of the Company’s consolidated statements of stockholders' equity in accumulated other comprehensive loss. During the years ended December 31, 2023, 2022 and $515,000, respectively.2021, a translation gain of $4.1 million, loss of $10.0 million, and loss of $0.6 million, respectively, were recognized as a component of accumulated other comprehensive income (loss) in the Company’s statements of stockholders’ equity, related to long-term intercompany loans.
Recent Accounting Pronouncements
Recently issued accounting pronouncements - Adopted
In May 2014,March 2020, the Financial Standards Accounting Standards Board or FASB,(“FASB”) issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," or ASU 2014-09, which amends the existing accounting standards update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for revenue recognition. ASU 2014-09 is based on principlesa limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that governreference the recognition of revenue at an amount an entity expectsLondon Interbank Offer Rate (“LIBOR”) or another reference rate expected to be entitleddiscontinued due to when productsreference rate reform. These amendments are transferredeffective immediately and may be applied prospectively to customers. In August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," or ASU 2015-14, that deferred the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date. In 2016, the FASB issued the following amendments to ASC 606: ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," which clarifies the implementation guidance on principal versus agent considerations; ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing," which clarifies guidance on identification of performance obligations and licensing implementation; ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients," which provides clarifying guidance on assessing collectibility, presentation of sales taxes, noncash consideration, contract modifications made and completed contracts; andhedging relationships entered into or evaluated on or before December 31, 2022. We adopted ASU No. 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers," which clarifies narrow aspects of ASC 606 or corrects unintended application of2020-04 during the guidance. ASC 606 will be effective for us beginning in our first quarter of 2018 using2023. On February 21, 2023, the modified retrospective method.
We continueCompany entered into an amended and restated credit agreement to, evaluate all potential impactsamong other things, provide for the replacement of LIBOR with the Secured Overnight Financing Rate (“SOFR”), an index measuring the cost of borrowing cash overnight collateralized by Treasury securities. The Company elected to apply the debt agreement modification expedients related to changes to the reference rate from LIBOR to SOFR in the Company's Credit Agreement, which it completed during the three months ended March 31, 2023. Application of these expedients allowed the Company to account for the modification as not substantial. As a result, the debt agreement modification was accounted for by prospectively adjusting the Credit Agreement’s effective interest rate, any existing unamortized debt discount was carried forward and continued to be amortized and no remeasurement of the new standard, as well asCredit Agreement at the modification date was required.
The Company has also elected to apply the hedge accounting expedients and exceptions related to changes that are required to systems, processes and internal controlsthe reference rate from LIBOR to meet the new standard's reporting and disclosure requirements. We currently believe the most significant impact relates to our accounting for arrangements that include contractual provisions providing for periodic price increases in subscription fee arrangements. Under current GAAP, we account for periodic price increasesSOFR in the period inCompany's interest rate swaps, which they occur, and underit completed during the new standard, we will recognize revenue for periodic price increases on a ratable basis overthree months ended March 31, 2023. Application of these exceptions preserves the termcash flow hedge designation of the contract. Additionally under current GAAP, for contracts in which customers hostinterest rate swaps and manage our solutions on-premises or in third-party data centers under term license and maintenance agreements, we recognize the entire arrangement consideration monthly over the term of the software license as we do not have VSOE of fair value for the license and maintenance. Under the new standard, we will be able to recognize software license revenue once the customer obtains control of the license, which will generally occur at the start of each license term. Under current GAAP, we also defer only direct and incremental commission costs to obtain a contract and amortize those costs over the term of the related contract. Under the new standard, we will be required to defer additional incremental costs related to the customer contractaccounting and amortize those costs over the expected periodpresentation consistent with past presentation. The replacement of customer benefit. Also a portion of the commission payment will now be expensed as incurred. We are substantially completeLIBOR with our evaluation of the effect that the adoption will have on our consolidated financial statements. In connection with the adoption of Topic 606, we expect to record a cumulative-effect adjustment to accumulated deficit of approximately $6.3 million to $6.7 million on December 31, 2017. The adjustment reflects the acceleration of revenues and deferral of expenses.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 is intended to add or clarify guidance on the classification of certain cash receipts and paymentsSOFR in the statement of cash flows and to eliminate the diversity in practice related to such classifications. The guidance in ASU 2016-15 is required for annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company doescredit agreement did not expect the adoption of this guidance will have a material impact on itsthe Company’s consolidated financial statements.statements and related disclosures. See “Note—7. Debt” for additional information.
In January 2017,August 2020, the FASB issued accounting standards update ASU 2017-01, Clarifying 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (the Definition“ASU 2020-06). ASU 2020-06 simplifies the accounting for convertible instruments by reducing the number of a Business, which revisesaccounting models available for convertible debt instruments and convertible preferred stock. This update also amends the definitionguidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. The update also requires entities to provide expanded disclosures about the terms and features of a business and assistsconvertible instruments, how the instruments have been reported in the evaluationentity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of when a set of transferred assets and activities is a business. ASU 2017-01an entity’s future cash flows related to those instruments. The guidance is effective for interim and annual reporting periods beginning after December 15, 2017, and should be applied prospectively. Early adoption is permitted under certain circumstances.2021. The Company does not expect the adoption ofadopted this guidance will have a materialin the first quarter of fiscal 2022 with an immaterial impact on itsto the consolidated financial statements.
In May 2017,October 2021, the FASB issued ASU 2017-09, Compensation - Stock Compensation: Scope of Modification2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which provides guidance about which changescreates an exception to the terms or conditionsgeneral recognition and measurement principle for contract assets and contract liabilities from contracts with customers acquired in a business combination. The new guidance will require companies to apply the definition of a share-based payment awarded requireperformance obligation under ASC Topic 606 to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers that are acquired in a business combination. Under current GAAP, an entityacquirer in a business combination is generally required to apply modification accounting. ASU 2017-09 isrecognize and measure the assets it acquires and the liabilities it assumes at fair value on the acquisition date. The new guidance will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. These amendments are effective for interim and annual reporting periodsfiscal years beginning after December 15, 2017,2022, with early adoption permitted. The amendments inWe adopted ASU 2017-09 are to be applied prospectively to an award modified2021-08 on or after theJanuary 1, 2023 and our adoption date; consequently, the impact will be dependent on whether we modify any share-based payment awards and the nature of such modifications. The adoption of this standard isdid not expected to have a material impact on our consolidated financial statements.
Recently issued accounting pronouncements - Not Adopted
In February 2016,November 2023, the FASB issued ASU 2016-02, Leases. The core change2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities to disclose information about their reportable segments' significant expenses and other segment items on an interim and annual basis. Public entities with a single reportable segment are required to apply the disclosure requirements in ASU 2016-2 is the requirement for the recognition of lease assets2023-07, as well as all existing segment disclosures and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The new standardreconciliation requirements in ASC 280 on an interim and annual basis. ASU 2023-07 is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2018,2023, and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the effect that the adoptionimpact of adopting ASU 2016-02 will have on its financial statements.2023-07.
In June 2016,December 2023, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities, on an annual basis, to provide disclosure of Credit Losses on Financial Instruments, which changesspecific categories in the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognitionrate reconciliation, as well as disclosure of allowances for losses.income taxes paid disaggregated by jurisdiction. ASU 2016-132023-09 is effective for annual and interim periodsfiscal years beginning after December 15, 2019 and2024, with early adoption is permitted for annual and interim periods beginning after December 15, 2018.permitted. The Company is currently evaluating the effect thatimpact of adopting ASU 2023-09.
3. Acquisitions
The Company performs quantitative and qualitative analyses to determine the adoptionsignificance of ASU 2016-13 will have oneach acquisition to its financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets should be disclosed. ASU 2017-04 is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019; early adoption is permitted. We currently anticipate that the adoption of ASU 2017-04 will not have a material impact on our consolidated financial statements. As such, the acquisitions below were deemed to be insignificant on an individual and cumulative basis.
Recently adopted accounting pronouncements2023 Acquisitions
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. The new standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The Company adopted ASU 2014-15had no acquisitions during the first quarter of 2017. No additional disclosure was deemed necessary upon the adoption of ASU 2014-15. This standard would not result in an amount being recorded.
In March 2016, the FASB issued ASU 2016-09, Stock Compensation. The core change with ASU 2016-09 is the simplification of several aspects of the accounting for share-based payment transactions, including the income tax consequences, classifications of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The Company adopted ASU 2016-09 during the first quarter of 2017. No impact on the financial statements was recorded as a result of the adoption of ASU 2016-09.
3. Acquisitions
2017 Acquisitions
On January 10, 2017, Upland completed its acquisition of Omtool, Ltd., an enterprise document capture, fax, and workflow solution company. The purchase price paid for Omtool was $19.3 million (net of cash acquired). Revenues recorded since the acquisition date through December 31, 2017 were approximately $10.7 million.
On April 21, 2017, the Company acquired RightAnswers, Inc. ("RightAnswers"), a cloud-based knowledge management system. The purchase price was $17.4 million, in cash at closing (net of $0.1 million cash acquired) and a $2.5 million cash holdback payable in one year (subject to indemnification claims) and excludes potential future earn-out payments valued at $4.0 million tied to additional performance-based goals, towards which $1.0 million was paid in September, 2017 and an additional $2.0 million was earned but not paid as of December 31, 2017. Revenues recorded since the acquisition date through December 31, 2017 were approximately $5.6 million.
On July 12, 2017, the Company acquired Waterfall International Inc. (“Waterfall”), a cloud-based mobile messaging platform. The purchase price consideration paid was approximately $24.4 million in cash at closing (net of $0.4 million of cash acquired) and a $1.5 million cash holdback payable in 18 months (subject to indemnification claims). The foregoing excludes additional potential $3.0 million in earnout payments tied to performance-based conditions. Revenues recorded since the acquisition date through December 31, 2017 were approximately $5.5 million.
On November 16, 2017, Upland Software, Inc., a Delaware corporation (the “Company” or “Upland”) completed its acquisition of Qvidian Corporation, a Delaware corporation (“Qvidian”), a Massachusetts-based provider of cloud-based RFP and sales-proposal automation software. The purchase price consideration paid by the Company was $50 million in cash. Revenues recorded since the acquisition date through December 31, 2017 were approximately $1.2 million.
The pro forma statements of operations data for years ended December 31, 2017 and December 31, 2016, shown in table below, give effect to the Qvidian acquisition, described above, as if it had occurred at January 1, 2016. These amounts have been calculated after applying our accounting policies and adjusting the results of Qvidian to reflect: the costs of debt financing incurred to acquire Qvidian, the additional intangible amortization and the adjustments to acquired deferred revenue that would have been occurred assuming the fair value adjustments had been applied and incurred since January 1, 2016. This pro forma data is presented for informational purposes only and does not purport to be indicative of our future results of operations. The table below shows the Pro forma statements of operations data for the respective years ending December 31 (in thousands):
|
| | | | | | | |
| 2017 | | 2016 |
Revenue | $ | 115,707 |
| | $ | 89,906 |
|
Loss from continuing operations (1) | $ | (13,679 | ) | | $ | (14,370 | ) |
(1) While some recurring adjustments impact the pro forma figures presented, the decrease in pro forma loss from continuing operations compared to our loss from continuing operations presented on the consolidated statements of operations for the year ended December 31, 2017 includes nonrecurring adjustment removing acquisition costs from 2017 and reflects these costs in2023.
2022 Acquisitions
Acquisitions completed during the year ended 2016, the year the acquisition was assumed to be completed for pro forma purposes.
2016 Acquisitions
On January 7, 2016, Upland completed its purchase of substantially all of the assets of LeadLander, Inc. (LeadLander), a website analytics provider. The purchase price consideration paid was approximately $8.0 million in cash payable at closing (net of approximately $0.4 million of cash acquired) and a $1.2 million cash holdback payable in 12 months (subject to indemnification claims), which was fully paid after December 31, 2016.2022 include the following:
In addition•BA Insight - On February 22, 2022, the Company entered into an agreement to purchase the cash consideration described above,shares comprising the Asset Purchase Agreement included a contingententire issued share consideration component pursuant to which Upland issued an aggregatecapital of $2.4 million in common stock on July 25, 2016. The Company also paid additional consideration of $2.4 million in March, 2017 in cash to the selling shareholders of LeadLander based on the achievement of certain revenue targets during fiscal years 2016 & 2017 and no further payment are expected to be made as of December 31, 2017.
On March 14, 2016, Upland completed its purchase of substantially all of the assets of HipCricket,BA Insight Inc., (“BA Insight”), a cloud-based mobile messaging software provider. The consideration paidenterprise knowledge management solution.
•Objectif Lune - On January 07, 2022, the Company entered into an agreement to the seller consisted of our issuance of one million shares of our common stock and the transfer of our EPM Live product business. The value ofpurchase the shares oncomprising the closing dateentire issued share capital of the transaction was approximately $5.7 million and the fair value of our EPM Live product business was approximately $5.9 million. The Company recognized a loss on the transfer in conjunction with the EPM Live net asset value of approximately $0.7 million in Other expense, net. Prior to the transaction, HipCricket was owned by an affiliate of ESW Capital, LLC, which is a shareholder of Upland. Raymond James & Co. provided a fairness opinion to Upland in connection with the transaction.
On April 27, 2016, Upland acquired Advanced Processing & Imaging,Objectif Lune Inc., a content management platform drivingQuebec proprietary company (“Objectif Lune”), cloud-based document workflow in governments and schools. The purchase price consideration consisted of $4.1 million in cash payable at closing (net of $0.1 million of cash acquired), and a $0.8 million cash holdback payable in 12 months (subject to indemnification claims).product.
20152021 Acquisitions
Acquisitions completed during the year ended December 31, 2021 include the following:
•Panviva - On November 13, 2015,June 24, 2021, the Company acquired 100% ofentered into an agreement to purchase the outstandingshares comprising the entire issued share capital of Ultriva,Panviva Pty Ltd, an Australian proprietary company (“Panviva”), a cloud-based enterprise knowledge management solution.
•BlueVenn - On February 28, 2021 the Company entered into an agreement to purchase the shares comprising the entire issued share capital of BlueVenn Group Limited, a company limited by shares organized and existing under the laws of England and Wales (“BlueVenn”), a cloud-based customer data platform.
•Second Street - On January 19, 2021, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Second Street Media, Inc. (Ultriva), a Missouri corporation (“Second Street”), an audience engagement platform.
Consideration
The following table summarizes the consideration transferred for total purchase consideration of $7.2 million, which includedthe acquisitions described above (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | BA Insight | | Objectif Lune | | Panviva | | BlueVenn | | Second Street | | | | | | | | | | | | | | | | | | | | |
Cash | | $ | 33,355 | | | $ | 29,750 | | | $ | 19,931 | | | $ | 53,535 | | | $ | 25,436 | | | | | | | | | | | | | | | | | | | | | |
Holdback(1) | | 645 | | | 5,250 | | | 3,517 | | | 2,429 | | | 5,000 | | | | | | | | | | | | | | | | | | | | | |
Contingent consideration(2) | | — | | | — | | | — | | | 2,535 | | | 1,650 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Working capital and other adjustments | | 1,587 | | | 644 | | | 379 | | | (537) | | | (1,365) | | | | | | | | | | | | | | | | | | | | | |
Total consideration | | $ | 35,587 | | | $ | 35,644 | | | $ | 23,827 | | | $ | 57,962 | | | $ | 30,721 | | | | | | | | | | | | | | | | | | | | | |
(1)Represents cash of $5.6 million, net of $0.4 million of cash acquired, 179,298 shares of the Company’s common stock with a fair value of $1.4 million, and an additional $200,000 in shares of common stock held in escrow,holdbacks subject to indemnification claims one yearthat are payable 12 months from closing for Objectif Lune, Panviva, and Second Street, 15 months following closing for BA Insight and 18 months following the dateclosing of BlueVenn. As of December 31, 2023, all of the acquisition. In November 2016,holdbacks had been paid.
(2)Represents the Company issued 24,587 sharesacquisition date fair value of common stock valued at approximately $200,000 as a resultanticipated earnout payments which are based on the estimated probability of attainment of the escrow release. Ultriva provides cloud-based supply chain work management software.underlying future performance-based conditions at the time of acquisition. The maximum potential payout for the BlueVenn and Second Street were $21.7 million and $3.0 million, respectively. As of March 31, 2022, the earnout payments for BlueVenn and Second Street were finalized resulting in no payments made. Refer to “Note 4. Fair Value Measurements” for further discussion regarding the calculation of fair value of acquisition related earnouts and subsequent payouts.
Fair Value of Assets Acquired and Liabilities Assumed
The Company recorded the purchase of the acquisitions described above using the acquisition method of accounting, and accordingly,has recognized the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The purchase price allocations for the 2015 acquisition of Ultriva, the 2016 acquisitions of LeadLander, HipCricket, and API, the 2017 acquisitions of Omtool and RightAnswers are final, and the 2017 acquisitions of Waterfall and Qvidian are preliminary as the Company has not obtained and evaluated all of the detailed information, including the valuation of assets acquired and liabilities assumed, necessary to finalize the opening balance sheet amounts in all respects. Management has recorded the preliminary purchase price allocations based upon acquired company information that is currently available. Management expects to finalize its purchase price allocations in the first half of 2018.
The following condensed table presents the preliminary and finalfinalized acquisition-date fair value of the assets acquired and liabilities assumed for the acquisitions as well asclosed in 2022 and 2021 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Final | | | | | | | | | | | | | | | | | | | | | | |
| BA Insight | | Objectif Lune | | Panviva | | BlueVenn | | Second Street | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Acquired | 2022 | | 2022 | | 2021 | | 2021 | | 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash | $ | 4 | | | $ | 745 | | | $ | 132 | | | $ | 1,115 | | | $ | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accounts receivable | 2,466 | | | 5,677 | | | 2,122 | | | 1,289 | | | 1,105 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other current assets | 4,080 | | | 7,183 | | | 4,985 | | | 2,002 | | | 89 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating lease right-of-use asset | 110 | | | 1,905 | | | 197 | | | 1,357 | | | 489 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Property and equipment | 3 | | | 248 | | | 26 | | | 611 | | | 156 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Customer relationships | 10,500 | | | 17,717 | | | 9,757 | | | 18,888 | | | 14,600 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Trade name | 150 | | | 362 | | | 76 | | | 238 | | | 200 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Technology | 2,000 | | | 5,512 | | | 2,194 | | | 4,337 | | | 3,400 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Favorable leases | — | | | 291 | | | — | | | — | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill | 25,495 | | | 23,797 | | | 16,604 | | | 44,892 | | | 16,586 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other assets | 25 | | | 744 | | | 33 | | | 24 | | | 13 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets acquired | 44,833 | | | 64,181 | | | 36,126 | | | 74,753 | | | 36,638 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accounts payable | (236) | | | (2,001) | | | (1,257) | | | (2,772) | | | (230) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accrued expense and other | (4,083) | | | (9,431) | | | (5,053) | | | (2,429) | | | (378) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred tax liabilities | — | | | (6,353) | | | (2,395) | | | (3,640) | | | (4,320) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred revenue | (4,817) | | | (8,847) | | | (3,397) | | | (6,593) | | | (500) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating lease liabilities | (110) | | | (1,905) | | | (197) | | | (1,357) | | | (489) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities assumed | (9,246) | | | (28,537) | | | (12,299) | | | (16,791) | | | (5,917) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total consideration | $ | 35,587 | | | $ | 35,644 | | | $ | 23,827 | | | $ | 57,962 | | | $ | 30,721 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The Company uses third party valuation consultants to determine the fair values of assets acquired and liabilities (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preliminary | | Finalized |
| Qvidian | | Waterfall | | RightAnswers | | Omtool | | API | | LeadLander | | HipCricket | | Ultriva |
Year Acquired | 2017 | | 2017 | | 2017 | | 2017 | | 2016 | | 2016 | | 2016 | | 2015 |
| | | | | | | | | | | | | | | |
Cash | $ | 468 |
| | $ | 100 |
| | $ | 139 |
| | $ | 2,957 |
| | $ | 125 |
| | $ | 365 |
| | $ | — |
| | $ | 372 |
|
Accounts receivable | 1,907 |
| | 1,477 |
| | 2,164 |
| | 784 |
| | 821 |
| | 199 |
| | 1,226 |
| | 689 |
|
Other current assets | 334 |
| | 608 |
| | 246 |
| | 464 |
| | 54 |
| | 55 |
| | 273 |
| | 52 |
|
Property and equipment | 108 |
| | 23 |
| | 408 |
| | 58 |
| | 68 |
| | 5 |
| | — |
| | 16 |
|
Customer relationships | 14,461 |
| | 6,400 |
| | 10,500 |
| | 4,400 |
| | 1,420 |
| | 970 |
| | 1,000 |
| | 1,820 |
|
Trade name | 319 |
| | 110 |
| | 180 |
| | 170 |
| | 40 |
| | 70 |
| | 70 |
| | 140 |
|
Technology | 5,622 |
| | 2,800 |
| | 2,300 |
| | 3,180 |
| | 810 |
| | 1,410 |
| | 900 |
| | 960 |
|
Goodwill | 36,261 |
| | 18,565 |
| | 15,680 |
| | 14,081 |
| | 3,420 |
| | 13,104 |
| | 8,531 |
| | 4,739 |
|
Other assets | 8 |
| | — |
| | — |
| | 33 |
| | 89 |
| | 6 |
| | — |
| | 32 |
|
Total assets acquired | 59,488 |
| | 30,083 |
| | 31,617 |
| | 26,127 |
| | 6,847 |
| | 16,184 |
| | 12,000 |
| | 8,820 |
|
Accounts payable | (388 | ) | | (605 | ) | | (139 | ) | | (219 | ) | | (11 | ) | | — |
| | (44 | ) | | (196 | ) |
Accrued expense and other | (445 | ) | | (1,126 | ) | | (2,108 | ) | | (915 | ) | | (137 | ) | | (254 | ) | | — |
| | (284 | ) |
Deferred revenue | (8,655 | ) | | (1,220 | ) | | (5,479 | ) | | (2,779 | ) | | (1,699 | ) | | (910 | ) | | (356 | ) | | (760 | ) |
Total liabilities assumed | (9,488 | ) | | (2,951 | ) | | (7,726 | ) | | (3,913 | ) | | (1,847 | ) | | (1,164 | ) | | (400 | ) | | (1,240 | ) |
Total consideration | $ | 50,000 |
| | $ | 27,132 |
| | $ | 23,891 |
| | $ | 22,214 |
| | $ | 5,000 |
| | $ | 15,020 |
| | $ | 11,600 |
| | $ | 7,580 |
|
assumed. Tangible assets wereare valued at their respective carrying amounts, which approximates their estimated fair value. The valuation of identifiable intangible assets reflects management’s estimates based on, among other factors, use of established valuation methods. Customer relationships wereare valued using an income approach,the multi-period excess earnings method. Developed technology and trade names are valued using the relief-from-royalty method.
The following table summarizes the weighted-average useful lives, by major finite-lived intangible asset class, for intangibles acquired during the year ended December 31, 2022 (in years):
| | | | | | | | | |
| | | |
| | | |
Customer relationships | | | 7.0 |
Trade name | | | 2.0 |
Developed technology | | | 6.2 |
Favorable Leases | | | 6.3 |
Total weighted-average useful life | | | 6.8 |
| | | |
During the measurement period, which estimates fair valuemay be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill based on changes to management’s estimates and assumptions.The $127.4 million goodwill for the earnings and cash flow capacity ofabove acquisitions is primarily attributable to the subject asset. The value ofsynergies expected to arise after the marketing-related intangibles was determined using a relief-from-royalty method, which estimates fair value based on the value the owner of the asset receives from not having to pay a royalty to use the asset. Developed technology was valued using a cost-to-recreate approach.
acquisition. Goodwill deductible for tax purposes is $4.9 million for our LeadLander acquisition, $8.7 million for HipCricket and $3.7 million for Waterfall. Thererelated to the above acquisitions was no Goodwill deductible for tax purposes for our API, Omtool, RightAnswers, and Qvidian acquisitions.$6.6 million.
Total transaction costs incurred with respect to acquisition activity in the years ended December 31, 2017, 2016,2023, 2022 and 20152021 were $6.1 million, $3.6nil, $4.6 million and $2.2$6.6 million, respectively. These costs are included in Acquisition-related expenses on our consolidated statement of operations.
4. Fair Value Measurements
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. GAAP sets forth a three–tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three tiers are Level 1, defined as observable inputs, such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, which therefore requires an entity to develop its own assumptions.
Changes to the fair value of earnout liabilities are recorded to other expense, net. LiabilitiesAssets measured at fair value on a recurring basis are summarized below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2023 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Cash equivalents - money market funds | $ | 211,661 | | | $ | — | | | $ | — | | | $ | 211,661 | |
Interest rate swaps | $ | — | | | $ | 14,270 | | | $ | — | | | $ | 14,270 | |
Total | $ | 211,661 | | | $ | 14,270 | | | $ | — | | | $ | 225,931 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2017 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Liabilities: | | | | | | | |
Earnout consideration liability | $ | — |
| | $ | — |
| | $ | 3,576 |
| | $ | 3,576 |
|
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2016 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Liabilities: | | | | | | | |
Earnout consideration liability | $ | — |
| | $ | — |
| | $ | 2,500 |
| | $ | 2,500 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Cash equivalents - money market funds | $ | 172,849 | | | $ | — | | | $ | — | | | $ | 172,849 | |
Interest rate swaps | — | | | 41,168 | | | — | | | 41,168 | |
Total | $ | 172,849 | | | $ | 41,168 | | | $ | — | | | $ | 214,017 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The Level 3 earnout consideration liability consists of amounts associated with the acquisitions of LeadLander in January 2016, RightAnswers in April 2017, and Waterfall in July 2017. The December 31, 2016 Level 3 earnout consideration liability opening balance for LeadLander of $2.5 million was settled in March 2017, a Level 3 earnout consideration liability associated with RightAnswers added $4.0 million in April 2017, of which $1.0 million was settled during September 2017, $1.0 million settled unearned as of December 31, 2017, leaving a remaining balance of $2.0 million as of December 31, 2017. In addition, a Level 3 earnout consideration liability associated with Waterfall added $1.2 million in July 2017 and was increased by $0.4 million as of December 31, 2017, resulting in a revised earnout liability of $1.6 million as of December 31, 2017.
The following table presents additional information about liabilitiesCompany’s cash equivalents - money market funds are measured at fair value on a recurring basisusing quoted market prices and for which we have utilized significant unobservable (Level 3) inputs to determine fair value:active markets, therefore are categorized as Level 1. |
| | |
Ending balance at December 31, 2016 | 2,500 |
|
Additions - cash earnouts | 5,598 |
|
Settlements - cash earnouts | (4,522 | ) |
Ending balance at December 31, 2017 | 3,576 |
|
In connection with entering into, and expanding, the Company's credit facility, as discussed further in “Note 7. Debt”, the Company entered into interest rate swaps. The fair value of these swaps are measured at the earnout consideration was determined using the Binary Option modelend of each interim reporting period based on the presentthen assessed fair value and adjusted if necessary. As the fair value measure is based on the market approach, they are categorized as Level 2. As of December 31, 2023, the fair value of the probability-weighted earnout consideration.interest rate swaps is included in the “Interest rate swap assets” on the Company's consolidated balance sheets.
The Company’s other financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, and long–term debt. The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value, primarily due to short maturities. The Company believes the carrying value of its long-term debt at December 31, 20172023 approximates its fair value based on theits variable interest rate feature or based uponand interest rates currently available to the Company. The carrying value and estimated fair value and carrying value of ourthe Company's debt, before debt discount, at December 31, 20172023 and December 31, 2016 is $113.82022 are $482.1 million and $49.4$522.5 million, respectively, based on valuation methodologies using interest rates currently available to the Company which are Level 2 inputs.
5. Goodwill and Other Intangible Assets
Changes in the Company’s goodwillGoodwill balance for each of the two years in the period ended December 31, 20172023 are summarized in the table below (in thousands): | | | | | | | | |
Balance at December 31, 2021 | | $ | 457,472 | |
Acquired in business combinations | | 48,768 | |
| | |
Adjustment related to prior year business combinations | | 1,466 | |
Adjustment related to finalization of current year business combinations | | 109 | |
Impairment of goodwill | | (12,500) | |
Foreign currency translation adjustment | | (18,272) | |
Balance at December 31, 2022 | | $ | 477,043 | |
| | |
| | |
Adjustment related to prior year business combinations | | 415 | |
| | |
Impairment of goodwill | | (128,755) | |
Foreign currency translation adjustment | | 5,075 | |
Balance at December 31, 2023 | | $ | 353,778 | |
|
| | | |
Balance at December 31, 2015 | 47,422 |
|
Acquired in business combinations | 25,037 |
|
Divestiture of business | (3,775 | ) |
Adjustment due to prior year business combinations | 57 |
|
Foreign currency translation adjustment | 356 |
|
Balance at December 31, 2016 | $ | 69,097 |
|
Acquired in business combinations | 88,819 |
|
Adjustment due to prior year business combinations | 17 |
|
Adjustment due to finalization of 2017 business combinations | (4,232 | ) |
Foreign currency translation adjustment | 906 |
|
Balance at December 31, 2017 | $ | 154,607 |
|
We performed a qualitative annual goodwill impairment test in October 2023 and concluded there was no impairment of Goodwill.As a result of the decline of our stock price impacting our market capitalization during the quarters ended March 31, 2023 and December 31, 2022, we performed quantitative impairment evaluations, which resulted in a goodwill impairments of $128.8 million and $12.5 million during the quarters ended March 31, 2023 and December 31, 2022, respectively. Our quantitative goodwill impairment analysis applied two methodologies to estimate the Company’s fair value which were: a) a discounted cash flow method and b) a guideline public company method. The two methods generated similar results and indicated that the fair value of the Company was less than its carrying value. The discounted cash flow method requires significant judgments, including estimation of future cash flows, which is dependent on internally developed forecasts, estimation of the long-term rate of growth for our business, and determination of our weighted average cost of capital. Under the guideline public company method, we estimate fair value based on a market multiple of revenues and earnings derived for comparable publicly traded companies with similar operating characteristics as the Company. We did not record a goodwill impairment charge for the year ended December 31, 2021.
Intangible assets, net, include the estimated acquisition-date fair values of customer relationships, marketing-related assets and developed technology that the Company recorded as part of its business acquisitions purchases and from acquisitions of customer relationships. The following is a summary of the Company’s intangibleIntangible assets, net (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Estimated Useful Life (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
December 31, 2023 | | | | | | | |
Customer relationships | 1-10 | | $ | 378,923 | | | $ | 222,436 | | | $ | 156,487 | |
Trade name | 1.5-10 | | 10,012 | | | 7,862 | | | 2,150 | |
Developed technology | 4-9 | | 94,103 | | | 70,582 | | | 23,521 | |
Favorable leases | 6.3 | | $ | 280 | | | $ | 89 | | | $ | 191 | |
Total intangible assets | | | $ | 483,318 | | | $ | 300,969 | | | $ | 182,349 | |
|
| | | | | | | | | | | | | |
| Estimated Useful Life (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
December 31, 2017 | | | | | | | |
Customer relationships | 5-10 | | $ | 69,061 |
| | $ | 18,040 |
| | $ | 51,021 |
|
Trade name | 1.5 | | 3,431 |
| | 2,900 |
| | 531 |
|
Developed technology | 4-7 | | 29,308 |
| | 10,817 |
| | 18,491 |
|
Total intangible assets | | | $ | 101,800 |
| | $ | 31,757 |
| | $ | 70,043 |
|
|
| | | | | | | | | | | | | |
| Estimated Useful Life (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
December 31, 2016 | | | | | | | |
Customer relationships | 1-10 | | $ | 32,703 |
| | $ | 12,418 |
| | $ | 20,285 |
|
Trade name | 1.5-3 | | 2,636 |
| | 2,462 |
| | 174 |
|
Developed technology | 4-7 | | 15,228 |
| | 7,175 |
| | 8,053 |
|
Total intangible assets | | | $ | 50,567 |
| | $ | 22,055 |
| | $ | 28,512 |
|
The following table summarizes the Company’s weighted-average amortization period, in total and by major finite-lived intangible asset class, by acquisition during the year ended December 31 (in years):
| | | 2017 | | 2016 |
| Estimated Useful Life (Years) | | | Estimated Useful Life (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
December 31, 2022 | |
Customer relationships | |
Customer relationships | |
Customer relationships | 9.0 | | 9.3 |
Trade name | 1.5 | | 2.8 |
Developed technology | 6.4 | | 6.3 |
Total weighted-average amortization period | 8.2 | | 8.0 |
| Favorable leases | |
Favorable leases | |
Favorable leases | |
Total intangible assets | |
The Company periodically reviews the estimated useful lives of its identifiable intangible assets, taking into consideration any events or circumstances that might result in either a diminished fair value or revised useful life. Management has determined there have been no other indicators
Total amortization expense was $70.6 million, $54.6 million, and $50.9 million for the years ended December 31, 2023, 2022 and 2021, respectively.
No impairment of impairment or change in the useful lifeintangible assets were recorded during the years ended December 31, 2017, 2016,2023, 2022 and 2015. Total amortization expense was $9.6 million, $7.2 million, and $6.1 million during the years ended2021.
As of December 31, 2017, 2016, and 2015, respectively.
Estimated2023, the estimated annual amortization expense for the next five years and thereafter is as follows (in thousands):
| | | | | | | | |
Year ending December 31: | | Amortization Expense |
| | |
| | |
2024 | | $ | 54,232 | |
2025 | | 39,163 | |
2026 | | 36,934 | |
2027 | | 28,028 | |
2028 | | 18,284 | |
Thereafter | | 5,708 | |
Total | | $ | 182,349 | |
|
| | | |
| Amortization Expense |
Year ending December 31: | |
2018 | 12,847 |
|
2019 | 11,668 |
|
2020 | 10,605 |
|
2021 | 10,209 |
|
2022 and thereafter | 24,714 |
|
Total | $ | 70,043 |
|
6. Income Taxes
The Tax Act was enacted in December 2017. The Tax Act significantly changes U.S. tax law by, among other things, lowering U.S. corporate income tax rates, implementing a territorial tax system and imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. The Tax Act reduces the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Act, the Company revalued its ending net deferred tax liabilities at December 31, 2017 and recognized a provisional $0.8 million tax benefit.
The Tax Act provided for a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”). Due to a current year tax loss in excess of the required deemed repatriation,we have not recognized a provisional income tax expense related to the transition tax. After utilization of the current year tax loss, existing net operating loss and tax credits carryforwards, the Company expects to pay minimal U.S. federal cash taxes on the deemed repatriation.
While the Tax Act provides for a modified territorial tax system, beginning in 2018, global intangible low-taxed income (“GILTI”) provisions will be applied providing an incremental tax on low taxed foreign income. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. Under U.S. GAAP, the Company is required to make an accounting policy election to either (1) treat taxes due related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factor such amounts into its measurement of its deferred taxes (the “deferred method”). The Company is continuing to evaluate the GILTI tax rules and has not yet adopted its policy to account for the related impacts.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act and allows the registrant to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The Company has included in its taxable income the provisional impact related to the one-time transition tax and the revaluation of deferred tax balances and included these estimates in its consolidated financial statements for the year ended December 31, 2017. The Company is in the process of analyzing the impact of the various provisions of the Tax Act. The ultimate impact may materially differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act. The company expects to complete its analysis within the measurement period in accordance with SAB 118.
The Company's loss from continuing operations before income taxes for the years ended December 31, was as follows (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
Loss before provision for income taxes: | | | | | |
United States | $ | (117,208) | | | $ | (40,818) | | | $ | (53,981) | |
Foreign | (65,159) | | | (29,336) | | | (12,575) | |
| $ | (182,367) | | | $ | (70,154) | | | $ | (66,556) | |
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Income (loss) before provision for income taxes: | | | | | |
United States | $ | (22,748 | ) | | $ | (14,242 | ) | | $ | (13,254 | ) |
Foreign | 5,319 |
| | 2,259 |
| | 629 |
|
| $ | (17,429 | ) | | $ | (11,983 | ) | | $ | (12,625 | ) |
The components of the provision (benefit) for income taxes attributable to continuing operations are as follows (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | 177 |
| | 37 |
| | (100 | ) |
Foreign | 1,381 |
| | 964 |
| | 932 |
|
Total Current | $ | 1,558 |
| | $ | 1,001 |
| | $ | 832 |
|
| | | | | |
Deferred | | | | | |
Federal | $ | (168 | ) | | $ | 727 |
| | $ | 293 |
|
State | 128 |
| | 131 |
| | 31 |
|
Foreign | (222 | ) | | (329 | ) | | (117 | ) |
Total Deferred | (262 | ) | | 529 |
| | 207 |
|
| $ | 1,296 |
| | $ | 1,530 |
| | $ | 1,039 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
Current | | | | | |
Federal | $ | — | | | $ | — | | | $ | — | |
State | 901 | | | 971 | | | 363 | |
Foreign | 1,613 | | | 4,776 | | | 2,349 | |
Total Current | $ | 2,514 | | | $ | 5,747 | | | $ | 2,712 | |
| | | | | |
Deferred | | | | | |
Federal | $ | (468) | | | $ | 84 | | | $ | (5,180) | |
State | (771) | | | 1,062 | | | (1,033) | |
Foreign | (3,768) | | | (8,634) | | | (4,843) | |
Total Deferred | (5,007) | | | (7,488) | | | (11,056) | |
(Benefit from) provision for income taxes | $ | (2,493) | | | $ | (1,741) | | | $ | (8,344) | |
As of December 31, 2017,2023 the Company had federaltotal net operating loss carryforwards of approximately $181.9$304.2 million consisting of $256.0 million and $48.2 million related to the U.S federal and foreign net operating loss carryforwards, respectively. $200.0 million of the U.S. federal net operating loss carryforwards are related to year prior to 2018 and begin to expire in 2024. The remaining $56.0 million carryforward indefinitely. In addition, $48.0 million of foreign net operating loss carryforwards carry forward indefinitely, and the remainder will expire beginning in 2041. In addition, as of December 31, 2023, the Company had research and development credit carryforwards of approximately $3.9 million. The net operating loss and credit carryforwards$4.0 million which will expire beginning in 2018,2024, if not utilized. Utilization of the U.S. federal net operating losses and tax credits may be subject to substantial annual limitation due to the “change of ownership” provisions of the Internal Revenue Code of 1986. The annual limitation will result in the expiration of approximately $77$155.0 million of U.S. federal net operating losses and $3.9$4.0 million of credit carryforwards before utilization.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred taxes as of December 31 are as follows (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Deferred tax assets: | | | | | |
Accrued expenses and allowances | $ | 1,715 |
| | $ | 993 |
| | $ | 793 |
|
Deferred revenue | — |
| | 573 |
| | 671 |
|
Stock compensation | 901 |
| | 1,054 |
| | 582 |
|
Net operating loss and tax credit carryforwards | 26,810 |
| | 24,895 |
| | 20,871 |
|
Capital expenses | 294 |
| | 307 |
| | — |
|
Other | 129 |
| | 176 |
| | 196 |
|
Valuation allowance for noncurrent deferred tax assets | (15,730 | ) | | (24,588 | ) | | (18,507 | ) |
Net deferred tax assets | $ | 14,119 |
| | $ | 3,410 |
| | $ | 4,606 |
|
| | | | | |
Deferred tax liabilities: | | | | | |
Capital expenses | $ | — |
| | $ | — |
| | $ | (2 | ) |
Deferred revenue | (401 | ) | | — |
| | — |
|
Prepaid expenses | (58 | ) | | (31 | ) | | (1 | ) |
Intangible assets | (15,298 | ) | | (5,716 | ) | | (6,481 | ) |
Goodwill | (1,214 | ) | | (1,029 | ) | | (561 | ) |
Tax credit carryforwards | (410 | ) | | (38 | ) | | (379 | ) |
Net deferred tax liabilities | $ | (17,381 | ) | | $ | (6,814 | ) | | $ | (7,424 | ) |
Net deferred taxes | $ | (3,262 | ) | | $ | (3,404 | ) | | $ | (2,818 | ) |
| | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 | | 2021 |
Deferred tax assets: | | | | | |
Accrued expenses and allowances | $ | 583 | | | $ | 1,640 | | | $ | 2,197 | |
Deferred revenue | 571 | | | 608 | | | 536 | |
Stock compensation | 489 | | | 612 | | | 1,558 | |
Net operating loss and tax credit carryforwards | 40,222 | | | 52,149 | | | 53,388 | |
Disallowed interest expense carryforwards | 17,670 | | | 17,181 | | | 15,654 | |
Capital expenses | 66 | | | 295 | | | 321 | |
Tax credit carryforwards | — | | | 348 | | | — | |
Lease liability | 960 | | | 2,139 | | | 2,340 | |
Unrealized losses | — | | | — | | | 1,974 | |
Research and development expenses | 13,247 | | | 6,243 | | | — | |
Other | 410 | | | 461 | | | 638 | |
Valuation allowance | (41,259) | | | (20,482) | | | (28,627) | |
Net deferred tax assets | $ | 32,959 | | | $ | 61,194 | | | $ | 49,979 | |
| | | | | |
Deferred tax liabilities: | | | | | |
| | | | | |
| | | | | |
Prepaid expenses | $ | — | | | $ | (161) | | | $ | (272) | |
Intangible assets | (36,342) | | | (54,153) | | | (59,092) | |
Goodwill | (2,850) | | | (7,382) | | | (6,570) | |
Tax credit carryforwards | (15) | | | — | | | (99) | |
Right of use asset | (670) | | | (1,504) | | | (1,330) | |
Unrealized gains | (4,049) | | | (10,705) | | | — | |
Deferred commissions | (5,003) | | | (5,705) | | | (5,409) | |
Net deferred tax liabilities | $ | (48,929) | | | $ | (79,610) | | | $ | (72,772) | |
Net deferred taxes | $ | (15,970) | | | $ | (18,416) | | | $ | (22,793) | |
Due to the uncertainty surrounding the timing of realizing the benefits of its domestic favorable tax attributes in future tax returns, the Company has placed a valuation allowance against its domestic net deferred tax asset,assets, exclusive of goodwill. During the year ended December 31, 20172023, the valuation allowance increased by $20.8 million and 2016,during the year ended December 31, 2022 the valuation allowance decreased by approximately $8.8$8.1 million. The valuation allowance for the year ended December 31, 2023 increased $7.1 million and increased by approximately $6.1due to the tax effect of items recorded in other comprehensive income with the remaining increase of $13.7 million respectively, duerelated primarily to current U.S., U.K. and Australia operations, acquisitions, andwhich have current year losses. The valuation allowance for the impactyear ended December 31, 2022 decreased by $13.0 million due to the tax effect of changesitems recorded in tax law.other comprehensive income which is partially offset with the remaining increase of approximately $4.9 million related primarily to current operations.
At December 31, 2017,2023, we did not provide deferred income taxes on temporary differences resulting from earnings of certain foreign subsidiaries which are indefinitely reinvested. The reversal of these temporary differences could result in additional tax; however, it is not practicable to estimate the amount of any unrecognized deferred income tax liabilities at this time. Deferred income taxes are provided as necessary with respect to earnings that are not indefinitely reinvested.
The Company’s provision for income taxes differs from the expected tax expense (benefit) amount computed by applying the statutory federal income tax rate of 34% to income before taxes due to the following: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
Federal statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
State taxes, net of federal benefit | 1.1 | % | | (0.2) | % | | 1.5 | % |
Tax credits | — | % | | 0.6 | % | | 0.6 | % |
Effect of foreign operations | (0.4) | % | | 0.1 | % | | (0.6) | % |
Stock compensation | (2.2) | % | | (9.5) | % | | (5.4) | % |
Disallowed excess executive compensation | — | % | | (0.6) | % | | (5.3) | % |
Goodwill impairment | (12.5) | % | | (3.6) | % | | — | % |
Permanent items and other | (0.3) | % | | (0.5) | % | | 0.1 | % |
| | | | | |
Change in valuation allowance | (5.9) | % | | (6.9) | % | | 1.1 | % |
Change in tax rates | 0.6 | % | | 2.1 | % | | (2.6) | % |
Australia tax basis uplift | — | % | | — | % | | 2.1 | % |
| 1.4 | % | | 2.5 | % | | 12.5 | % |
|
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | 34.0 | % | | 34.0 | % | | 34.0 | % |
State taxes, net of federal benefit | 4.7 | % | | 1.2 | % | | 3.5 | % |
Tax credits | 1.0 | % | | (0.1 | )% | | (0.2 | )% |
Effect of foreign operations | 2.1 | % | | 1.1 | % | | (2.2 | )% |
Stock compensation | 7.9 | % | | (1.7 | )% | | (2.9 | )% |
Permanent items and other | (0.5 | )% | | (1.6 | )% | | (3.3 | )% |
Effect of Tax Act | (43.7 | )% | | — | % | | — | % |
Tax carryforwards not benefited | (12.9 | )% | | (45.7 | )% | | (37.1 | )% |
| (7.4 | )% | | (12.8 | )% | | (8.2 | )% |
Under ASC 740-10, Income Taxes - Overall, the Company periodically reviews the uncertainties and judgments related to the application of complex income tax regulations to determine income tax liabilities in several jurisdictions. The Company uses a “more likely than not” criterion for recognizing an asset for unrecognized income tax benefits or a liability for uncertain tax positions. The Company has determined it has the following unrecognized assets or liabilitiesan immaterial exposure related to uncertain tax positions as of December 31, 2017.2023. The Company does not anticipate any significant changes$0.8 million exposure at December 31, 2022 was released in such uncertainties and judgments during2023 due to a lapse in the next 12 months.statute of limitations for a Canadian exposure. To the extent the Company is required to recognize interest and penalties related to unrecognized tax liabilities, this amount will be recorded as an accrued liability,liability.
A reconciliation of the beginning and ending amount of unrecognized tax exposure is as follows (in thousands).:
| | | | | |
Balance at December 31, 2021 | $ | 772 | |
| |
Additions for tax positions of prior years | 45 | |
| |
| |
Balance at December 31, 2022 | $ | 817 | |
| |
| |
Reductions for tax positions of prior years | (817) | |
| |
Balance at December 31, 2023 | $ | — | |
|
| | | |
Balance at December 31, 2015 | $ | 621 |
|
Additional based on tax positions related to the current year | — |
|
Additions for tax positions of prior years | 84 |
|
Reductions for tax positions of prior years | — |
|
Settlements | — |
|
Balance at December 31, 2016 | $ | 705 |
|
Additional based on tax positions related to the current year | — |
|
Additions for tax positions of prior years | — |
|
Reductions for tax positions of prior years | (225 | ) |
Settlements | — |
|
Balance at December 31, 2017 | $ | 480 |
|
Due to the existence of the valuation allowance, future changes in our unrecognized tax benefits will not materially impact the Company’s effective tax rate. If the Company were to recognize unrecognized tax benefits as of
December 31, 2017, $399,000 would impact the effective tax rate. The Company’s assessment of its unrecognized tax benefits is subject to change as a function of the Company’s financial statement audit.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2017,2023, the Company had nohas not accrued any interest or penalties related to uncertain tax positions.
The Company and its subsidiaries file tax returns in the U.S. federal jurisdiction and in several state and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years ending before December 31, 20142019 and is no longer subject to state and local or foreign income tax examinations by tax authorities for years ending before December 31, 2013.2018. The Company is not currently under audit for federal, state or any foreign jurisdictions. US operating losses generated in years prior to 2019 remain open to adjustment until the statute of limitations closes for the tax year in which the net operating losses are utilized.
7. Debt
Long-term debt consisted of the following at December 31, 20172023 and December 31, 20162022 (in thousands): | | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
Senior secured loans (includes unamortized discount of $5,376 and $7,467 based on an imputed interest rate of 7.6% and 5.8%, at December 31, 2023 and December 31, 2022, respectively) | $ | 476,674 | | | $ | 514,983 | |
| | | |
Less current maturities | (3,172) | | | (3,136) | |
Total long-term debt | $ | 473,502 | | | $ | 511,847 | |
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Senior secured loans (includes unamortized discount of $2,668 and $1,442 at December 31, 2017 and December 31, 2016, respectively, based on imputed interest rate of 7.7%) | $ | 111,144 |
| | $ | 47,929 |
|
Less current maturities | (2,301 | ) | | (2,190 | ) |
Total long-term debt | $ | 108,843 |
| | $ | 45,739 |
|
Loan and Security Agreements
Fifth Amendment to Credit Facility
On August 2, 2017,In 2019, the Company amended and expanded its Credit Agreemententered into a credit agreement (the “Credit Facility”). The Company entered into which provided for (i) a fully-drawn $350 million, 7 year, senior secured term loan facility (the “Term Loan”) and (ii) a term loan facility to be established under the Credit Facility with Wells Fargo Capital Finance and CIT Bank, N.A. as joint lead arrangers, and including Goldman Sachs Bank USA, Regions Bank, and Citizens Bank, N.A. (collectively, the "Lenders"), with a Fifth Amendment to Credit Agreement (the “Fifth Amendment”) that amends that certain Credit Facility dated as of May 14, 2015 among inter alia the Company, certain of its subsidiaries, and each of the Lenders named in the Credit Facility.
As of December 31, 2017, there was (i) none in U.S. revolving loans outstanding under the Credit Agreement, (ii) none drawn on the Canadian revolving credit facility, (iii) $108.5 million in U.S. term loans outstanding under the Credit Agreement, and (iv) $5.3 million in Canadian term loans outstanding under the Credit Agreement.
Loans
The Fifth Amendment to the Credit Facility provides for a $200.0 million credit facility, including (i) a fully drawn $95.0 million term loan, (ii) a fully available $40.0 million delayed draw term loan commitment (the "DDTL") ($20.0 million of which was drawn in conjunction with the acquisition of Qvidian in November, 2017), (iii) a fully available $10.0 million revolving loan commitment, and (iv) a $55.0 million uncommitted accordion.
Specifically, the Credit Facility provides for $95.0 million of term debt comprised of (i) a fully drawn U.S. term loan facility in an aggregate principal amount of $89.6$190.0 million (the “U.S.“2019 Incremental Term Loan”), and (ii) a fully drawn Canadian term loan facility in an aggregate principal amount of $5.4 million (the “Canadiantogether with the Term Loan”) (the Canadian Term Loan, and the U.S. Term Loan together are referred to as the “Term Loans”).
The Credit Facility also provides for the expansion of the Company’s delayed draw term facility from $10.0 and (iii) a $60 million, to $40.0 million ($20.0 million of which was drawn in conjunction with the acquisition of Qvidian in November, 2017), and for an increase in the Company’s uncommitted accordion amount from $20.0 million to $55.0 million.
In addition, the Credit Facility also provides for revolvers of $10.0 million, comprised of (i) a U.S.5 year, revolving credit facility in an aggregate principal amount of up to $9.0 million (the “U.S. Revolver”), and (ii) a Canadian revolving
credit facility in an aggregate principal amount of up to $1.0 million (the “Canadian Revolver”“Revolver”) (the Canadian Revolver and the U.S. Revolver are referred tothat was fully available as the “Revolver”).
As of December 31, 2017, there were no amounts drawn on its U.S. Revolver or Canadian Revolver loans outstanding under the Credit Facility, and there was $113.8 million outstanding on the Term Loans comprised of (i) $108.5 million in the U.S. Term Loan outstanding under the Credit Facility, and (ii) $5.3 million in the Canadian Term Loan outstanding under the Credit Facility.2023.
Terms of Term Loans
Under the terms of the Fifth Amendment, the Term Loans are repayable, on a quarterly basis by an amount equal to 2.5% per annum on or before June 30, 2019, after which the existing 5.0% per annum is due thereafter until the facility’s maturity date of August 2, 2022.
In addition, the leverage ratio was adjusted to exclude from the definition of Funded Indebtedness up to $15.0 million of qualified cash in excess of $2.5 million of qualified cash.
Also, the maximum amount of purchase consideration payable in respect of an individual permitted acquisition increased from $20.0 million to $25.0 million and in respect of all permitted acquisitions from $75.0 million to $175.0 million. In addition, the amount of permitted indebtedness to sellers of businesses increased from $16.7 million to $20.0 million.
Terms of Delay Draw Term Loan
Pursuant to the terms of the Credit Facility, the $40.0 million DDTL is to be used to finance acquisitions. The DDTL, if all or a portion is drawn, is repayable, on a quarterly basis, by an amount equal to 2.5% per annum on or before June 30, 2019, after which the existing 5.0% per annum is due thereafter until the facility’s maturity date of August 2, 2022.
Terms of Revolver
Loans under the Revolver are available up to the lesser$60 million, of (i) $10.0 million (the “Maximum Revolver Amount”) or (ii) the maximum facility amount of $145.0 million, less the sum of any amount of Revolver usage plus the outstanding balance of the Term Loans and other uses of the capacity made under the Credit Facility (such amount, the “Credit Amount”).which none is currently outstanding. The Revolver provides a subfacilitysub facility whereby the Company may request letters of credit (the “Letters of Credit”) in an aggregate amount not to exceed, at any one time outstanding, $0.5$10.0 million and $0.25 million, fromfor the U.S and Canadian facilities, respectively.Company. The aggregate amount of outstanding Letters of Credit isare reserved against the credit availability under the Maximum Revolver Amount andAmount. The Company incurs a 0.50% per annum unused line fee on the Credit Amount.unborrowed balance of the Revolver which is paid quarterly.
Loans under the Revolver may be borrowed, repaid and reborrowed until August 2, 20226, 2024 (the “Maturity Date”), at which time all amounts borrowed under the Credit FacilityRevolver must be repaid. As of December 31, 2023, the Company had no borrowings outstanding under the Revolver or related sub facility.
Other TermsPayment terms
The Term Loans are repayable on a quarterly basis beginning on December 31, 2019 by an amount equal to 0.25% (1.00% per annum) of Credit Facilitythe aggregate principal amount of such loan. Any amount remaining unpaid is due and payable in full on August 6, 2026 (the “Term Loan Maturity Date”).
AtInitially, at the option of the Company, U.S. loans accruethe Term Loans (including the 2019 Incremental Term Loan) accrued interest at a per annum rate based on (i) the U.S. base rateBase Rate plus a margin ranging from 3.75% to 4.50% depending on the leverage ratioof 2.75% or (ii) the U.S. LIBOR rate (not less than 0.00%) for Eurodollar deposits quoted on the LIBOR01 or LIBOR02 pages on the Reuters Screen, or as otherwise determined in accordance with the Credit Facility (based on a period equal to 1, 2, 3 or 6-month interest periods)6 months or, if available and agreed to by all relevant Lenders and the Agent, 12 months or such period of less than 1 month) plus a margin ranging from 4.75% to 5.50% depending on the leverage ratio.of 3.75%. The U.S. baseBase Rate for any day was a rate is a rateper annum equal to the highestgreatest of (i) the prime rate in effect on such day, (ii) the federal funds effective rate (not less than 0.00%) in effect on such day plus a margin equal to 0.5%½ of 1.00%, and (ii) the U.S. LIBOREurodollar rate for a 1-monthone month interest period beginning on such day plus 1.0%1.00%. On February 21, 2023, the Company entered into an amendment to its Credit Facility. The amendment amended the interest rate benchmark from LIBOR to SOFR. Other than the foregoing, the material terms of the Credit Agreement remain unchanged. After giving effect to the interest rate swaps described below, $258.5 million of the Term Loans has an effective annualized fixed interest rate of 5.4%, and (ii) Wells Fargo Capital Finance’s prime rate.
At the optionremaining principal outstanding at December 31, 2023 has a floating interest rate of the Company, the Canadian loans accrue interest at a per annum rate based on (i) the Canadian prime rate or the U.S. base rate plus a margin ranging from 3.75% to 4.50% depending on the leverage ratio or (ii) the U.S. LIBOR rate determined in accordance with the Credit Facility (based on 1, 2, 3 or 6-month interest periods) (or the Canadian Bankers' Acceptance ("Canadian BA") rate determined in accordance with the Credit Facility for obligations in Canadian dollars) plus a margin ranging from 4.75% to 5.50% depending on the leverage ratio.9.2%
Accrued interest on the loans will beis paid monthly,quarterly or, with respect to loansTerm Loans that are accruing interest based on the U.S. LIBOR rate or Canadian BA rate,Federal Funds Effective Rate, at the end of the applicable U.S. LIBOR or Canadian BA interest rate period.
Lenders are entitled to a premium (the “Prepayment Premium”) inOn August 31, 2023, the event of certain prepaymentsCompany prepaid $35.0 million of the loansTerm Loans.
Interest rate swaps
In 2019, the Company entered into floating-to-fixed interest rate swap agreements to limit exposure to interest rate risk related to our debt. Until the termination of a portion of the interest rate swaps as described below, these interest rate swaps effectively converted the entire balance of the Company's $540.0 million original principal Term Loans from variable interest payments to fixed interest rate payments, based on an annualized fixed rate of 5.4%, for the 7-year term of debt. The interest rate associated with our undrawn $60 million Revolver remains floating.
In August 2023, the Company sold $259.9 million of the notional amount of its interest rate swap assets back to the counterparties for $20.5 million, reducing the total notional amount of the interest rate swap assets to $259.9 million. The $20.5 million gain in anaccumulated other comprehensive income related to the $259.9 million amount equalsold is being released to (i) August 2, 2017 to August 1, 2018, 2.0% timesinterest expense, net as interest is accrued on the sum of (a)Company’s variable-rate debt over the Maximum Revolver Amount plus (b) the outstanding principal amountremaining term of the Term Loans and DDTLas a decrease to interest expense, net, the amortization of which totaled $2.5 million for the year ended December 31, 2023.
As discussed above, on September 1, 2023, the Company prepaid $35.0 million of the Term Loans. As a result of this prepayment, $2.8 million of the deferred gain in accumulated comprehensive income was released immediately into earnings as interest expense, net.
In the next twelve months, the Company estimates that $5.9 million will be reclassified from Accumulated other comprehensive income (loss) to Interest expense, net on our consolidated statement of operations.
Amounts reported in accumulated other comprehensive income related to the Company's derivatives are reclassified to interest expense, net as interest is accrued on the date immediately prior to the dateCompany’s variable-rate debt. The impact of the prepayment (such sum,Company’s derivative financial instruments on its consolidated statements of comprehensive loss was as follows (in thousands):
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| | Year Ended December 31 | | | | |
| | 2023 | | 2022 | | 2021 | | | | | | |
Unrealized gain (loss) recognized in Other comprehensive income (loss) on interest rate swaps | | $ | (6,434) | | | $ | 49,577 | | | $ | 21,623 | | | | | | | |
Amounts reclassified from Accumulated other comprehensive income (loss) to interest expense, net | | (5,289) | | | — | | | — | | | | | | | |
Total Other comprehensive income (loss) on interest rate swaps | | $ | (11,723) | | | $ | 49,577 | | | $ | 21,623 | | | | | | | |
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Cash interest costs averaged 7.2%, 5.4%, and 5.4% for the “Prepayment Amount”) (ii) from August 2, 2018years ended December 31, 2023, 2022, and 2021, respectively. As of December 31, 2023, the Company had $5.4 million of unamortized debt issuance costs associated with the Credit Facility. These issuance costs will be amortized to August 1, 2019, 1.0% timesInterest expense, net on our consolidated statement of operations, over the Prepayment Amount and (iii) from August 2, 2019 to the Maturity Date, 0.0% times the Prepayment Amount. The Company may also be subject to prepayment fees in the case of commitment reductionsterm of the Revolver and also may be obligated to prepay loans upon the occurrence of certain events.Credit Facility.
The Company is also obligated to pay other customary servicing fees, letter of credit fees and unused credit facility fees.Covenants
The Credit Facility contains customary affirmative and negative covenants. The negative covenants limit the ability of the Company and its subsidiariesLoan Parties to, among other things (in each case subject to customary exceptions for a credit facility of this size and type):
•Incur additional indebtedness or guarantee indebtedness of others;
•Create liens on theirour assets;
•Make investments, including certain acquisitions;
•Enter into mergers or consolidations;
•Dispose of assets;
•Pay dividends and make other distributions on the Company’s capital stock, and redeem and repurchase the Company’s capital stock;
•Enter into transactions with affiliates; and
•Prepay indebtedness or make changes to certain agreements.
There are certainThe Credit Facility has no financial covenants as long as less than 35% of the Revolver is drawn as of the last day of any fiscal quarter. If 35% of the Revolver is drawn as of the last day of a given fiscal quarter, the Company will be required to maintain a Total Leverage Ratio (the ratio of funded indebtedness as of such date less the amount of unrestricted cash and cash equivalents of the Company and its guarantors in an amount not to exceed $50.0 million, to Adjusted EBITDA (calculated on a pro forma basis including giving effect to any acquisition)), measured on a quarter-end basis for each four consecutive fiscal quarters then ended, of not greater than 6.00 to 1.00.
The Credit Facility contains customary events of default subject to customary cure periods for certain defaults that became more restrictive starting March 31, 2018. Ifinclude, among others, non-payment defaults, inaccuracy of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness, change in control, bankruptcy and insolvency defaults and material judgment defaults. The occurrence of an event of default occurs, atcould result in the acceleration of Term Loans and Revolver and a right by the agent and lenders to exercise remedies. At the election of the Lenders,lenders, a default interest rate shall apply on all obligations during an event of default, at a rate per annum equal to 2.00% above the applicable interest rate.
The Credit Facility permitsTerm Loan and Revolver are secured by substantially all of the Company's to buyback up to $10.0 millionassets.
As of its capital stock, subject to restrictions including a minimum liquidity requirement of $25.0 million before and after any such buyback.
Interest Rate and Debt Discount
Cash interest costs averaged 6.3%December 31, 2023 the Company was in compliance with all covenants under the new Credit Agreement for the year ended December 31, 2017. In addition, the Company incurred $1.7 million of financing costs associated with the Credit Agreement in the year ended December 31, 2017. These financing costs will be amortized to non-cash interest expense over the term of the Credit Agreement.
Seller Notes
In May 2013, the Company issued seller notes payable in connection with the acquisition of FileBound. The notes had an aggregate principal amount of $3.5 million with 5% stated interest. $3.0 million of the notes were paid in May 2015, and $500,000 of the notes were paid in May 2016.
Facility.
Debt Maturities
Under the terms of the Fifth Amendment,Credit Facility, future debt maturities of long-term debt excluding debt discounts at December 31, 20172023 are as follows (in thousands):
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Year ending December 31: | | Amount |
2024 | | $ | 5,400 | |
2025 | | 5,400 | |
2026 | | 471,250 | |
| | |
| | |
| | |
Total debt outstanding | | $ | 482,050 | |
Less unamortized discount | | 5,376 | |
Total debt outstanding, net of discount | | $ | 476,674 | |