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 thereto 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 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 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 Statements and Supplementary Data” of this Annual Report on Form 10-K. All information 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 software applications address diverse enterprise work challenges and our customers currently use our applications in the following functional areas:
•Marketing. Digital marketing, e-commerce, and customer service teams use our applications to interact with consumers across multiple channels to acquire new customers, drive product and service utilization, resolve issues, and build brand loyalty. Our applications deliver value to CX-focused organizations across a variety of use cases including mobile messaging, mobile application marketing, VoC, email marketing, knowledge management and call center productivity. Our teams bring deep industry experience in orchestrating campaigns and interactions that consumers want and value.
•Sales. Sales teams employ our applications to drive growth through deeper customer engagement, reduced sales cycle times, and overall improved collaboration between sales, marketing, and other customer-facing functions. We offer applications that help organizations optimize their sales opportunity and account management processes, coordinate proposal and reference activities, collaborate on the creation and publication of digital content, and gain increased control over key sales and marketing workflows, activities, and budgets.
•Contact Center. Customer service and support environments use our applications to enable agents to resolve issues and engage customers. We offer applications that improve customer experience and reduce call volume and cycle times through customer self-service products and VoC technology that captures customer sentiment in real-time. Upland also offers products that improve call center agent productivity by providing more direct access to knowledge and to customer sentiment thereby improving both inbound call outcomes and proactive outbound success. Additional solutions help call center leadership to manage agent performance and measure real-time performance relative to call resolution and customer sentiment, improve performance through gamification, and gather agent feedback to keep employee engagement high.
•Project Management. Business leaders and PMOs use our applications to optimize project portfolios, balance capacity against demand, improve financial-based decision making, align execution of projects to strategy across large organizations, and manage the entire project delivery lifecycle. Our applications deliver value to project management across a variety of use cases including continuous improvement, enterprise IT, new product development, and services departments along with industry depth in higher education, public sector, and healthcare IT.
•Information Technology. IT departments use our applications to manage a variety of IT activities and resources across the enterprise. Our applications help information technology departments ensure they are delivering against the objectives of the business by helping them select and prioritize the right investments, gain greater control of resource demand and allocation, and track and report benefit realization. Our applications enable executives to gain better insight into IT spending to help prevent cost overruns and understand the nature of consumption.
•Business Operations. Multiple functional departments use our applications to streamline operations and accelerate business performance across their value chains. Upland solutions in this area range from supply chain collaboration and factory management, back office document and vendor management, to applications that improve sales responsiveness.
•Human Resources and Legal. HR, legal departments, and law firms use our applications to improve collaboration and operational control and streamline routine processes. We offer applications that automate document management and workflow including, contracts, records, and other documentation that require enhanced security and compliance requirements. Other applications support HR-specific workflows including onboarding, employee management, termination, HR support, and time and expense management.
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 10,000 customers with over 1,000,000 users across a broad range of industries, including financial services, consulting services, technology, manufacturing, media, telecommunications, government and political, non-profit, healthcare and life sciences, retail, and hospitality.
Through a series of acquisitions and integrations, we have established a diverse family of software applications under the Upland brand and in the product solution categories listed above, each of which addresses a specific enterprise work management need. Our revenue has grown from $98.0 million in 2017 to $291.8 million in 2020, representing a cumulative annual growth rate of 44%. During the year ended December 31, 2020 domestic revenue as a percent of total revenue increased to 74% compared to 70% during the year ended December 31, 2019. See Note 13 Revenue Recognition in the notes to consolidated financial statements for more information regarding our revenue as it relates to domestic and foreign operations.
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, 2020, 2019 and 2018, our subscription and support revenue accounted for 95%, 92%, and 91%, respectively of our total revenue. Historically, we have sold certain of our applications under perpetual licenses, which also are paid in advance. For the years ended December 31, 2020, 2019 and 2018, our perpetual license revenue accounted for 1%, 3%, and 3% 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, 2020, 2019 and 2018, our professional services revenue accounted for 4%, 5%, and 6%, 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 enterprise solution categories as described in Item 1. Business herein. Consistent with our growth strategy, we have made a total of 26 acquisitions from February 2012 through December 31, 2020.
Acquisitions completed during the years ended December 31, 2020, 2019 and 2018 include the following:
2020 Acquisitions
•Localytics - On February 6, 2020, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Char Software, Inc (dba Localytics), a Delaware corporation (“Localytics”), a provider of mobile app personalization and analytics solutions. Revenues recorded since the acquisition date through December 31, 2020 were approximately $16.3 million.
2019 Acquisitions
•Postup - On April 18, 2019, the Company completed its purchase of the shares comprising the entire issued share capital of Postup Holdings, LLC, a Texas limited liability company (“Postup Holdings”), and Postup Digital, LLC, a Texas limited liability company (“Postup Digital”), an Austin-based company providing email and audience development solutions for publishing & media brands.
•Kapost - On May 24, 2019, the Company completed of its purchase of the shares comprising the entire issued share capital of Daily Inches, Inc., d/b/a Kapost, a Delaware corporation (“Kapost”), a content operations platform provider for sales and marketing.
•Cimpl - On August 21, 2019, the Company completed its purchase of the shares comprising the entire issued share capital of Cimpl, Inc., a Canadian corporation (“Cimpl”), a cloud-based telecom expense management platform.
•InGenius - On October 1, 2019, the Company completed its purchase of the shares comprising the entire issued share capital of InGenius Software Inc., a Canadian corporation (“InGenius”), a Computer Telephony Integration (CTI) solution for enterprise contact centers.
•Altify - On October 4, 2019, the Company’s wholly owned subsidiary, PowerSteering Software Limited, a limited company incorporated under the laws of England and Wales (“PowerSteering UK”), entered into an agreement to purchase the shares comprising the entire issued share capital of Altify Ireland Limited, a private company limited by shares organized and existing under the laws of Ireland (“Altify”), a customer revenue optimization (CRO) cloud solution for sales and the extended revenue teams.
2018 Acquisitions
•Interfax - On March 21, 2018, the Company’s wholly owned subsidiary, PowerSteering Software Limited, a limited liability company organized and existing under the laws of England and Wales (“PowerSteering UK”), completed its purchase of the shares comprising the entire issued share capital of Interfax Communications Limited (“Interfax”), an Irish-based software company providing secured cloud-based messaging solutions, including enterprise cloud fax and secure document distribution. In connection with this acquisition, the Company also acquired certain assets related to Interfax’s business from a United States based reseller of Interfax’s products.
•RO Innovation - On June 27, 2018, the Company completed its purchase of RO Innovation, Inc. (“RO Innovation”), a cloud-based customer reference solution for creating, deploying, managing, and measuring customer reference and sales enablement content.
•Rant & Rave - On October 3, 2018, the Company’s wholly owned subsidiary, PowerSteering UK, completed its purchase of the shares comprising the entire issued share capital of Rapide Communication LTD, a private company limited by shares organized and existing under the laws of England and Wales doing business as Rant & Rave (“Rant & Rave”), a leading provider of cloud-based customer engagement solutions.
•Adestra - On December 12, 2018, the Company completed its purchase of Adestra Ltd. (“Adestra”), a leading provider of enterprise-grade email marketing, transaction and automation software.
COVID-19 Impact
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout the U.S. and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. We cannot predict the extent to which the COVID-19 outbreak will impact our business or operating results, which is highly dependent on inherently uncertain future developments, including the severity of COVID-19 and the actions taken by governments and private businesses in relation to COVID-19 containment. As our software applications are offered as subscription-based services, the effect of the outbreak may not be fully reflected in our operating results until future periods, if at all. As of the date of this report, we do not yet know the extent of the negative impact on our ability to attract, serve, retain or upsell customers. Furthermore, existing and potential customers may choose to reduce or delay technology spending in response to the COVID-19 outbreak, or attempt to renegotiate contracts and obtain concessions, which may materially and negatively impact our operating results, financial condition and prospects.
As a result of the pandemic, Upland has taken certain measures to support the health and well-being of our employees, customers, partners and communities during this time of uncertainty. Prior to the wide-spread implementation of stay-at-home measures, approximately 60 percent of our employee and contractor workforce was already remote. This enabled us to quickly convert the entire company to remote work status to ensure the safety of our employees, while still allowing us to continue serving our customers without disruption. In addition, while we typically host virtual user conferences for our customers, we do not anticipate hosting any in person user group meetings for at least the first half of 2021.
As approximately 95% of our revenue is associated with recurring revenue, with minimal organic growth assumptions, the disruptions related to the pandemic did not have a material adverse impact on our financial results for the year ended December 31, 2020. While we have limited exposure to the industry verticals that have been hardest hit by the pandemic (including the travel, transportation, entertainment and retail industries) we have seen an impact to new bookings and churn which we attribute to COVID-19. The continued impacted to bookings and churn is uncertain. In 2020, the impact to new bookings and churn attributable to COVID-19 has been more than offset by strength in our cloud offerings that enable our customers to digitally transform their organizations at a time when they must adapt to remote work and digital engagement even more quickly and strong sales into political campaigns in the US, which will decrease in 2021. We expect that current cash and cash equivalent balances and cash flows generated from operations will be sufficient to meet our domestic and international working capital needs for at least the next 12 months.
During the second, third and fourth quarters of 2020 we paused our acquisition activity in order to gauge the overall economic impact of the pandemic and focus on evaluating our pipeline of opportunities. This resulted in a steady decrease in acquisition related expenses over this period. With acquisition activity picking up again in the first quarter of 2021, including the acquisition of Second Street in January 2021, these quarterly acquisition related expenses will increase in proportion to the size, timing and complexity of future acquisitions.
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 %):
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Year Ended December 31,
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2020
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2019
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2018
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Other Financial Data:
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Annualized recurring revenue value at year-end(1)
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$
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220,535
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$
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209,700
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$
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131,919
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Annual net dollar retention rate(2)
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94
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%
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97
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%
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98
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%
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Adjusted EBITDA(3)
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$
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99,903
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$
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82,520
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$
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53,105
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(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, on-demand service fees and certain divested and/or sunseted minor non-strategic customer contracts and related website management and analytics assets (collectively referred to as the “Sunset Assets”). Refer to Note 3, Acquisitions and Note 5, Goodwill and Other Intangible Assets in our consolidated financial statements for further discussion.
(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, on-demand service fees and our Sunset Assets.
(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 depreciation and amortization expense, interest expense, net, other expense (income), net, loss on debt extinguishment, provision for income taxes, stock-based compensation expense, acquisition-related expenses, non-recurring litigation costs, and purchase accounting adjustments for deferred revenue.
Non-GAAP Financial Measures
Adjusted EBITDA
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).
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Year Ended December 31,
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2020
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2019
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2018
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Net loss
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$
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(51,219)
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$
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(45,371)
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$
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(10,839)
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Depreciation and amortization expense
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47,164
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34,621
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21,347
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Interest expense, net
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31,529
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22,313
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13,273
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Loss on debt extinguishment
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—
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2,317
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—
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Other expense, net
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111
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3,240
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1,781
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Benefit from income taxes
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(4,234)
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(6,805)
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(9,809)
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Stock-based compensation expense
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41,692
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25,754
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14,130
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Acquisition-related expense
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27,075
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39,657
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18,728
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Purchase accounting deferred revenue discount
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7,785
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6,794
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4,494
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Adjusted EBITDA
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$
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99,903
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$
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82,520
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$
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53,105
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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;
•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, 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 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.
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 as the customer receives and consumes the benefits of the cloud services through the contract period. Our subscription agreements are typically 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 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 over time as services 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 are performed.
Cost of Revenue
Cost of product revenue. Cost of product revenue consists primarily of personnel and 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, Internet connectivity, and depreciation expenses 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.
Cost of professional services revenue. Cost of professional services revenue consists primarily of personnel and 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 five categories: sales and marketing, research and development, general and administrative, depreciation and amortization and acquisition-related expenses. For each category, other than depreciation and amortization, the largest expense component is personnel and 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 related costs for our sales and marketing staff, including salaries, benefits, 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. Sales 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 quarterly or annual period.
Research and development. Research and development expenses primarily consist of personnel and 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 16 Related Party Transactions, in 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. Investment tax credits are accounted for as a reduction of research and development costs. Credits are accrued 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 from the amounts recorded.
General and administrative. General and administrative expenses primarily consist of personnel and related costs for our executive, administrative, 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 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 nine-year period.
Acquisition-related expenses. Acquisition-related expenses are typically incurred for up to four quarters after each acquisition, with the majority of these costs being incurred within 6 to 9 months, to transform the acquired business into the Company's unified operating 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. If the Company ceased acquisition activity today, within a year these acquisition-related expenses would no longer be incurred.
Total Other Expense
Total other expense consists primarily of amortization of deferred financing costs over the term of the related loan facility, revaluation of contingent consideration, and interest expense on outstanding debt, including amortization of debt issuance costs. We participate in interest rate swap agreements for the purpose of reducing variability in interest rate payments the Company’s term loans. These interest rate swaps fix the Company's interest rate (including the hedge premium) at 5.4% for the term of the Credit Agreement. In addition, gains/losses on divested assets that meet the definition of a business under ASC 805-10 are included in 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. The balance of the tax provision for the years ended December 31, 2020, 2019, and 2018, outside of tax deductible goodwill and current taxes in separate filing states, is related to foreign income taxes, primarily operations of our Canadian, UK, and Ireland subsidiaries, and to the release of valuation allowances associated with acquisitions of domestic entities with deferred tax liabilities. 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,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
Amount
|
Percent of Revenue
|
|
Amount
|
Percent of Revenue
|
|
Amount
|
Percent of Revenue
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and support
|
|
$
|
277,504
|
|
|
95%
|
|
$
|
203,866
|
|
|
92%
|
|
$
|
136,578
|
|
|
91%
|
Perpetual license
|
|
1,884
|
|
|
1%
|
|
5,738
|
|
|
3%
|
|
3,902
|
|
|
3%
|
Total product revenue
|
|
279,388
|
|
|
96%
|
|
209,604
|
|
|
95%
|
|
140,480
|
|
|
94%
|
Professional services
|
|
12,390
|
|
|
4%
|
|
13,033
|
|
|
5%
|
|
9,405
|
|
|
6%
|
Total revenue
|
|
291,778
|
|
|
100%
|
|
222,637
|
|
|
100%
|
|
149,885
|
|
|
100%
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and support (1)(2)
|
|
89,880
|
|
|
31%
|
|
61,465
|
|
|
28%
|
|
42,881
|
|
|
29%
|
Professional services
|
|
8,566
|
|
|
3%
|
|
7,652
|
|
|
3%
|
|
5,708
|
|
|
3%
|
Total cost of revenue
|
|
98,446
|
|
|
34%
|
|
69,117
|
|
|
31%
|
|
48,589
|
|
|
32%
|
Gross profit
|
|
193,332
|
|
|
66%
|
|
153,520
|
|
|
69%
|
|
101,296
|
|
|
68%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing (1)
|
|
46,077
|
|
|
16%
|
|
35,170
|
|
|
16%
|
|
20,935
|
|
|
14%
|
Research and development (1)
|
|
39,002
|
|
|
13%
|
|
29,037
|
|
|
13%
|
|
20,914
|
|
|
14%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative (1)
|
|
68,072
|
|
|
23%
|
|
48,077
|
|
|
22%
|
|
32,041
|
|
|
21%
|
Depreciation and amortization
|
|
36,919
|
|
|
13%
|
|
25,885
|
|
|
12%
|
|
14,272
|
|
|
10%
|
Acquisition-related expenses
|
|
27,075
|
|
|
9%
|
|
39,657
|
|
|
17%
|
|
18,728
|
|
|
12%
|
Total operating expenses
|
|
217,145
|
|
|
74%
|
|
177,826
|
|
|
80%
|
|
106,890
|
|
|
71%
|
Loss from operations
|
|
(23,813)
|
|
|
(8)%
|
|
(24,306)
|
|
|
(11)%
|
|
(5,594)
|
|
|
(3)%
|
Other Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
(31,529)
|
|
|
(11)%
|
|
(22,313)
|
|
|
(10)%
|
|
(13,273)
|
|
|
(9)%
|
Loss on debt extinguishment
|
|
—
|
|
|
—%
|
|
(2,317)
|
|
|
(1)%
|
|
—
|
|
|
—%
|
Other expense, net
|
|
(111)
|
|
|
—%
|
|
(3,240)
|
|
|
(2)%
|
|
(1,781)
|
|
|
(1)%
|
Total other expense
|
|
(31,640)
|
|
|
(11)%
|
|
(27,870)
|
|
|
(13)%
|
|
(15,054)
|
|
|
(10)%
|
Loss before benefit from income taxes
|
|
(55,453)
|
|
|
(19)%
|
|
(52,176)
|
|
|
(24)%
|
|
(20,648)
|
|
|
(13)%
|
Benefit from income taxes
|
|
4,234
|
|
|
1%
|
|
6,805
|
|
|
4%
|
|
9,809
|
|
|
6%
|
Net loss
|
|
(51,219)
|
|
|
(18)%
|
|
(45,371)
|
|
|
(20)%
|
|
(10,839)
|
|
|
(7)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations per common share, basic and diluted (3)
|
|
$
|
(1.92)
|
|
|
|
|
$
|
(1.96)
|
|
|
|
|
$
|
(0.54)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, basic and diluted (3)
|
|
26,632,116
|
|
|
|
|
23,099,549
|
|
|
|
|
19,985,528
|
|
|
|
(1)Includes stock-based compensation. See tables below for stock based compensation by operating expense line item.
(2)Includes depreciation and amortization of $10.2 million, $8.7 million, and $7.1 million in 2020, 2019, and 2018, respectively.
(3)See Note 8 Net Loss Per Share, in 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.
The following tables present stock-based compensation included in the respective line items in our Consolidated Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
(dollars in thousands)
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
$
|
1,951
|
|
|
$
|
1,000
|
|
|
$
|
654
|
|
|
|
|
|
Research and development
|
3,391
|
|
|
2,310
|
|
|
1,250
|
|
|
|
|
|
Sales and marketing
|
3,450
|
|
|
1,543
|
|
|
533
|
|
|
|
|
|
General and administrative
|
32,900
|
|
|
20,901
|
|
|
11,693
|
|
|
|
|
|
Total
|
$
|
41,692
|
|
|
$
|
25,754
|
|
|
$
|
14,130
|
|
|
|
|
|
Comparison of Years Ended December 31, 2020 and December 31, 2019
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
|
Amount
|
|
Percent of Revenue
|
|
Amount
|
|
Percent of Revenue
|
|
Amount
|
|
% Change
|
|
|
(dollars in thousands)
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and support
|
|
$
|
277,504
|
|
|
95%
|
|
$
|
203,866
|
|
|
92%
|
|
$
|
73,638
|
|
|
36%
|
Perpetual license
|
|
1,884
|
|
|
1%
|
|
5,738
|
|
|
3%
|
|
(3,854)
|
|
|
(67)%
|
Total product revenue
|
|
279,388
|
|
|
96%
|
|
209,604
|
|
|
95%
|
|
69,784
|
|
|
33%
|
Professional services
|
|
12,390
|
|
|
4%
|
|
13,033
|
|
|
5%
|
|
(643)
|
|
|
(5)%
|
Total revenue
|
|
$
|
291,778
|
|
|
100%
|
|
$
|
222,637
|
|
|
100%
|
|
$
|
69,141
|
|
|
31%
|
Total revenue was $291.8 million in 2020, compared to $222.6 million in 2019, an increase of $69.2 million, or 31%. The acquisitions not fully in the comparative period contributed $58.9 million to the increase after the reduction of $7.8 million purchase accounting deferred revenue discount in 2020. Total Revenue related to Sunset Assets decreased by $4.0 million as a result of decreased sales and marketing focus on those Sunset Assets. Our organic business excludes acquisitions closed during or subsequent to the prior year comparable period and business operations related to Sunset Assets (the “Organic Business”). Therefore, total revenue for the Organic Business increased by $14.3 million. The increase in revenue from our Organic Business was primarily driven by an increase in mobile messaging usage from US election-year presidential campaigns.
Subscription and support revenue was $277.5 million in 2020, compared to $203.9 million in 2019, an increase of $73.6 million, or 36%. The acquisitions not fully in the comparative period contributed $57.3 million to the increase in subscription and support revenue after the reduction of $7.8 million purchase accounting deferred revenue discount in 2020. Subscription and support revenue related to our Sunset Assets decreased $3.7 million as a result of decreased sales and marketing focus on those Sunset Assets. Therefore, subscription and support revenue from our Organic Business increased by $20.0 million. The increase in subscription and support revenue from our Organic Business was primarily driven by an increase in mobile messaging usage from US election-year presidential campaigns.
Perpetual license revenue was $1.9 million in 2020, compared to $5.7 million in 2019, a decrease of $3.8 million, or 67%. The acquisitions we closed after January 1, 2019 contributed no perpetual license revenue. The entire decrease relates to our Organic Business, as we continue to focus on growth in subscription and support revenue.
Professional services revenue was $12.4 million in 2020, compared to $13.0 million in 2019, a decrease of $0.6 million, or 5%. The acquisitions not fully in the comparative period contributed to a $1.5 million increase in professional services revenue in 2020. Professional services revenue related to our Sunset Assets decreased by $0.3 million as a result of decreased sales and marketing focus on those Sunset Assets. Therefore, professional services revenue from our Organic Business decreased by $1.8 million due primarily to COVID-19 related travel impacts and a higher proportion of expansion bookings versus new bookings which tend to have more professional services associated with them.
Cost of Revenue and Gross Profit Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
|
Amount
|
|
Percent of Revenue
|
|
Amount
|
|
Percent of Revenue
|
|
Amount
|
|
% Change
|
|
|
(dollars in thousands)
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and support (1)
|
|
$
|
89,880
|
|
|
31%
|
|
$
|
61,465
|
|
|
28%
|
|
$
|
28,415
|
|
|
46%
|
Professional services
|
|
8,566
|
|
|
3%
|
|
7,652
|
|
|
3%
|
|
914
|
|
|
12%
|
Total cost of revenue
|
|
98,446
|
|
|
34%
|
|
69,117
|
|
|
31%
|
|
29,329
|
|
|
42%
|
Gross profit
|
|
$
|
193,332
|
|
|
66%
|
|
$
|
153,520
|
|
|
69%
|
|
$
|
39,812
|
|
|
26%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes depreciation and amortization expense as follows:
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
170
|
|
|
—%
|
|
$
|
834
|
|
|
—%
|
|
$
|
(664)
|
|
|
(80)%
|
Amortization
|
|
$
|
10,075
|
|
|
3%
|
|
$
|
7,903
|
|
|
4%
|
|
$
|
2,172
|
|
|
27%
|
Cost of subscription and support revenue was $89.9 million in 2020, compared to $61.5 million in 2019, an increase of $28.4 million, or 46%. The acquisitions not fully in the comparative period contributed $17.6 million to the increase to cost of subscription and support revenue, primarily related to costs associated with the delivery of the Postup, Kapost, Cimpl, InGenius, Altify, and Localytics products. Cost of subscription and support revenue related to our Sunset Assets decreased $0.4 million primarily related to hosting and infrastructure costs. Therefore, cost of subscription and support revenue for our Organic Business increased by $11.2 million, primarily related to an increase in messaging costs related to an increase in mobile messaging usage from US election-year presidential campaigns.
Cost of professional services revenue was $8.6 million in 2020, compared to $7.7 million in 2019, an increase of $0.9 million, or 12%. The acquisitions not fully in the comparative period contributed $1.6 million to the increase to cost of professional services revenue, primarily related to an increase in personnel and related costs. Cost of professional services revenue related to our Sunset Assets decreased $0.2 million. Therefore, cost of professional services revenue for our Organic Business decreased by $0.5 million which corresponds with the reduction in professional services revenue as a result of COVID-19 related travel impacts.
Operating Expenses
Sales and Marketing Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
|
Amount
|
|
Percent of Revenue
|
|
Amount
|
|
Percent of Revenue
|
|
Amount
|
|
% Change
|
|
|
(dollars in thousands)
|
Sales and marketing
|
$
|
46,077
|
|
|
16%
|
|
$
|
35,170
|
|
|
16%
|
|
$
|
10,907
|
|
|
31%
|
Sales and marketing expense was $46.1 million in 2020, compared to $35.2 million in 2019, an increase of $10.9 million, or 31%. The acquisitions not fully in the comparative period contributed $11.8 million to the increase in sales and marketing expense, primarily consisting of personnel and related costs in 2020. Sales and marketing expense related to our Sunset Assets decreased by $0.7 million primarily due to reductions in personnel costs. Therefore, sales and marketing expense for our Organic Business decreased by $0.2 million, primarily as a result of decreased travel and discretionary marketing expenses which were partially offset by a $1.0 million increase in personnel costs associated with additional headcount related to our new and ongoing go-to-market investments.
Research and Development Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
|
Amount
|
|
Percent of Revenue
|
|
Amount
|
|
Percent of Revenue
|
|
Amount
|
|
% Change
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
39,002
|
|
|
13%
|
|
$
|
29,037
|
|
|
13%
|
|
$
|
9,965
|
|
|
34%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense was $39.0 million in 2020, compared to $29.0 million in 2019, an increase of $10.0 million, or 34%. The acquisitions not fully in the comparative period contributed $10.1 million to the increase in research and development expense primarily consisting of personnel and related costs. Research and development expense related to our Sunset Assets decreased by $0.2 million primarily due to reductions in personnel costs. Therefore, research and development costs for our Organic Business increased by $0.9 million primarily related to an increase in non-cash stock compensation expense and outsourced technology services costs.
Refundable tax credits were $1.2 million in 2020, compared to $0.4 million in 2019, an increase of $0.8 million. This increase was predominately driven by tax credits related to our newly acquired companies.
General and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
|
Amount
|
|
Percent of Revenue
|
|
Amount
|
|
Percent of Revenue
|
|
Amount
|
|
% Change
|
|
|
(dollars in thousands)
|
General and administrative
|
|
$
|
68,072
|
|
|
23%
|
|
$
|
48,077
|
|
|
22%
|
|
$
|
19,995
|
|
|
42%
|
General and administrative expense was $68.1 million in 2020, compared to $48.1 million in 2019, an increase of $20.0 million, or 42%. An increase in general administrative expense of $6.9 million was due to the acquisitions not fully in the comparative period, which consisted primarily of personnel and related costs and administrative expenses. Therefore, general and administrative expense for our Organic Business increased by $13.1 million, which was driven primarily by increased non-cash stock compensation expense, and also includes investment in our new go-to-market leadership team and other personnel related expenses, and costs incurred related to the implementation of our new enterprise resource planning (“ERP”) system.
Depreciation and Amortization Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
|
Amount
|
|
Percent of Revenue
|
|
Amount
|
|
Percent of Revenue
|
|
Amount
|
|
% Change
|
|
|
(dollars in thousands)
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
2,057
|
|
|
1%
|
|
$
|
1,392
|
|
|
1%
|
|
$
|
665
|
|
|
48%
|
Amortization
|
|
34,862
|
|
|
12%
|
|
24,492
|
|
|
11%
|
|
10,370
|
|
|
42%
|
Total depreciation and amortization
|
|
$
|
36,919
|
|
|
13%
|
|
$
|
25,884
|
|
|
12%
|
|
$
|
11,035
|
|
|
43%
|
Depreciation and amortization expense was $36.9 million in 2020, compared to $25.9 million in 2019, an increase of $11.0 million, or 43%. The acquisitions not fully in the comparative period increased depreciation and amortization expense by $11.5 million, primarily related to acquired intangible assets such as customer relationships, developed technology and tradenames. Therefore, depreciation and amortization expense for our Organic Business decreased by $0.5 million in the comparative periods due to assets becoming fully depreciated or amortized during the period.
Acquisition-related Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
|
Amount
|
|
Percent of Revenue
|
|
Amount
|
|
Percent of Revenue
|
|
Amount
|
|
% Change
|
|
|
(dollars in thousands)
|
Acquisition-related expense
|
|
$27,075
|
|
9%
|
|
$39,657
|
|
17%
|
|
$(12,582)
|
|
(32)%
|
Acquisition-related expenses are one-time expenses typically incurred for up to four quarters after each acquisition, with the majority of these costs being incurred within 6 to 9 months, to transform the acquired business into the Company's unified operating 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, without new acquisition activity, acquisition related expenses decline in subsequent sequential quarters and are no longer incurred after the first anniversary of the last closed acquisition.
Acquisition related expense was $27.1 million in 2020, compared to $39.7 million for 2019, a decrease of $12.6 million, or 32%. During the twelve months ended December 31, 2020 and December 31, 2019 transaction related expenses were $4.3 million and $11.3 million, respectively, and transformational expenses were $22.8 million and $28.4 million, respectively. Transformational and transaction costs decreased in 2020 as a result of the Company temporarily pausing its acquisition activity due to the COVID-19 pandemic. As a result, we completed one acquisition in 2020 compared to 5 acquisitions in 2019. The transformational expenses in both the 2020 and 2019 were primarily related to temporary transitional personnel and related costs along with accelerated rent related expenses incurred in conjunction with the closures of offices of our acquired companies as we consolidate and integrate these acquisitions. These accelerated rent related expenses increased $3.5 million to $4.3 million during 2020 from $0.8 million during 2019.
Other Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
|
Amount
|
|
Percent of Revenue
|
|
Amount
|
|
Percent of Revenue
|
|
Amount
|
|
% Change
|
|
|
(dollars in thousands)
|
Other Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
(31,529)
|
|
|
(11)%
|
|
$
|
(22,313)
|
|
|
(10)%
|
|
$
|
(9,216)
|
|
|
41%
|
Loss on debt extinguishment
|
|
—
|
|
|
—%
|
|
(2,317)
|
|
|
(1)%
|
|
2,317
|
|
|
NA
|
Other expense, net
|
|
(111)
|
|
|
—%
|
|
(3,240)
|
|
|
(3)%
|
|
3,129
|
|
|
(97)%
|
Total other expense
|
|
$
|
(31,640)
|
|
|
(11)%
|
|
$
|
(27,870)
|
|
|
(13)%
|
|
$
|
(3,770)
|
|
|
14%
|
Interest expense was $31.5 million in 2020, compared to $22.3 million for 2019, an increase of $9.2 million, or 41%. The increase is primarily attributable to increased average borrowing under our credit facility used to fund our acquisitions.
During 2019, we recorded a $2.3 million loss on debt extinguishment related to the successful completion of our new credit facility, which resulted in the write-off of the remaining deferred debt offering costs from our previous credit facility. See the “Liquidity and Capital Resources” section herein for further discussion regarding our new credit facility.
Other expense was $0.1 million in 2020, compared to other expense of $3.2 million in 2019, a decrease of $3.1 million, or 97%. The difference in other expense is primarily due to a decrease in foreign currency exchange losses compared to 2019 and the 2019 non-cash loss of $2.0 million on divestiture of Sunset Assets which consisted primarily of non-cash expense for deferred sales commissions.
Benefit from Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
|
Amount
|
|
Percent of Revenue
|
|
Amount
|
|
Percent of Revenue
|
|
Amount
|
|
% Change
|
|
|
(dollars in thousands)
|
Loss before provision for income taxes
|
|
(55,453)
|
|
|
(19)%
|
|
(52,176)
|
|
|
(24)%
|
|
(3,277)
|
|
|
(6)%
|
Benefit from (provision for) income taxes
|
|
$
|
4,234
|
|
|
1%
|
|
$
|
6,805
|
|
|
4%
|
|
$
|
(2,571)
|
|
|
(38)%
|
Effective income tax rate
|
|
(7.6)
|
%
|
|
|
|
(13.0)
|
%
|
|
|
|
|
|
|
Benefit from income taxes was $4.2 million in 2020, compared to a benefit for income taxes of $6.8 million in 2019, a decrease in the benefit from income taxes of $2.6 million, or 38%. This decrease was due primarily to an decrease in deferred tax liabilities during the year in our foreign entities associated with the amortization of acquired intangibles and losses generated from continuing operations at certain UK and Canada entities, and decreased benefits recognized during the year attributable to the release of valuation allowances associated with acquisitions of domestic entities with deferred tax liabilities
that, upon acquisition, allow us to recognize certain deferred tax assets that had previously been offset by a valuation allowances.
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 any remaining tax deductible goodwill after application of indefinite life deferred tax assets. 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. Refer to Note 6. Income Taxes in the notes to consolidated financial statements for more information regarding our income taxes as they relate to foreign and domestic operations.
Comparison of Years Ended December 31, 2019 and December 31, 2018
For a comparison of years ended December 31, 2019 and December 31, 2018 refer to “Item 7. Management’s Discussion and Analysis” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed on March 2, 2020.
Liquidity and Capital Resources
To date, we have financed our operations primarily through the raising of capital including sales of our common stock, cash from operating activities, borrowing under our credit facility, and the issuance of notes to sellers in some of our acquisitions. We believe that current cash and cash equivalents, cash flows from operating activities, availability under our existing credit facility, as discussed below, and the ability to offer and sell securities pursuant to our registration statement, as discussed below, 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 Credit Facility and registration statement to support our continued growth via acquisitions within our core enterprise solution suites of complementary technologies and businesses.
As of December 31, 2020, we had cash and cash equivalents of $250.0 million, $60.0 million of available borrowings under our Credit Facility, as discussed below, and $533.3 million of borrowings outstanding under our Credit Facility. As of December 31, 2019, we had cash and cash equivalents of $175.0 million, $60.0 million of available borrowings under our Credit Facility, and $538.7 million of borrowings outstanding under our Credit Facility. The $75.0 million increase in cash and cash equivalents from December 31, 2019 to December 31, 2020 includes $130.1 million in net proceeds from our August 2020 secondary stock offering partially offset by a $67.7 million cash payment for an acquisition in February 2020. Our cash and cash equivalents held by our foreign subsidiaries was $15.3 million as of December 31, 2020. 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, 2020 and 2019, we had a working capital surplus of $196.1 million and $109.5 million, respectively.
Credit Facility
Our facility is comprised of $540.0 million in term loans and a $60.0 million revolving credit facility.
On August 6, 2019, we entered into a credit agreement (the “Credit Facility”) which provides for (i) a fully-drawn $350 million, 7 year, senior secured term loan B facility (the “Term Loan”) and (ii) a $60 million, 5 year, revolving credit facility (the “Revolver”) that was fully available as of December 31, 2020. The Credit Facility replaced our previous credit facility. All outstanding balances under our previous credit facility were paid off using proceeds from our current Credit Facility.
On November 26, 2019, the Company entered into a First Incremental Assumption Agreement (the “Incremental Assumption Agreement”) which provides for a term loan facility to be established under the Credit Agreement in an aggregate principal amount of $190 million (the “2019 Incremental Term Loan”) which is in addition to the existing $350 million term loans outstanding under the Credit Agreement and the $60 million Revolver under the Credit Agreement.
The 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. The Credit Facility is secured by a security interest in substantially all of our assets and requires us to maintain certain financial covenants. The Credit Facility contains certain non-financial restrictive covenants that limit our ability to transfer or dispose of assets, merge with other companies or consummate certain changes of control, acquire other companies, pay dividends, incur additional indebtedness and liens, effect changes in management and enter into new businesses. As of December 31, 2020, we were in compliance with all covenants under the Credit Facility. See Note 7. Debt for more information regarding our Credit Facility and outstanding debt as of December 31, 2020.
Registration Statement
On December 12, 2018, we filed a registration statement on Form S-3 (File No. 333-228767) (the “2018 S-3”), to register Upland securities in an aggregate amount of up to $250.0 million for offerings from time to time. In connection with the filing of the Form S-3 we withdrew our previous registration statement filed on May 12, 2017. On May 13, 2019, we completed a registered underwritten public offering pursuant to the 2018 S-3 of 3,795,000 shares of the Company's $0.0001 par value common stock for an offering price to the public of $42.00 per share. This included the 495,000 shares issuable pursuant to a fully exercised option to purchase additional shares granted to the underwriters of the offering. The net proceeds of the offering of $151.1 million, net of issuance costs of $8.3 million, will be used for general business purposes, including the funding of future acquisitions.
On August 10, 2020, we filed a registration statement on Form S-3 (File No. 333-243728) (the “2020 S-3”), which became effective automatically upon its filing and covers an unlimited amount of securities. The 2020 S-3 will remain effective through August 2023. On August 14, 2020, we completed a registered underwritten public offering pursuant to the 2020 S-3 of 3,500,000 shares of the Company's $0.0001 par value common stock for an offering price to the public of $34.00 per share. In addition, on August 27, 2020 we closed the sale of an additional 525,000 shares issuable pursuant to a fully exercised option to purchase additional shares granted to the underwriters of the offering. The total net proceeds of the offering, including shares issued pursuant to the fully exercised option, of $130.1 million, net of issuance costs of $6.8 million, will be used for general business purposes, including the funding of future acquisitions. There are no outstanding security offerings at this time.
The following table summarizes our cash flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(dollars in thousands)
|
Consolidated Statements of Cash Flow Data:
|
|
|
|
|
|
Net cash provided by operating activities
|
$
|
35,620
|
|
|
$
|
12,076
|
|
|
$
|
7,347
|
|
Net cash used in investing activities
|
(68,970)
|
|
|
(217,761)
|
|
|
(161,686)
|
|
Net cash provided by financing activities
|
107,899
|
|
|
363,768
|
|
|
149,923
|
|
Effect of exchange rate fluctuations on cash
|
456
|
|
|
203
|
|
|
(1,172)
|
|
Change in cash and cash equivalents
|
75,005
|
|
|
158,286
|
|
|
(5,588)
|
|
Cash and cash equivalents, beginning of period
|
175,024
|
|
|
16,738
|
|
|
22,326
|
|
Cash and cash equivalents, end of period
|
$
|
250,029
|
|
|
$
|
175,024
|
|
|
$
|
16,738
|
|
Cash Flows from Operating Activities
Cash provided 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 unified operating platform. Additionally, operating cash flows includes the impact of earn-outs payments in excess of original purchase accounting estimates. Our working capital consists primarily of cash, receivables from customers, 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 volume of professional services rendered, the volume and timing of 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, accrued expenses, accrued payroll and related benefits, all affect these account balances.
Cash provided by operating activities was $35.6 million for 2020 compared to $12.1 million for 2019, an increase of $23.4 million. This increase in operating cash flow is generally attributable to the Company’s increased size and scale and a $12.6 million decrease in acquisition-related expenses in 2020 as a result of a slow down in acquisition related activity due to the COVID-19 pandemic. This year-over-year increase in operating cash flow is in spite of net working capital uses of cash of $2.3 million for 2020 compared to $2.7 million for 2019. Working capital sources of cash for 2020 included a $10.4 million decrease in accounts receivable and a $6.8 million increase in deferred revenue related to the timing of collections and billings. Working capital uses of cash for 2020 included a $8.6 million increase in prepaids and other related primarily to an increase in capitalized commissions, a $3.1 million decrease in accounts payable, and a $7.8 million decrease in accrued expenses, which is attributable primarily to the payment of acquisition related expenses accrued in 2019 and paid in 2020.
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 liability. Deferred revenue consists of the unearned portion of booked fees for our software subscriptions and support, which is amortized into revenue in accordance with our revenue recognition policy. We assess our liquidity, in part, through an analysis of new subscriptions invoiced, expected cash receipts on new and existing subscriptions, and our ongoing operating expense requirements.
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 2020, cash used in investing activities consisted of $67.7 million associated with the acquisition of Localytics which closed in February 2020, the purchases of property and equipment of $1.1 million, and the purchase of customer relationships of $0.2 million. Cash used in investing activities decreased $148.8 million in 2020 compared to 2019 primarily as a result of a pause in acquisition activity in 2020 due to the COVID-19 pandemic.
Cash Flows from Financing Activities
Our primary financing activities have consisted of capital raised to fund our acquisitions, proceeds from debt obligations incurred to finance our acquisitions, repayments of our debt obligations, and share based tax payment activity.
Cash provided by financing activities decreased $255.9 million in 2020 compared to 2019. During 2020, we received net proceeds from the issuance of common stock, including proceeds from the exercise of employee stock options, of $130.5 million compared to $151.6 million in 2019. During 2020, we made net payments on our notes payable balance of $5.7 million compared to a net increase in our notes payable balance of $242.1 million in 2019 as a result of the paydown of our previous credit facility and entry into our new expanded credit facility. During 2020, we paid $14.7 million in additional consideration to sellers of acquired businesses related to holdback and earnout payments compared to $16.7 million in 2019. During 2020, we paid $2.1 million in taxes on behalf of employees related to net share settlements of restricted stock vesting events which decreased from the $12.7 million in net share settlement payments in 2019 as a result of the election in 2020 to sell shares to cover employee taxes on stock compensation vestings. During 2020, we made principal payments of $0.1 million on finance leases compared to $0.5 million in 2019 as a result of certain finance leases expiring in 2020.
Contractual Payment Obligations
The following table summarizes our future contractual obligations as of December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
Less than 1 Year
|
|
1-3 Years
|
|
>3-5 Years
|
|
More Than 5 Years
|
Debt Obligations (1)
|
|
|
$
|
5,400
|
|
|
$
|
10,800
|
|
|
$
|
10,800
|
|
|
$
|
506,250
|
|
Interest on Debt Obligations (2)
|
|
|
$
|
29,001
|
|
|
$
|
56,963
|
|
|
$
|
56,170
|
|
|
$
|
16,475
|
|
Financing Lease Obligations (3)
|
|
|
$
|
7
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating Lease Obligations (4)
|
|
|
$
|
3,785
|
|
|
$
|
6,280
|
|
|
$
|
2,987
|
|
|
$
|
547
|
|
Purchase Commitments (5)
|
|
|
$
|
19,409
|
|
|
$
|
21,035
|
|
|
$
|
18,073
|
|
|
$
|
—
|
|
Total
|
|
|
$
|
57,602
|
|
|
$
|
95,087
|
|
|
$
|
88,030
|
|
|
$
|
523,272
|
|
(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 obligations is calculated using the interest rate effective as of December 31, 2020. We have entered into floating-to-fixed interest rate swap agreements to limit exposure to interest rate risk related to our debt. These interest rate swaps effectively converted the entire balance of the Company's $540 million 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 the debt. In conjunction with our new $350 million, 7 year, term credit facility and our $190 million 2019 Incremental Term Loan we entered into interest rate hedge instruments for the full 7 year term, effectively fixing our interest rate at 5.4%. However, the interest rate associated with our new $60 million, 5 year, undrawn revolving credit facility remains floating. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for further discussion.
(3)We lease office equipment under capital leases that expire between 2021 and 2023.
(4)We lease office space under operating leases that expire between 2021 and 2026. 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.
(5)We define a purchase commitment as an agreement that is enforceable and legally binding and that specifies all significant terms, including: fixed or minimum services to be used; fixed, minimum or variable price provisions; and the 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 purchase commitments related to hosting services, third-party technology used in the Company's solutions and for other services the Company purchases as part of normal operations. In certain cases these arrangements require a minimum annual purchase commitment.
We have an outstanding purchase commitment in 2021 for software development services from DevFactory FZ-LLC (“DevFactory”) pursuant to a technology services agreement in the amount of $9.6 million. See Note 16. Related Party Transactions, in the notes to consolidated financial statements for more information regarding our purchase commitment to this related party.
Off-Balance Sheet Arrangements
During the years ended December 31, 2020, 2019, and 2018, 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. 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. Our significant accounting policies are described in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, and 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 used in the preparation of our condensed consolidated financial statements:
• revenue recognition and deferred revenue;
• deferred sales commissions and sales commission expense;
• stock-based compensation;
• income taxes; and
• business combinations and the recoverability of goodwill and long-lived assets.
Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of February 25, 2021, 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.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services over the term of the agreement. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenues are recognized net of sales credits and allowances. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.
Revenue-generating activities consist of subscription and support, perpetual licenses, and professional services revenues within a single operating segment.
Subscription and Support Revenues
Our software solutions are available for use as hosted application arrangements under subscription fee agreements without licensing perpetual rights to the software. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the our solution is made available to the customer. As our customers have access to use our solutions over the term of the contract agreement we believe this method of revenue recognition provides a faithful depiction of the transfer of services provided. Our subscription contracts are generally 1 to 3 years in length. Amounts that have been invoiced are recorded in accounts receivable and deferred revenues or subscription and support revenues, depending on whether the revenue recognition criteria have been met. Additional fees for monthly usage above the levels included in the standard subscription fee are recognized as subscription and support revenue at the end of each month and is invoiced concurrently. Subscription and support revenue includes revenue related to the our digital engagement application which provides short code connectivity for its two-way short message service (“SMS”) programs and campaigns. As discussed further in the “Principal vs. Agent Considerations” section below, we recognize revenue related to these messaging-related subscription contracts on a gross basis.
Perpetual License Revenues
We also records revenue from the sales of proprietary software products under perpetual licenses. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. Our products do not require significant customization.
Professional Services Revenue
Professional services provided with subscription and support licenses and perpetual licenses consist of implementation fees, data extraction, configuration, and training. Our 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 over time as such services 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 are performed.
Significant Judgments
Performance Obligations and Standalone Selling Price
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of accounting. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. We have contracts with customers that often include multiple performance obligations, usually including professional services sold with either individual or multiple subscriptions or perpetual licenses. For these contracts, we record individual performance obligations separately if they are distinct by allocating the contract's total transaction price to each performance obligation in an amount based on the relative standalone selling price, (“SSP”), of each distinct good or service in the contract. We only include estimated amounts of variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.
Judgment is required to determine the SSP for each distinct performance obligation. A residual approach is only applied in limited circumstances when a particular performance obligation has highly variable and uncertain SSP and is bundled with other performance obligations that have observable SSP. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, historical standalone sales, customer demographics, geographic locations, and the number and types of users within our contracts.
Principal vs. Agent Considerations
We evaluate whether we are the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis) for vendor reseller agreements and messaging-related agreements. Where we are the principal, we first obtain control of the inputs to the specific good or service and direct their use to create the combined output. Our control is evidenced by our involvement in the integration of the good or service on its platform before it is transferred to its customers, and is further supported by the Company being primarily responsible to our customers and having a level of discretion in establishing pricing. Revenues provided from agreements in which we are an agent are immaterial. While none of the factors individually are considered presumptive or determinative, in reaching conclusions on gross versus net revenue recognition, we place the most weight on the analysis of whether or not it is the primary obligor in the arrangement.
Generally, we report revenues from vendor reseller agreements on a gross basis, meaning the amounts billed to customers are recorded as revenues, and expenses incurred are recorded as cost of revenues. As we are primarily obligated in our messaging-related subscription contracts, have latitude in establishing prices associated with our messaging program management services, are responsible for fulfillment of the transaction, and have credit risk, we have concluded it is appropriate to record revenue on a gross basis with related telecom messaging costs incurred from third parties recorded as cost of revenues. Revenues provided from agreements in which we are an agent are immaterial.
Contract Balances
The timing of revenue recognition, billings and cash collections can result in billed accounts receivable, unbilled receivables, and deferred revenues. Billings scheduled to occur after the performance obligation has been satisfied and revenue recognition has occurred result in unbilled receivables, which are expected to be billed during the succeeding twelve-month period and are recorded in Unbilled receivables in our consolidated balance sheets. A contract liability results when we receive prepayments or deposits from customers in advance for implementation, maintenance and other services, as well as subscription fees. Customer prepayments are generally applied against invoices issued to customers when services are performed and billed. We recognize contract liabilities as revenues upon satisfaction of the underlying performance obligations. Contract liabilities that are expected to be recognized as revenues during the succeeding twelve-month period are recorded in Deferred revenue and the remaining portion is recorded in Deferred revenue noncurrent on the accompanying consolidated balance sheets at the end of each reporting period.
Deferred revenues primarily consist of amounts that have been billed to or received from customers in advance of revenue recognition and prepayments received from customers in advance for maintenance and other services, as well as initial subscription fees. We recognize deferred revenues as revenues when the services are performed, and the corresponding revenue recognition criteria are met. Customer prepayments are generally applied against invoices issued to customers when services are performed and billed. Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer.
Deferred Sales Commissions
Sales 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 new customer contracts are capitalized upon contract signing and amortized over the expected life of the customer relationships, which has been determined to be approximately 6 years based on historical data and management’s estimate in a pattern similar to how revenue is recognized. Commissions paid on renewal contracts are not commensurate with commissions paid on new customer contracts, as such, deferred commissions related to renewals are capitalized and amortized over the estimated contractual renewal term of 18 months. We utilized the ‘portfolio approach’ practical expedient, which allows entities to apply the guidance to a portfolio of contracts with similar characteristics as the effects on the financial statements of this approach would not differ materially from applying the guidance to individual contracts. The portion of capitalized costs expected to be amortized during the succeeding twelve-month period is recorded in current assets as deferred commissions, current, and the remainder is recorded in long-term assets as deferred commissions, net of current portion. Amortization expense is included in sales and marketing expenses in the accompanying consolidated statements of operations. Deferred commissions are reviewed for impairment whenever events or circumstances indicate their carrying value may not be recoverable consistent with the Company's long-lived assets policy.
Stock-Based Compensation
We measure all share-based payments, including grants of options to purchase 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 consolidated statement of operations based on the estimated fair value of those awards on the grant date and amortized on a straight-line basis over the requisite service period. We value restricted 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 model. For the years ended December 31, 2020, 2019, and 2018 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 over the required service period of the grant based on the grant date fair value of the award and is not subject to fluctuation due to achievement of the underlying market-based condition.
Income Taxes
We are subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in evaluating and estimating our provision for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate 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 able to realize the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and geographies and changes to our existing businesses, acquisitions and investments, changes in our deferred tax assets and liabilities including changes in our assessment of valuation allowances, changes in the relevant tax laws or interpretations of these tax laws, and developments in current and future tax 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 included, 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 2019 and in future periods when the deferred taxes are realized.
A valuation allowance is established against our deferred tax assets to reduce their carrying value to an amount that is more likely than not to be realized. As of December 31, 2020 we recorded a valuation allowance of $35.7 million against our deferred tax assets. If, in the future, we evaluate that our deferred tax assets are not likely 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 accounting for interest and penalties as a component of income tax expense.
Business Combinations
We apply the provisions of ASC 805, Business Combinations, in accounting for our acquisitions which requires the acquisition purchase price to be allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition dates. The excess of the purchase price over these estimated fair values is recorded to goodwill.
Significant estimates and assumptions, including fair value estimates, 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 in our consolidated statement of operations.
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 due to sellers in 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. 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 due to sellers in the 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) in our consolidated statements of operations based on management’s assessment of the nature of the liability.
Goodwill and Other Intangibles
The Company’s indefinite lived intangible assets consist entirely of goodwill, which is evaluated for impairment annually in October 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.
As we operate as one reporting unit, the impairment test is performed at the consolidated entity level by comparing the estimated fair value of the Company to the its carrying value. We have elected to first assess qualitative factors to determine whether it is more likely than not that the fair value of our single reporting unit is less than its carrying value. We further estimate the fair value of the reporting unit using a fair-value-based approach based on market capitalization to determine if it is more likely than not that the fair value of our reporting unit is less than its carrying amount.
Determining the fair value of goodwill 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 lower than the original estimates used to assess the recoverability of these assets, we could incur impairment charges in a future period.
We have historically performed our annual goodwill and indefinite-lived intangible asset impairment test as of October 31st. During the first quarter of 2020, we changed the date of our annual impairment test to the first day of its fourth fiscal quarter, October 1st. This change was made to improve alignment with our quarterly financial reporting process and our annual planning and budgeting process. In connection with the change in the date of our annual goodwill and indefinite-lived intangible asset impairment test, we also performed a qualitative assessment as of October 31, 2020 to ensure the change did not result in the delay, acceleration or avoidance of an impairment charge. No impairment of goodwill was identified during the years ended December 31, 2020, 2019, or 2018.
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 our best estimate of the distribution of the economic value of the identifiable 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.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, refer to Note 2. Significant Accounting Policies to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.
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 in money market accounts are with Wells Fargo, our lender under our loan
facility. 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 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.
In conjunction with entering into our $350 million, 7 year, term credit facility, and subsequent entry into an additional $190 million in incremental term loans under the Credit Facility, we entered into interest rate hedge instruments for the full 7 year term, effectively fixing our interest rate at 5.4%. However, the interest rate associated with our $60 million, 5 year, Revolver remains floating. As of December 31, 2020, we had a principal balance of $533.3 million under our Credit Facility. As there was no debt outstanding under our Revolver as of December 31, 2020, a hypothetical change of 100 basis points would result in no change to interest expense.
Foreign Currency Exchange Risk
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 Canadian dollars, British pounds and Euros, 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. 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 $6.0 million for the year ended December 31, 2020. 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.
The non-financial assets and liabilities of our foreign subsidiaries are translated into United States dollars 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 during the years ended December 31, 2019 and 2018. 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 income (loss).
Inflation
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.
Item 8. Financial Statements and Supplementary Data
UPLAND SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Stockholders 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) as of December 31, 2020 and 2019, 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, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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 25, 2021, 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’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.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. 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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Measurement of Income Tax Provision
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Description of the Matter
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As more fully described in Notes 2 and 6 to the consolidated financial statements, the Company operates in domestic and international markets and is subject to tax law in the U.S., U.K., and other foreign tax jurisdictions. The income tax provision is an estimate based on management’s understanding of current enacted tax laws and tax rates of each tax jurisdiction. The Company’s accounting for income taxes involves the application of complex and changing tax laws, regulations, and case law in multiple jurisdictions as it relates to non-routine transactions such as acquisitions. The Company utilizes judgment in the interpretation of tax laws, regulations, and case law as they apply to its tax positions. For the year ended December 31, 2020, income tax benefit was $4.2 million.
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Auditing management’s calculation of the provision for income taxes was complex because the provision for income taxes involved auditor judgment, due to the interpretation of tax laws, regulations, and case law across multiple jurisdictions, the application of those laws, regulations, and case law as it relates to non-routine transactions such as acquisitions, and evaluation of the application of such tax laws, regulations, and case law to the Company’s tax positions. These matters are subject to legal and factual interpretation. Our audit procedures required significant audit effort, including the use of our tax professionals to assist in evaluating the audit evidence obtained from our procedure
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How We Addressed the Matter in Our Audit
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We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls relating to the provision for income taxes, inclusive of management’s review of the provision for income taxes and interpretation of tax laws, regulations, and case law. For example, we tested the Company’s controls over management’s review of the underlying data used in the provision for income tax calculations and controls over management’s review of the analysis provided by advisors utilized in the application of tax law to the Company’s tax positions.
Among other audit procedures performed, we assessed the Company’s evaluation of tax laws, regulations, and case law, and tested the provision for income tax calculations including the completeness and accuracy of underlying data used in the calculations. We involved our tax matter professionals to evaluate the Company’s interpretation and application of tax laws, regulations, and case law to the Company’s tax positions. This included evaluating advice obtained by the Company. We have also evaluated the Company’s income tax disclosures included in Notes 2 and 6 of the consolidated financial statements in relation to these matters.
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Revenue recognition for new products and services
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Description of the Matter
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The Company frequently acquires companies that have their own portfolio of products and services that will be included in the Upland suite of offerings. For each of these new products and services, the Company must understand the terms and conditions contained in the contracts with customers and evaluate and apply the five step model under ASC 606 to ensure proper revenue recognition. Management performs detailed contract review procedures to ensure that any non-standard terms and conditions included in the contracts are properly considered in relation to the accounting literature.
Auditing the Company’s revenue recognition analysis related to new products and services, primarily from acquisitions, was challenging due to the effort required in identifying and evaluating non-standard terms and conditions in contracts under Upland’s revenue recognition policy, in accordance with ASC 606. For example, there may be non-standard terms and conditions that required judgment to determine distinct performance obligations, transaction price, or the pattern of revenue recognition.
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How We Addressed the Matter in Our Audit
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We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company's internal controls over the process to evaluate the application of the Company’s revenue recognition policy to newly added products and services. This included the controls related to the determination of distinct performance obligations, transaction price, and pattern of revenue recognition.
Among other procedures, we obtained and evaluated management’s assessment of the respective revenue recognition for new products and services. We also reviewed management’s evidence for compiling the complete portfolio of contracts and selected a sample of executed contracts to review the terms and conditions. For each of the contracts we reviewed, we identified the promised goods and services in the contract and assessed the distinct performance obligations. We also evaluated the impact of non-standard terms and conditions on the determination of the transaction price and pattern of revenue recognition.
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/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2013.
Austin, Texas
February 25, 2021
Upland Software, Inc.
Consolidated Balance Sheets
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(in thousands, except share and per share amounts)
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December 31,
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2020
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2019
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Assets
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Current assets:
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Cash and cash equivalents
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$
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250,029
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$
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175,024
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Accounts receivable, net of allowance for credit losses
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44,472
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50,938
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Deferred commissions, current
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5,784
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|
3,059
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Unbilled receivables
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4,561
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5,111
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Prepaid and other
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12,694
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4,748
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Total current assets
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317,540
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238,880
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Tax credits receivable
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2,427
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|
4,186
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Property and equipment, net
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2,778
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3,917
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Operating lease right-of-use asset
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10,124
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8,056
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Intangible assets, net
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279,975
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282,727
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Goodwill
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383,598
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346,134
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Deferred commissions, noncurrent
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12,962
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8,763
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Other assets
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1,816
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4,165
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Total assets
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$
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1,011,220
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$
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896,828
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Liabilities and stockholders’ equity
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Current liabilities:
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Accounts payable
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$
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5,395
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$
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5,904
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Accrued compensation
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8,138
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11,559
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Accrued expenses and other current liabilities
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13,438
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15,344
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Deferred revenue
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87,552
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76,558
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Due to sellers
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416
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14,276
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Operating lease liabilities, current
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3,315
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2,533
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Current maturities of notes payable (includes unamortized discount of $2,234 and $2,207 at December 31, 2020 and December 31, 2019, respectively)
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3,166
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3,193
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Total current liabilities
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121,420
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129,367
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Notes payable, less current maturities (includes unamortized discount of $9,414 and $11,369 at December 31, 2020 and December 31, 2019, respectively)
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518,437
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521,881
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Deferred revenue, noncurrent
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1,587
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496
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Operating lease liabilities, noncurrent
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8,387
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5,862
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Noncurrent deferred tax liability, net
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24,092
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25,685
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Interest rate swap liabilities
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30,032
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—
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Other long-term liabilities
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650
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676
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Total liabilities
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704,605
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683,967
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Stockholders’ equity:
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Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding as of December 31, 2020; no shares issued and outstanding as of December 31, 2019, respectively
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—
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—
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Common stock, $0.0001 par value; 50,000,000 shares authorized: 29,987,114 and 25,250,120 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively)
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3
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3
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Additional paid-in capital
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515,219
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345,127
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Accumulated other comprehensive loss
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(26,234)
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(1,223)
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Accumulated deficit
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(182,373)
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(131,046)
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Total stockholders’ equity
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306,615
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212,861
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Total liabilities and stockholders’ equity
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$
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1,011,220
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$
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896,828
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See accompanying notes.
Upland Software, Inc.
Consolidated Statements of Operations
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(in thousands, except share and per share amounts)
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Year Ended December 31,
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2020
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2019
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2018
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Revenue:
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Subscription and support
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$
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277,504
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$
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203,866
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$
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136,578
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Perpetual license
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1,884
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|
5,738
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|
3,902
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Total product revenue
|
279,388
|
|
|
209,604
|
|
|
140,480
|
|
Professional services
|
12,390
|
|
|
13,033
|
|
|
9,405
|
|
Total revenue
|
291,778
|
|
|
222,637
|
|
|
149,885
|
|
Cost of revenue:
|
|
|
|
|
|
Subscription and support
|
89,880
|
|
|
61,465
|
|
|
42,881
|
|
Professional services
|
8,566
|
|
|
7,652
|
|
|
5,708
|
|
Total cost of revenue
|
98,446
|
|
|
69,117
|
|
|
48,589
|
|
Gross profit
|
193,332
|
|
|
153,520
|
|
|
101,296
|
|
Operating expenses:
|
|
|
|
|
|
Sales and marketing
|
46,077
|
|
|
35,170
|
|
|
20,935
|
|
Research and development
|
39,002
|
|
|
29,037
|
|
|
20,914
|
|
|
|
|
|
|
|
General and administrative
|
68,072
|
|
|
48,077
|
|
|
32,041
|
|
Depreciation and amortization
|
36,919
|
|
|
25,885
|
|
|
14,272
|
|
Acquisition-related expenses
|
27,075
|
|
|
39,657
|
|
|
18,728
|
|
Total operating expenses
|
217,145
|
|
|
177,826
|
|
|
106,890
|
|
Loss from operations
|
(23,813)
|
|
|
(24,306)
|
|
|
(5,594)
|
|
Other expense:
|
|
|
|
|
|
Interest expense, net
|
(31,529)
|
|
|
(22,313)
|
|
|
(13,273)
|
|
Loss on debt extinguishment
|
—
|
|
|
(2,317)
|
|
|
—
|
|
Other income (expense), net
|
(111)
|
|
|
(3,240)
|
|
|
(1,781)
|
|
Total other expense
|
(31,640)
|
|
|
(27,870)
|
|
|
(15,054)
|
|
Loss before benefit from income taxes
|
(55,453)
|
|
|
(52,176)
|
|
|
(20,648)
|
|
Benefit from income taxes
|
4,234
|
|
|
6,805
|
|
|
9,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(51,219)
|
|
|
$
|
(45,371)
|
|
|
$
|
(10,839)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
$
|
(1.92)
|
|
|
$
|
(1.96)
|
|
|
$
|
(0.54)
|
|
Weighted-average common shares outstanding, basic and diluted
|
26,632,116
|
|
|
23,099,549
|
|
|
19,985,528
|
|
See accompanying notes.
Upland Software, Inc.
Consolidated Statements of Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Net loss
|
$
|
(51,219)
|
|
|
$
|
(45,371)
|
|
|
$
|
(10,839)
|
|
Foreign currency translation adjustment
|
5,173
|
|
|
1,635
|
|
|
(3,762)
|
|
Unrealized translation gain (loss) on intercompany loans with foreign subsidiaries
|
2,271
|
|
|
2,219
|
|
|
(1,336)
|
|
Unrealized gain (loss) on interest rate swaps
|
(32,455)
|
|
|
2,424
|
|
|
—
|
|
Comprehensive loss
|
$
|
(76,230)
|
|
|
$
|
(39,093)
|
|
|
$
|
(15,937)
|
|
See accompanying notes.
Upland Software, Inc.
Consolidated Statement of Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except share amounts)
|
Common Stock
|
|
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Accumulated
Deficit
|
|
Total
Stockholders’
Equity
|
|
Shares
|
|
Amount
|
|
|
|
|
|
Balance at December 31, 2017
|
20,768,401
|
|
|
$
|
2
|
|
|
|
|
|
|
$
|
174,944
|
|
|
$
|
(2,403)
|
|
|
$
|
(81,128)
|
|
|
$
|
91,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in business combination
|
911
|
|
|
—
|
|
|
|
|
|
|
(61)
|
|
|
—
|
|
|
—
|
|
|
(61)
|
|
Issuance of stock under Company plans, net of shares withheld for tax
|
719,800
|
|
|
—
|
|
|
|
|
|
|
(8,511)
|
|
|
—
|
|
|
—
|
|
|
(8,511)
|
|
Issuance of stock, net of issuance costs
|
—
|
|
|
—
|
|
|
|
|
|
|
(21)
|
|
|
—
|
|
|
—
|
|
|
(21)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
|
|
|
|
14,130
|
|
|
—
|
|
|
—
|
|
|
14,130
|
|
Cumulative ASC 606 adjustments
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
6,292
|
|
|
6,292
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
(3,762)
|
|
|
—
|
|
|
(3,762)
|
|
Unrealized translation gain on intercompany loans with foreign subsidiaries
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
(1,336)
|
|
|
—
|
|
|
(1,336)
|
|
Net loss
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
(10,839)
|
|
|
(10,839)
|
|
Balance at December 31, 2018
|
21,489,112
|
|
|
$
|
2
|
|
|
|
|
|
|
$
|
180,481
|
|
|
$
|
(7,501)
|
|
|
$
|
(85,675)
|
|
|
$
|
87,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in business combination
|
7,898
|
|
|
—
|
|
|
|
|
|
|
(30)
|
|
|
—
|
|
|
—
|
|
|
(30)
|
|
Issuance of stock under Company plans, net of shares withheld for tax
|
(41,890)
|
|
|
—
|
|
|
|
|
|
|
(12,191)
|
|
|
—
|
|
|
—
|
|
|
(12,191)
|
|
Issuance of stock, net of issuance costs
|
3,795,000
|
|
|
1
|
|
|
|
|
|
|
151,113
|
|
|
—
|
|
|
—
|
|
|
151,114
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
|
|
|
|
25,754
|
|
|
—
|
|
|
—
|
|
|
25,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
1,635
|
|
|
—
|
|
|
1,635
|
|
Unrealized translation gain on intercompany loans with foreign subsidiaries
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
2,219
|
|
|
—
|
|
|
2,219
|
|
Unrealized gain on interest rate swaps
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
2,424
|
|
|
—
|
|
|
2,424
|
|
Net loss
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
(45,371)
|
|
|
(45,371)
|
|
Balance at December 31, 2019
|
25,250,120
|
|
|
$
|
3
|
|
|
|
|
|
|
$
|
345,127
|
|
|
$
|
(1,223)
|
|
|
$
|
(131,046)
|
|
|
$
|
212,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock under Company plans, net of shares withheld for tax
|
711,994
|
|
|
—
|
|
|
|
|
|
|
(1,673)
|
|
|
—
|
|
|
—
|
|
|
(1,673)
|
|
Issuance of stock, net of issuance costs
|
4,025,000
|
|
|
—
|
|
|
|
|
|
|
130,073
|
|
|
—
|
|
|
—
|
|
|
130,073
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
|
|
|
|
41,692
|
|
|
—
|
|
|
—
|
|
|
41,692
|
|
Cumulative adjustment related to adoption of accounting standard
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
(108)
|
|
|
(108)
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
5,173
|
|
|
—
|
|
|
5,173
|
|
Unrealized translation gain on intercompany loans with foreign subsidiaries
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
2,271
|
|
|
—
|
|
|
2,271
|
|
Unrealized loss on interest rate swaps
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
(32,455)
|
|
|
—
|
|
|
(32,455)
|
|
Net loss
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
(51,219)
|
|
|
(51,219)
|
|
Balance at December 31, 2020
|
29,987,114
|
|
|
$
|
3
|
|
|
|
|
|
|
$
|
515,219
|
|
|
$
|
(26,234)
|
|
|
$
|
(182,373)
|
|
|
$
|
306,615
|
|
See accompanying notes.
Upland Software, Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
Net loss
|
$
|
(51,219)
|
|
|
$
|
(45,371)
|
|
|
$
|
(10,839)
|
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
47,164
|
|
|
34,621
|
|
|
21,347
|
|
|
|
|
|
|
|
Deferred income taxes
|
(7,533)
|
|
|
(9,432)
|
|
|
268
|
|
Amortization of deferred costs
|
4,684
|
|
|
3,476
|
|
|
2,367
|
|
Foreign currency re-measurement (gain) loss
|
272
|
|
|
58
|
|
|
305
|
|
Non-cash interest and other expense
|
2,233
|
|
|
1,398
|
|
|
874
|
|
Non-cash stock compensation expense
|
41,692
|
|
|
25,754
|
|
|
14,130
|
|
|
|
|
|
|
|
Non-cash loss on divestiture of assets
|
—
|
|
|
1,988
|
|
|
—
|
|
Non-cash loss on retirement of fixed assets
|
635
|
|
|
—
|
|
|
—
|
|
Non-cash loss on debt extinguishment
|
—
|
|
|
2,317
|
|
|
—
|
|
Changes in operating assets and liabilities, net of purchase business combinations:
|
|
|
|
|
|
Accounts receivable
|
10,355
|
|
|
3,160
|
|
|
(5,212)
|
|
Prepaids and other
|
(8,582)
|
|
|
(5,532)
|
|
|
(2,798)
|
|
Accounts payable
|
(3,081)
|
|
|
(73)
|
|
|
(3,399)
|
|
Accrued expenses and other liabilities
|
(7,825)
|
|
|
(4,153)
|
|
|
(17,615)
|
|
Deferred revenue
|
6,825
|
|
|
3,865
|
|
|
7,919
|
|
Net cash provided by operating activities
|
35,620
|
|
|
12,076
|
|
|
7,347
|
|
Investing activities
|
|
|
|
|
|
Purchase of property and equipment
|
(1,114)
|
|
|
(1,040)
|
|
|
(935)
|
|
Purchase of customer relationships
|
(201)
|
|
|
(696)
|
|
|
—
|
|
Purchase business combinations, net of cash acquired
|
(67,655)
|
|
|
(216,025)
|
|
|
(160,751)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
(68,970)
|
|
|
(217,761)
|
|
|
(161,686)
|
|
Financing activities
|
|
|
|
|
|
Payments on finance leases
|
(88)
|
|
|
(529)
|
|
|
(1,136)
|
|
Proceeds from notes payable, net of issuance costs
|
(303)
|
|
|
625,666
|
|
|
172,397
|
|
Payments on notes payable
|
(5,400)
|
|
|
(383,568)
|
|
|
(4,689)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes paid related to net share settlement of equity awards
|
(2,139)
|
|
|
(12,659)
|
|
|
(9,400)
|
|
Issuance of common stock, net of issuance costs
|
130,539
|
|
|
151,551
|
|
|
807
|
|
Additional consideration paid to sellers of businesses
|
(14,710)
|
|
|
(16,693)
|
|
|
(8,056)
|
|
Net cash provided by financing activities
|
107,899
|
|
|
363,768
|
|
|
149,923
|
|
Effect of exchange rate fluctuations on cash
|
456
|
|
|
203
|
|
|
(1,172)
|
|
Change in cash and cash equivalents
|
75,005
|
|
|
158,286
|
|
|
(5,588)
|
|
Cash and cash equivalents, beginning of period
|
175,024
|
|
|
16,738
|
|
|
22,326
|
|
Cash and cash equivalents, end of period
|
$
|
250,029
|
|
|
$
|
175,024
|
|
|
$
|
16,738
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Cash paid for interest, net of interest rate swaps
|
$
|
29,919
|
|
|
$
|
23,862
|
|
|
$
|
12,429
|
|
Cash paid for taxes
|
$
|
3,185
|
|
|
$
|
3,557
|
|
|
$
|
3,348
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Business combination consideration including holdbacks and earnouts
|
$
|
(4,893)
|
|
|
$
|
16,108
|
|
|
$
|
17,713
|
|
Equipment acquired pursuant to financing lease obligations
|
$
|
—
|
|
|
$
|
44
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
Upland Software, Inc.
Notes to Consolidated Financial Statements
1. Organization and Nature of Operations
Upland Software, Inc. (“Upland” or the “Company”) is a provider of cloud-based enterprise work management software that enables organizations to plan, manage and execute projects and work. Upland’s four cloud offerings address a broad range of enterprise work management needs, from strategic planning to task execution in the following functional areas: Sales, Marketing, Contact Center, Project Management, Information Technology, Business Operations, and Human Resources and Legal.
To support continued growth, Upland intends to pursue acquisitions within its core 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 26 acquisitions in the 9 years ending December 31, 2020.
2. Summary of Significant Accounting Policies
Basis of Presentation
These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, or 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. There have been no changes in the Company’s accounting policies since December 31, 2019, except as discussed below with respect to the Company’s adoption of ASU 2016-13.
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make 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 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.
Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. 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 25, 2021, 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 Credit 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 to 60 days from the invoice date. 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.
To manage accounts receivable credit risk, the Company performs periodic credit evaluations of its customers and maintains current expected credit losses which considers such factors as historical loss information, geographic location of customers, current market conditions, and reasonable and supportable forecasts.
The following table presents the changes in the allowance for credit losses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Balance at beginning of year
|
$
|
1,238
|
|
|
$
|
1,405
|
|
|
$
|
1,069
|
|
Cumulative adjustment related to adoption of ASU 2016-13
|
108
|
|
|
—
|
|
|
—
|
|
Provision
|
1,115
|
|
|
1,720
|
|
|
875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Writeoffs, net of recoveries
|
(996)
|
|
|
(1,887)
|
|
|
(539)
|
|
Balance at end of year
|
$
|
1,465
|
|
|
$
|
1,238
|
|
|
$
|
1,405
|
|
Concentrations 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 nor more than 10% of accounts receivable in the years ended December 31, 2020, 2019, or 2018.
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:
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|
|
|
|
|
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
|
Business Combinations
We apply the provisions of ASC 805, Business Combinations, in accounting for our acquisitions which requires the acquisition purchase price to be allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition dates. The excess of the purchase price over these estimated fair values is recorded to goodwill.
Significant estimates and assumptions, including fair value estimates, 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 in 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 due to sellers in 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 due to sellers in our consolidated balance sheet. 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 due to sellers in the 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) in our consolidated statements of operations based on management’s assessment of the nature of the liability.
Goodwill and Other Intangibles
Goodwill is evaluated for impairment annually in October 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 company adopted ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment during the first quarter of 2018 which eliminated step 2 from the goodwill impairment test.
As we operate as one reporting unit, the impairment test is performed at the consolidated entity level by comparing the estimated fair value of the Company to the its carrying value. We have elected to first assess qualitative factors to determine whether it is more likely than not that the fair value of our single reporting unit is less than its carrying 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 we would compare the carrying value of the Company's single reporting unit to its fair value and recognize any excess carrying value as an impairment loss. We further estimate the fair value of the reporting unit using a fair-value-based approach based on market capitalization to determine if it is more likely than not that the fair value of our reporting unit is less than its carrying amount.
Determining the fair value of goodwill 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 lower than the original estimates used to assess the recoverability of these assets, we could incur impairment charges in a future period.
The Company has historically performed its annual goodwill and indefinite-lived intangible asset impairment test as of October 31st. During the first quarter of 2020, the Company changed the date of its annual impairment test to the first day of its fourth fiscal quarter, October 1st. This change was made to improve alignment with our quarterly financial reporting process and our annual planning and budgeting process. In connection with the change in the date of our annual goodwill and indefinite-lived intangible asset impairment test, the Company also performed a qualitative assessment as of October 31, 2020 to ensure the change did not result in the delay, acceleration or avoidance of an impairment charge. No impairment of goodwill was identified during the years ended December 31, 2020, 2019, or 2018.
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.
There were no impairments of our intangible assets during the years ended December 31, 2020, 2019 or 2018.
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, 2020, 2019, or 2018.
Software Development Costs
Software development costs 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 fiscal years ended December 31, 2020, 2019, and 2018, there were no internal use software development costs capitalized under ASC 350-40, Internal-Use Software.
ASC 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 must 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 capitalized implementation costs are presented within the same category of cash flow activity as the cash flows for the related hosting arrangement (i.e. operating activity).
As of December 31, 2020 and 2019, the net carrying value of capitalized implementation costs related to hosting arrangements that were incurred during the application development stage were $0.6 million and $0.5 million, respectively. These costs related primarily to the implementation of a new ERP system. These capitalized implementation costs will be amortized over the expected term of the arrangement and are amortized in the same line item in the consolidated statements of operations as the expense for fees for the associated hosting arrangement.
Refundable Tax Credits
Refundable tax credits related to current expenses are accounted for as a reduction of the research and development costs. Such credits relate to the Company's operations in Canada, the United Kingdom, and Ireland and are not dependent upon taxable income. Credits are accrued in the year in which the research and development costs or 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.
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 over the term of the related debt using the effective interest rate method. Upon the extinguishment of the related debt, any unamortized capitalized deferred financing costs are recorded to interest expense. In 2019 the Company wrote off approximately $2.3 million of deferred financing costs associated with the pay down of its prior credit facility in connection with entering into the Company’s new Credit Agreement as discussed in Note 7. Debt. In 2020 and 2018, the Company had no write offs of deferred financing costs.
Derivatives
The Company entered into floating-to-fixed interest rate swap agreements to limit exposure to interest rate risk related to our debt. These interest rate swaps effectively converted the entire balance of the Company's $540 million 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 the debt. ASC 815 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 in the accompanying Consolidated Balance Sheets. The fair value of interest rate swaps included in Interest rate swap liabilities in the Company's consolidated balance sheets was December 31, 2020 was $30.0 million. As of December 31, 2019, the fair value of the interest rate swaps included in Other assets in the Company's consolidated balance sheet was $2.4 million.
The change in the fair value of the hedging instruments is recorded in Other comprehensive income. Amounts deferred in Other comprehensive income will be reclassified to Interest expense in the accompanying consolidated statements of operations in the period in which the hedged item affects earnings.
Fair Value of Financial Instruments
The Company recognizes 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.
The Company’s 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 carrying values of the Company’s debt instruments approximated their fair value based on rates currently available to the Company.
Revenue Recognition
On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers. Refer to Note 13 Revenue Recognition for a detailed discussion of accounting policies related to revenue recognition, including deferred revenue and deferred 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, and hosting and infrastructure costs related to the delivery of 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 13. Revenue Recognition for further discussion regarding deferred commissions.
Advertising Costs
Advertising costs are expensed in the period incurred. Advertising expenses were $87,000, $132,000 and $79,000 for the years ended December 31, 2020, 2019, or 2018, respectively. Advertising costs are recorded in sales and marketing expenses in the accompanying 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. 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 review 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, operating lease liabilities, 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 the lease term and 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 is reduced for tenant incentives and excludes any initial direct costs incurred. 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
We measure all share-based payments, including grants of options to purchase 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 consolidated statement of operations based on the estimated fair value of those awards on the grant date and amortized on a straight-line basis over the requisite service period. We value restricted 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 model. For the years ended December 31, 2020, 2019, and 2018 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 over the required service period of the grant based on the grant date fair value of the award and is not subject to fluctuation due to achievement of the underlying market-based condition.
Significant assumptions used in the Monte Carlo simulation model for the PRSUs granted during the twelve months ended December 31, 2020 are as follows. No PRSUs were granted during the years ended December 31, 2019 and 2018, respectively.
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|
|
Year Ended December 31,
|
|
2020
|
Expected volatility
|
45.1%
|
Risk-free interest rate
|
1.3%
|
Remaining performance period (in years)
|
1.35
|
Dividend yield
|
—
|
The following table summarizes the weighted-average grant-date fair value of options granted during 2018 and the assumptions used to develop their fair values. No stock options were awarded during the years ended December 31, 2020 and 2019.
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|
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|
|
Year Ended December 31,
|
|
|
|
2018
|
Weighted average grant-date fair value of options
|
|
|
$11.42
|
Expected volatility
|
|
|
33.4%
|
Risk-free interest rate
|
|
|
2.8%
|
Expected life in years
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|
|
5.00
|
Dividend yield
|
|
|
—
|
Comprehensive Loss
The Company utilizes the guidance in Accounting Standards Codification (ASC) Topic 220, Comprehensive Income, for the reporting and display of comprehensive loss and its components in the consolidated financial statements. Comprehensive loss consists of net loss, foreign currency translation adjustments for subsidiaries with functional currencies other than the U.S. dollar, unrealized translation gains (losses) on foreign currency denominated intercompany loans, and unrealized gains (losses) on interest rate swaps. Refer to Note 12. Stockholders' Equity for a detail of the components of accumulated comprehensive income for the years ended December 31, 2020, 2019, or 2018.
Foreign Currency Transactions
The functional currency of our foreign subsidiaries are the local currencies. Results of operations for foreign subsidiaries are translated in United States dollars using the average exchange rates on a monthly basis during the year. The assets and liabilities of those subsidiaries are translated into United States dollars 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. Assets and liabilities denominated in currencies other than the functional currency are remeasured using the current exchange rate for monetary accounts and historical exchange rates for nonmonetary accounts, with exchange differences on remeasurement included in other income (expense) in our statements of operations. For the years ended December 31, 2020 and 2018 net gains related to remeasurement of foreign currency transactions of $0.2 million, and $0.3 million, respectively, were recorded in other income (expense) in our statements of operations. For the year ended December 31, 2019 net losses related to remeasurement of foreign currency transactions of $0.5 million were recorded in other income (expense) in our statements of operations.
We have foreign currency denominated intercompany loans that were used to fund the acquisition of foreign subsidiaries in 2018 and 2019. Due to the long-term nature of the loans, the foreign currency gains (losses) resulting from remeasurement are recognized as a component of accumulated other comprehensive income (loss). During the year ended December 31, 2020 the balances of these intercompany loans were converted to US dollars. During the years ended December 31, 2020, 2019 and 2018 a translation gain of $2.3 million, gain of $2.2 million, and loss of $1.4 million, respectively, were recognized as a component of accumulated other comprehensive income (loss) related to long-term intercompany loans.
Recent Accounting Pronouncements
Recently issued accounting pronouncements not yet adopted
In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a 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 reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company does not anticipate the adoption of this standard to have a material impact on its consolidated financial statements.
Recently adopted accounting pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, to eliminate, add and modify certain disclosure requirements for fair value measurements. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance is effective for annual and interim periods beginning after December 15, 2019, but entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. The Company adopted this guidance in the first quarter of 2020 with no material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company adopted this guidance in the first quarter of 2020 and as a result of the adoption recorded a cumulative-effect adjustment to decrease the beginning balance of Accumulated deficit in the amount of $0.1 million, which represents the accelerated recognition of credit losses related to our trade receivables under the expected credit loss model of calculating our current expected credit losses compared to the previous incurred loss model.
3. Acquisitions
The Company performs quantitative and qualitative analyses to determine the significance of each acquisition, to the consolidated financial statements of the Company. Based on these analyses the below acquisitions were deemed to be
insignificant on an individual and cumulative basis, with the exception of Rapide Communication LTD, a private company limited by shares organized and existing under the laws of England and Wales doing business as Rant & Rave (“Rant & Rave”). Refer to the pro forma disclosed below.
2020 Acquisitions
Acquisitions completed during the twelve months ended December 31, 2020 include the following:
•Localytics - On February 6, 2020, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Char Software, Inc (dba Localytics), a Delaware corporation (“Localytics”), a provider of mobile app personalization and analytics solutions. Revenues recorded since the acquisition date through December 31, 2020 were approximately $16.3 million. We determined that disclosing the amount of Localytics related earnings included in the consolidated statements of operations is impracticable, as certain operations of Localytics were integrated into the operations of the Company from the date of acquisition.
•See Note 17. Subsequent Events for discussion of the acquisition of Second Street Media, Inc., which was completed subsequent to December 31, 2020.
2019 Acquisitions
Acquisitions completed during the year ended December 31, 2020 include the following:
•Postup - On April 18, 2019, the Company completed its purchase of the shares comprising the entire issued share capital of Postup Holdings, LLC, a Texas limited liability company (“Postup”), and Postup Digital, LLC, a Texas limited liability company, an Austin-based company providing email and audience development solutions for publishing & media brands.
•Kapost - On May 24, 2019, the Company completed of its purchase of the shares comprising the entire issued share capital of Daily Inches, Inc., d/b/a Kapost, a Delaware corporation (“Kapost”), a content operations platform provider for sales and marketing.
•Cimpl - On August 21, 2019, the Company completed its purchase of the shares comprising the entire issued share capital of Cimpl, Inc., a Canadian corporation (“Cimpl”), a cloud-based telecom expense management platform.
•InGenius - On October 1, 2019, the Company completed its purchase of the shares comprising the entire issued share capital of InGenius Software Inc., a Canadian corporation (“InGenius”), a Computer Telephony Integration (CTI) solution for enterprise contact centers.
•Altify - On October 4, 2019, the Company’s wholly owned subsidiary, Upland Software UK, a limited company incorporated under the laws of England and Wales, entered into an agreement to purchase the shares comprising the entire issued share capital of Altify Ireland Limited, a private company limited by shares organized and existing under the laws of Ireland (“Altify”), a customer revenue optimization (CRO) cloud solution for sales and the extended revenue teams.
2018 Acquisitions
Acquisitions completed during the year ended December 31, 2018 include the following:
•Interfax - On March 21, 2018, the Company’s wholly owned subsidiary, PowerSteering UK, a limited liability company organized and existing under the laws of England and Wales (“PowerSteering UK”), completed its purchase of the shares comprising the entire issued share capital of Interfax Communications Limited (“Interfax”), an Irish-based software company providing secured cloud-based messaging solutions, including enterprise cloud fax and secure document distribution.
•RO Innovation - On June 27, 2018, the Company completed its purchase of RO Innovation, Inc. (“RO Innovation”), a cloud-based customer reference solution for creating, deploying, managing, and measuring customer reference and sales enablement content.
•Rant & Rave - On October 3, 2018, the Company’s wholly owned subsidiary, PowerSteering UK, completed its purchase of the shares comprising the entire issued voting share capital of Rant & Rave, a leading provider of cloud-based customer engagement solutions.
•Adestra - On December 12, 2018, the Company completed its purchase of Adestra Ltd. (“Adestra”), a leading provider of enterprise-grade email marketing, transaction and automation software.
Consideration
The following table summarizes the consideration transferred for the acquisitions described above (in thousands):
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Localytics
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Altify
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InGenius
|
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Cimpl
|
|
Kapost
|
|
Postup
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Adestra
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Rant & Rave
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RO Innovation
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Interfax
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Cash
|
$
|
67,655
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|
|
$
|
84,000
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|
$
|
26,428
|
|
|
$
|
23,071
|
|
|
$
|
45,000
|
|
|
$
|
34,825
|
|
|
$
|
55,242
|
|
|
$
|
58,470
|
|
|
$
|
12,469
|
|
|
$
|
35,000
|
|
Holdback(1)
|
345
|
|
|
—
|
|
|
3,000
|
|
|
2,600
|
|
|
5,000
|
|
|
175
|
|
|
4,432
|
|
|
6,500
|
|
|
1,781
|
|
|
5,000
|
|
Contingent consideration(2)
|
1,000
|
|
|
—
|
|
|
4,865
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital and other adjustments (3)
|
(5,238)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(601)
|
|
|
—
|
|
|
197
|
|
|
(211)
|
|
|
(87)
|
|
|
—
|
|
Total consideration
|
$
|
63,762
|
|
|
$
|
84,000
|
|
|
$
|
34,293
|
|
|
$
|
25,671
|
|
|
$
|
49,399
|
|
|
$
|
35,000
|
|
|
$
|
59,871
|
|
|
$
|
64,759
|
|
|
$
|
14,163
|
|
|
$
|
40,000
|
|
(1)Represents cash holdbacks subject to indemnification claims that are payable 12 months from closing for Localytics, InGenius, Cimpl, Kapost, Postup, Adestra, Rant & Rave and RO Innovation and 18 months from closing for Interfax.
(2)Represents the acquisition date fair value of anticipated earn-out payments which are based on the estimated probability of attainment of the underlying future performance-based conditions at the time of acquisition. The maximum potential payout for the InGenius earn-out was $15.0 million. For the year ended December 31, 2018, contingent consideration included potential future earn-out payments related to the acquisition of RO Innovation for up to $7.5 million which was valued at $0.0 million as of the acquisition date based on the probability of attainment of future performance-based goals. In addition to the contingent consideration detailed in the table above, during the year ended December 31, 2018 the Company incurred contingent consideration related to an asset acquisition from a former reseller of Interfax in connection with our acquisition of Interfax as discussed under “Other Acquisitions” below. Refer to Note 4 for further discussion regarding the calculation of fair value of acquisition related earn-outs and subsequent payouts.
(3)Working capital and other adjustments includes a $5.2 million reduction in total consideration for Localytics related to a representation and warranty insurance settlement which is included in prepaids and other current assets on the Company’s consolidated balance sheets as of December 31, 2020.
Unaudited Pro Forma Information
The pro forma statements of operations data for year ended December 31, 2018, shown in table below, give effect to the Rant & Rave acquisition, described above, as if it had occurred at January 1, 2017. These amounts have been calculated after applying our accounting policies and adjusting the results of Rant & Rave to reflect: the reversal and deferral of commissions expense, the costs of debt financing incurred to acquire Rant & Rave, the additional intangible amortization and the adjustments to acquired deferred revenue that would have been recognized assuming the fair value adjustments had been applied and incurred since January 1, 2017. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
Revenue
|
|
|
$
|
167,450
|
|
|
|
Net loss (1)
|
|
|
$
|
(14,086)
|
|
|
|
(1)While some recurring adjustments impact the pro forma figures presented, the decrease in pro forma net loss compared to our net loss presented on the consolidated statements of operations for the year ended December 31, 2018 includes nonrecurring adjustment removing acquisition costs from 2018 and reflects these costs in the year ended 2017, the year the acquisition was assumed to be completed for pro forma purposes.
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, recognized the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The accounting for the Company’s 2020, 2019 and 2018 acquisitions (as disclosed in the table below) are final.
The following condensed table presents the finalized acquisition-date fair value of the assets acquired and liabilities assumed for the acquisitions closed in 2019 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Final
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Localytics
|
|
Altify
|
|
InGenius
|
|
Cimpl
|
|
Kapost
|
|
Postup
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Acquired
|
2020
|
|
2019
|
|
2019
|
|
2019
|
|
2019
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
—
|
|
|
$
|
730
|
|
|
$
|
11
|
|
|
$
|
142
|
|
|
$
|
—
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
3,648
|
|
|
6,629
|
|
|
1,456
|
|
|
1,041
|
|
|
3,901
|
|
|
1,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
6,323
|
|
|
889
|
|
|
317
|
|
|
278
|
|
|
1,066
|
|
|
1,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax credits receivable
|
—
|
|
|
916
|
|
|
1,489
|
|
|
1,383
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use asset
|
7,605
|
|
|
1,085
|
|
|
1,099
|
|
|
230
|
|
|
2,136
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
409
|
|
|
139
|
|
|
364
|
|
|
233
|
|
|
686
|
|
|
743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
30,500
|
|
|
50,954
|
|
|
11,208
|
|
|
12,430
|
|
|
23,735
|
|
|
10,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
300
|
|
|
1,112
|
|
|
424
|
|
|
216
|
|
|
787
|
|
|
468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
6,600
|
|
|
7,648
|
|
|
4,576
|
|
|
3,240
|
|
|
5,756
|
|
|
2,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
33,543
|
|
|
34,426
|
|
|
24,141
|
|
|
12,928
|
|
|
20,953
|
|
|
21,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
6
|
|
|
378
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
88,934
|
|
|
104,906
|
|
|
45,085
|
|
|
32,127
|
|
|
59,020
|
|
|
39,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
(2,382)
|
|
|
(1,499)
|
|
|
(128)
|
|
|
(305)
|
|
|
(50)
|
|
|
(447)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expense and other
|
(6,761)
|
|
|
(3,901)
|
|
|
(2,807)
|
|
|
(1,206)
|
|
|
(3,724)
|
|
|
(530)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
(3,382)
|
|
|
(7,083)
|
|
|
(4,897)
|
|
|
(4,595)
|
|
|
(1,954)
|
|
|
(3,248)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
(4,812)
|
|
|
(7,907)
|
|
|
(2,960)
|
|
|
(350)
|
|
|
(3,893)
|
|
|
(15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
(7,835)
|
|
|
(516)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
(25,172)
|
|
|
(20,906)
|
|
|
(10,792)
|
|
|
(6,456)
|
|
|
(9,621)
|
|
|
(4,240)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consideration
|
$
|
63,762
|
|
|
$
|
84,000
|
|
|
$
|
34,293
|
|
|
$
|
25,671
|
|
|
$
|
49,399
|
|
|
$
|
35,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company uses third party valuation consultants to determine the fair values of assets acquired and liabilities assumed. 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. 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 years ended December 31, 2020 and 2019 (in years):
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
December 31, 2020
|
|
December 31, 2019
|
Customer relationships
|
8.0
|
|
9.8
|
Trade name
|
2.0
|
|
9.2
|
Developed technology
|
5.0
|
|
7.9
|
|
|
|
|
Total weighted-average useful life
|
7.4
|
|
9.5
|
During the measurement period, which may 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 change in the preliminary acquisition-date fair value of assets and liabilities for Altify during the twelve months ended December 31, 2020 was related primarily to a $1.0 million decrease in deferred tax liabilities. The change in the preliminary acquisition-date fair value of assets and liabilities for Localytics during the twelve months ended December 31, 2020 was related primarily to a $0.9 million decrease in deferred tax liabilities.
The goodwill of $148.0 million for the above acquisitions is primarily attributable to the synergies expected to arise after the acquisition. Goodwill deductible for tax purposes related to the above acquisitions was $6.2 million.
Total transaction costs incurred with respect to acquisition activity in the years ended December 31, 2020, 2019, and 2018 were $4.3 million, $11.3 million, and $6.1 million, respectively. These costs are included in Acquisition-related expenses in our consolidated statement of operations.
Other Acquisitions and Divestitures
From time to time we may purchase or sell customer relationships that meet certain criteria. During the twelve months ended December 31, 2020 and 2019 we completed customer relationship acquisitions totaling $0.2 million and $1.6 million, respectively.
In connection with the acquisition of Interfax, the Company acquired certain assets and customer relationships of Interfax's U.S. reseller (“Marketech”) for $2.0 million, excluding potential future earn-out payments of $1.0 million valued at $0.3 million as of the acquisition dated based on the probability of attainment of future performance-based goals. During the year ended December 31, 2019 we paid $0.6 million based on the final valuation of this earn-out. Refer to Note 4. Fair Value Measurements for further discussion regarding the calculation of fair value of acquisition related earn-outs.
In the fourth quarter of 2019, Upland divested of certain minor non-strategic customer contracts and related website management and analytics assets. As a result, during the year ended December 31, 2019 the Company recognized a $2.0 million non-cash expense on divestiture which is included in the Other income (expense), net line item in the Company’s consolidated statement of operations for the year ended December 31, 2019. The assets divested consisted primarily of $2.2 million in deferred commission costs, $1.1 million in intangible assets (customer relationship and related technology), $0.2 million in allocated goodwill, and $1.0 million of liabilities primarily deferred revenue.
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.
As of December 31, 2020 and 2019 the Company had contingent accrued earnout business acquisition consideration liabilities for which fair values are measured as Level 3 instruments. These contingent consideration liabilities were recorded at fair value on the acquisition date and are remeasured periodically based on the then assessed fair value and adjusted if necessary. The increases or decreases in the fair value of contingent consideration payable can result from changes in anticipated revenue levels or changes in assumed discount periods and rates. As the fair value measure is based on significant inputs that are not observable in the market, they are categorized as Level 3. Any gain (loss) related to subsequent changes in the fair value of contingent consideration is recorded in acquisition-related expense or other income (expense) in the Company's consolidated statements of operations based on management's assessment of the nature of the liability. Earnout consideration liabilities are included in Due to sellers in the Company's consolidated balance sheets.
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 for the full 7 year term of the Company’s term loans, effectively fixing our interest rate at 5.4% for the full value of the Company’s term loans. The fair value of this swap is measured at the end of each interim reporting period based on the then 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, 2020 and 2019 the fair value of the interest rate swaps are included in Interest rate swap liabilities and Other assets, respectively, on the Company's consolidated balance sheets.
Liabilities measured at fair value on a recurring basis are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap liability
|
$
|
—
|
|
|
$
|
30,032
|
|
|
$
|
—
|
|
|
$
|
30,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
2,424
|
|
|
$
|
—
|
|
|
$
|
2,424
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnout consideration liability
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,394
|
|
|
$
|
4,394
|
|
The decrease in cash earnouts from December 31, 2019 to December 31, 2020 is related to cash settlement of earnouts related to Localytics and InGenius.
The following table presents additional information about earnout consideration liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Beginning balance
|
$
|
4,394
|
|
|
$
|
1,396
|
|
|
|
|
|
Remeasurement adjustments:
|
|
|
|
Loss included in earnings
|
155
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions and settlements:
|
|
|
|
|
|
|
|
Acquisitions
|
1,000
|
|
|
4,865
|
|
|
|
|
|
Settlements (1)
|
(5,549)
|
|
|
(2,108)
|
|
Ending balance
|
$
|
—
|
|
|
$
|
4,394
|
|
(1)The year ended December 31, 2020 includes payments of $1.0 million and $4.5 million for the outstanding balance of earnout liabilities related to the acquisition of Localytics and InGenius, respectively, as described in Note 3. Acquisitions.The year ended December 31, 2019 includes payments of $1.5 million and $0.6 million for the outstanding balance of earnout liabilities related to the acquisition of RO Innovation and the Marketech asset purchase, respectively, as describe in Note 3. Acquisitions.
Quantitative Information about Level 3 Fair Value Measurements
The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration liabilities designated as Level 3 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2019
|
|
Valuation Technique
|
|
Significant Unobservable Inputs
|
Contingent acquisition consideration:
(InGenius)
|
$
|
4,394
|
|
|
Binary option model
|
|
Expected future annual revenue streams and probability of achievement
|
As of December 31, 2020 the Company had no contingent consideration liabilities outstanding.
Sensitivity to Changes in Significant Unobservable Inputs
As presented in the table above, the significant unobservable inputs used in the fair value measurement of contingent consideration related to business acquisitions are forecasts of expected future annual revenues as developed by the Company's management and the probability of achievement of those revenue forecast. Significant increases (decreases) in these unobservable inputs in isolation would likely result in a significantly (lower) higher fair value measurement.
Debt
The Company believes the carrying value of its long-term debt at December 31, 2020 approximates its fair value based on the variable interest rate feature or based upon interest rates currently available to the Company. The estimated fair value and carrying value of the Company's debt, before debt discount, at December 31, 2020 and December 31, 2019 are $533.3 million and $538.7 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 goodwill balance for each of the two years in the period ended December 31, 2020 are summarized in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
$
|
225,322
|
|
Acquired in business combinations
|
117,610
|
|
|
|
Adjustment related to prior year business combinations
|
3,123
|
|
Adjustment related to finalization of business combinations
|
(2,195)
|
|
Foreign currency translation adjustment
|
2,274
|
|
Balance at December 31, 2019
|
$
|
346,134
|
|
Acquired in business combinations
|
39,646
|
|
|
|
Adjustment related to prior year business combinations (1)
|
(996)
|
|
Adjustment related to finalization of current year business combinations
|
(6,103)
|
|
Foreign currency translation adjustment
|
4,917
|
|
Balance at December 31, 2020
|
$
|
383,598
|
|
(1)Related to changes in the ASC 805 valuation of intangible assets in the prior year business combination of Altify.
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 intangible assets, net (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful
Life (Years)
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
December 31, 2020
|
|
|
|
|
|
|
|
Customer relationships
|
1-10
|
|
$
|
318,941
|
|
|
$
|
89,131
|
|
|
$
|
229,810
|
|
Trade name
|
1.5-10
|
|
9,283
|
|
|
4,763
|
|
|
4,520
|
|
Developed technology
|
4-9
|
|
79,382
|
|
|
33,929
|
|
|
45,453
|
|
Non-compete agreements
|
3
|
|
$
|
1,148
|
|
|
$
|
956
|
|
|
$
|
192
|
|
Total intangible assets
|
|
|
$
|
408,754
|
|
|
$
|
128,779
|
|
|
$
|
279,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful
Life (Years)
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
December 31, 2019
|
|
|
|
|
|
|
|
Customer relationships
|
1-10
|
|
$
|
283,005
|
|
|
$
|
53,984
|
|
|
$
|
229,021
|
|
Trade name
|
1.5-10
|
|
8,827
|
|
|
3,884
|
|
|
4,943
|
|
Developed technology
|
4-9
|
|
71,522
|
|
|
23,333
|
|
|
48,189
|
|
Non-compete agreements
|
3
|
|
1,148
|
|
|
574
|
|
|
574
|
|
Total intangible assets
|
|
|
$
|
364,502
|
|
|
$
|
81,775
|
|
|
$
|
282,727
|
|
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. During the twelve months ended December 31, 2020, the Company considered whether the current market and economic conditions arising from the COVID-19 pandemic could be a potential indicator of impairment of the Company’s intangible assets and goodwill. Based on management’s qualitative review, no impairment of intangible assets or goodwill was identified. During the fourth quarter of 2019, management made the decision to sunset and divest certain minor non-strategic customer contracts and related website management and analytics assets. The remaining useful life of certain customer relationship assets included in the sunset asset group were reduced by 1 year to 2.5 years which represents the term left on the current active contracts. Management has determined there have been no other changes in the useful life during the years ended December 31, 2020, 2019, and 2018. No impairment was recorded during the years ended December 31, 2020, 2019, and 2018. Total amortization expense was $44.9 million, $32.4 million, and $19.0 million during the years ended December 31, 2020, 2019, and 2018, respectively.
As of December 31, 2020, the estimated annual amortization expense for the next five years and thereafter is as follows (in thousands):
|
|
|
|
|
|
|
Amortization
Expense
|
Year ending December 31:
|
|
|
|
2021
|
$
|
44,243
|
|
2022
|
41,377
|
|
2023
|
39,234
|
|
2024
|
36,915
|
|
2025
|
33,592
|
|
Thereafter
|
84,614
|
|
Total
|
$
|
279,975
|
|
6. Income Taxes
The Company's loss from continuing operations before income taxes for the years ended December 31, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Loss before provision for income taxes:
|
|
|
|
|
|
United States
|
$
|
(43,851)
|
|
|
$
|
(41,237)
|
|
|
$
|
(23,350)
|
|
Foreign
|
(11,602)
|
|
|
(10,939)
|
|
|
2,702
|
|
|
$
|
(55,453)
|
|
|
$
|
(52,176)
|
|
|
$
|
(20,648)
|
|
The components of the provision (benefit) for income taxes attributable to continuing operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Current
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
(10)
|
|
|
$
|
177
|
|
State
|
402
|
|
|
395
|
|
|
253
|
|
Foreign
|
2,449
|
|
|
1,989
|
|
|
2,328
|
|
Total Current
|
$
|
2,851
|
|
|
$
|
2,374
|
|
|
$
|
2,758
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
Federal
|
$
|
(2,275)
|
|
|
$
|
(5,139)
|
|
|
$
|
(9,866)
|
|
State
|
(137)
|
|
|
(103)
|
|
|
(1,584)
|
|
Foreign
|
(4,673)
|
|
|
(3,937)
|
|
|
(1,117)
|
|
Total Deferred
|
(7,085)
|
|
|
(9,179)
|
|
|
(12,567)
|
|
(Benefit from) provision for income taxes
|
$
|
(4,234)
|
|
|
$
|
(6,805)
|
|
|
$
|
(9,809)
|
|
As of December 31, 2020 the Company had total net operating loss carryforwards of approximately $344.5 million consisting of $318.6 million and $25.9 million related to the U.S federal and foreign net operating loss carryforwards, respectively. In addition, as of December 31, 2020, the Company had research and development credit carryforwards of approximately $3.0 million. The U.S. federal net operating loss and credit carryforwards will expire beginning in 2021, 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 $133.9 million of U.S. federal net operating losses and $3.0 million of credit carryforwards before utilization. Approximately $23.8 million of the foreign net operating loss carryforwards carry forward indefinitely with the remainder expiring beginning in 2039.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
|
|
Accrued expenses and allowances
|
$
|
2,095
|
|
|
$
|
2,616
|
|
|
$
|
1,871
|
|
Deferred revenue
|
613
|
|
|
28
|
|
|
4
|
|
Stock compensation
|
1,151
|
|
|
1,157
|
|
|
743
|
|
Net operating loss and tax credit carryforwards
|
53,157
|
|
|
45,716
|
|
|
33,579
|
|
Disallowed interest expense carryforwards
|
11,599
|
|
|
6,692
|
|
|
2,888
|
|
Capital expenses
|
286
|
|
|
192
|
|
|
205
|
|
Tax credit carryforwards
|
600
|
|
|
991
|
|
|
—
|
|
Lease liability
|
3,054
|
|
|
2,177
|
|
|
—
|
|
Unrealized losses
|
7,617
|
|
|
—
|
|
|
—
|
|
Other
|
658
|
|
|
696
|
|
|
723
|
|
Valuation allowance for noncurrent deferred tax assets
|
(35,701)
|
|
|
(21,179)
|
|
|
(15,507)
|
|
Net deferred tax assets
|
$
|
45,129
|
|
|
$
|
39,086
|
|
|
$
|
24,506
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
(260)
|
|
|
(210)
|
|
|
(61)
|
|
Intangible assets
|
(56,541)
|
|
|
(53,737)
|
|
|
(33,518)
|
|
Goodwill
|
(5,954)
|
|
|
(5,187)
|
|
|
(2,012)
|
|
Tax credit carryforwards
|
—
|
|
|
—
|
|
|
(302)
|
|
Right of use asset
|
(2,597)
|
|
|
(2,135)
|
|
|
—
|
|
Unrealized gains
|
—
|
|
|
(1,184)
|
|
|
—
|
|
Deferred commissions
|
(3,869)
|
|
|
(2,318)
|
|
|
(1,924)
|
|
Net deferred tax liabilities
|
$
|
(69,221)
|
|
|
$
|
(64,771)
|
|
|
$
|
(37,817)
|
|
Net deferred taxes
|
$
|
(24,092)
|
|
|
$
|
(25,685)
|
|
|
$
|
(13,311)
|
|
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, exclusive of goodwill. During the year ended December 31, 2020 and 2019, the valuation allowance increased by approximately $14.5 million and increased by approximately $5.7 million, respectively, due primarily to operations and acquisitions. The valuation allowance change included a reduction of $2.4 million due to acquired net deferred tax liabilities as a result of domestic business combinations, which was recorded as an income tax benefit in the year ended December 31, 2020.
At December 31, 2020, 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 to income before taxes due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Federal statutory rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
State taxes, net of federal benefit
|
1.6
|
%
|
|
2.7
|
%
|
|
4.6
|
%
|
Tax credits
|
(0.1)
|
%
|
|
1.4
|
%
|
|
0.4
|
%
|
Effect of foreign operations
|
(1.1)
|
%
|
|
(1.0)
|
%
|
|
(2.1)
|
%
|
Stock compensation
|
(0.3)
|
%
|
|
4.1
|
%
|
|
12.3
|
%
|
Disallowed excess executive compensation
|
(4.0)
|
%
|
|
(2.1)
|
%
|
|
—
|
%
|
Permanent items and other
|
(0.7)
|
%
|
|
(2.3)
|
%
|
|
(6.6)
|
%
|
|
|
|
|
|
|
Change in valuation allowance
|
(8.8)
|
%
|
|
(10.8)
|
%
|
|
17.9
|
%
|
|
7.6
|
%
|
|
13.0
|
%
|
|
47.5
|
%
|
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 liabilities related to uncertain tax positions as of December 31, 2020. The Company does not anticipate any significant changes in such uncertainties and judgments during the next 12 months. 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, (in thousands).
|
|
|
|
|
|
Balance at December 31, 2018
|
$
|
2,006
|
|
Additional based on tax positions related to the current year
|
—
|
|
Additions for tax positions of prior years
|
—
|
|
Reductions for tax positions of prior years
|
(1,317)
|
|
Settlements
|
—
|
|
Balance at December 31, 2019
|
$
|
689
|
|
Additional based on tax positions related to the current year
|
—
|
|
Additions for tax positions of prior years
|
—
|
|
Reductions for tax positions of prior years
|
(79)
|
|
Settlements
|
—
|
|
Balance at December 31, 2020
|
$
|
610
|
|
If the Company were to recognize unrecognized tax benefits as of December 31, 2020, $0.6 million 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, 2020, the Company had $0.2 million accrued interest or penalties related to uncertain tax positions, none of which is expected to reverse in the next 12 months.
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, 2016 and is no longer subject to state and local or foreign income tax examinations by tax authorities for years ending before December 31, 2015. The Company is not currently under audit for federal, state or any foreign jurisdictions. US operating losses generated in years prior to 2016 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, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Senior secured loans (includes unamortized discount of $11,648 and $13,576 based on an imputed interest rate of 5.8% and 5.8%, at December 31, 2020 and December 31, 2019, respectively)
|
$
|
521,603
|
|
|
$
|
525,074
|
|
|
|
|
|
Less current maturities
|
(3,166)
|
|
|
(3,193)
|
|
Total long-term debt
|
$
|
518,437
|
|
|
$
|
521,881
|
|
Credit Facility
On August 6, 2019, the Company entered into a credit agreement (the “Credit Facility”) which provides for (i) a fully-drawn $350 million, 7 year, senior secured term loan B facility (the “Term Loan”) and (ii) a new $60 million, 5 year, revolving credit facility (the “Revolver”) that was fully available as of December 31, 2020. The Credit Facility replaced the Company's previous credit agreement. All outstanding balances under our previous credit agreement were paid off using proceeds from our Credit Facility.
On November 26, 2019 (the “Closing Date”), the Company entered into a First Incremental Assumption Agreement (the “Incremental Assumption Agreement”) which provides for a term loan facility to be established under the Credit Facility in an aggregate principal amount of $190.0 million (the “2019 Incremental Term Loan”), which is in addition to the existing $350 million term loans outstanding under the Credit Facility and the $60 million revolving credit facility under the Credit Facility.
Payment terms
The Term Loans (including the 2019 Incremental Term Loan) are repayable on a quarterly basis beginning on December 31, 2019 by an amount equal to 0.25% (1.00% per annum) of the 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”).
At the option of the Company, the Term Loans (including the 2019 Incremental Term Loan) accrue interest at a per annum rate based on (i) the Base Rate plus a margin of 2.75% or (ii) the 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 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 of 3.75%. The Base Rate for any day is a rate per annum equal to the greatest 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 ½ of 1.00%, and (ii) the Eurodollar rate for a one month interest period beginning on such day plus 1.00%.
Accrued interest on the loans will be paid quarterly or, with respect to loans that are accruing interest based on the Eurodollar rate, at the end of the applicable interest rate period.
Interest rate swaps
On August 6, 2019, the Company entered into an interest rate hedge instrument for the full 7 year term, effectively fixing our interest rate at 5.4% for the Term Loan. In addition, on November 26, 2019, the Company entered into interest rate swap agreements to hedge the interest rate risk associated with the Company’s floating rate obligations under the 2019 Incremental Term Loan. These interest rate swaps fix the Company's interest rate (including the hedge premium) at 5.4% for the term of the Credit Facility. The interest rate associated with our new $60 million, 5 year, Revolver remains floating.
The interest rate swap has been designated as a cash flow hedge and is valued using a market approach, which is a Level 2 valuation technique. At December 31, 2020, the fair value of the interest rate swap was a $30.0 million liability as a result of a decline in short term interest rates during 2020. In the next twelve months, the Company estimates that $5.5 million will be reclassified from Accumulated other comprehensive income (loss) and recorded as an increase/decrease to Interest expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
Gain (loss) recognized in Other comprehensive income on derivative financial instruments
|
$
|
(32,455)
|
|
|
$
|
2,424
|
|
|
|
|
|
|
|
Gain (loss) on interest rate swap (included in Interest expense on our consolidated statement of operations)
|
$
|
(5,500)
|
|
|
$
|
484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolver
Loans under the Revolver are available up to $60 million, of which none is currently outstanding. The Revolver provides a sub 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, $10.0 million for the Company. The aggregate amount of outstanding Letters of Credit are reserved against the credit availability under the Maximum Revolver Amount. The Company incurs a 0.50% per annum unused line fee on the unborrowed balance of the Revolver which is paid quarterly.
Loans under the Revolver may be borrowed, repaid and reborrowed until August 6, 2024 (the “Maturity Date”), at which time all amounts borrowed under the Revolver must be repaid. As of December 31, 2020, the Company had no borrowings outstanding under the Revolver or related sub facility.
Covenants
The Credit Facility contains customary affirmative and negative covenants. The negative covenants limit the ability of the Loan 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 our 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.
The 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 Agreement contains customary events of default subject to customary cure periods for certain defaults that include, 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 could 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, 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 Term Loan and Revolver are secured by substantially all of the Company's assets. As of December 31, 2020 the Company was in compliance with all covenants under the Credit Agreement.
Cash interest costs averaged 5.4% and 6.0% for the years ended December 31, 2020 and 2019, respectively. In addition, as of December 31, 2020 the Company had incurred $11.6 million of unamortized financing costs associated with the Credit Facility. These financing costs will be amortized to non-cash interest expense over the term of the Credit Agreement. During the year ended December 31, 2019, as a result of the paydown of our previous credit facility, the Company was required to write off debt issuance cost of $2.3 million as a loss on debt extinguishment related to the unamortized debt discount on our previous term loan.
Debt Maturities
Under the terms of the Credit Agreement, future debt maturities of long-term debt excluding debt discounts at December 31, 2020 are as follows, (in thousands):
|
|
|
|
|
|
Year ending December 31:
|
|
2021
|
$
|
5,400
|
|
2022
|
5,400
|
|
2023
|
5,400
|
|
2024
|
5,400
|
|
2025
|
5,400
|
|
Thereafter
|
506,251
|
|
|
$
|
533,251
|
|
Less unamortized discount
|
11,648
|
|
|
$
|
521,603
|
|
8. Net Loss Per Share
The following table sets for the computations of loss per share (in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Numerators:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(51,219)
|
|
|
$
|
(45,371)
|
|
|
$
|
(10,839)
|
|
Denominator:
|
|
|
|
|
|
Weighted–average common shares outstanding, basic and diluted
|
26,632,116
|
|
|
23,099,549
|
|
|
19,985,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
$
|
(1.92)
|
|
|
$
|
(1.96)
|
|
|
$
|
(0.54)
|
|
Due to the net losses incurred for the years ended December 31, 2020, 2019, and 2018, basic and diluted loss per share were the same, as the effect of all potentially dilutive securities would have been anti-dilutive. The following table sets forth the anti-dilutive common share equivalents excluded from the weighted-average shares used to calculate diluted net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
264,002
|
|
|
329,698
|
|
|
408,899
|
|
Restricted stock awards
|
34,508
|
|
|
371,217
|
|
|
997,014
|
|
Restricted stock units
|
1,261,290
|
|
|
790,807
|
|
|
—
|
|
Performance restricted stock units
|
66,297
|
|
|
—
|
|
|
—
|
|
Total anti–dilutive common share equivalents
|
1,626,097
|
|
|
1,491,722
|
|
|
1,405,913
|
|
9. Leases
Operating Leases
The Company leases office space under operating leases that expire between 2021 and 2026. The terms of the Company's non-cancelable operating lease arrangements typically contain fixed rent increases over the term of the lease, rent holidays and provide for additional renewal periods. Rent expense on these operating leases is recognized over the term of the lease on a straight-line basis.
Finance Leases
The current and long-term portion of finance lease obligations are recorded in other current liabilities and other long-term liabilities line items on the balance sheet, respectively. The Company's finance lease agreements are generally for four years and contain a bargain purchase option at the end of the lease term.
Total office rent expense for the years ended December 31, 2020, 2019, and 2018 were approximately $5.9 million, $2.9 million, and $1.9 million, respectively. The $5.9 million office rent expense in 2020 includes approximately $3.6 million of transformation charges in conjunction with the closures of the Localytics, Kapost and Altify offices as we continue to consolidate and integrate these acquisitions.
The Company has entered into sublease agreements related to excess office space as a result of the Company's transformation activities related to its acquisitions. The Company’s current sublease agreements terminate in 2023. For the years ended December 31, 2020, 2019, and 2018 the Company recognized rental income on subleases, as offsets to rental expense, of $0.8 million, $0.5 million and $0.3 million, respectively. Operating lease obligations in the future minimum payments table below do not include the impact of future rental income of $3.3 million related to these subleases as of December 31, 2020.
The components of lease expense were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Operating lease cost
|
$
|
6,681
|
|
|
2,915
|
|
Finance lease costs:
|
|
|
|
Amortization of right-of-use assets
|
139
|
|
|
714
|
|
Interest on lease liabilities
|
10
|
|
|
67
|
|
Sublease income
|
(798)
|
|
|
(454)
|
|
Total lease costs
|
$
|
6,032
|
|
|
3,242
|
|
Other information about lease amounts recognized in our consolidated financial statements is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities (in thousands):
|
|
|
|
Operating cash flows from operating leases
|
$
|
4,160
|
|
|
$
|
3,119
|
|
Operating cash flows from finance leases
|
$
|
10
|
|
|
$
|
75
|
|
Financing cash flows from finance leases
|
$
|
88
|
|
|
$
|
529
|
|
Right-of-use assets obtained in exchange for lease obligations (in thousands):
|
|
|
|
Operating leases
|
$
|
8,915
|
|
|
$
|
5,770
|
|
Weighted average remaining lease term (in years):
|
|
|
|
Operating leases
|
4.1
|
|
4.3
|
Finance leases
|
2.6
|
|
1.2
|
Weighted average discount rate
|
|
|
|
Operating leases
|
5.6
|
%
|
|
6.0
|
%
|
Finance leases
|
5.1
|
%
|
|
5.6
|
%
|
Future minimum payments for operating and finance lease obligations and purchase commitments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance Leases
|
|
Operating
Leases
|
2021
|
$
|
7
|
|
|
$
|
3,785
|
|
2022
|
7
|
|
|
3,406
|
|
2023
|
2
|
|
|
2,874
|
|
2024
|
—
|
|
|
1,861
|
|
2025
|
—
|
|
|
1,126
|
|
Thereafter
|
—
|
|
|
547
|
|
Total minimum lease payments
|
16
|
|
|
13,599
|
|
Less amount representing interest
|
(2)
|
|
|
(1,897)
|
|
Present value of lease liabilities
|
$
|
14
|
|
|
$
|
11,702
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
$
|
9
|
|
|
$
|
—
|
|
Operating lease liabilities, current
|
—
|
|
|
3,315
|
|
Operating lease liabilities, noncurrent
|
—
|
|
|
8,387
|
|
Other long-term liabilities
|
5
|
|
|
—
|
|
Total lease liabilities
|
$
|
14
|
|
|
$
|
11,702
|
|
10. Commitments and Contingencies
Purchase Commitments
The Company has purchase commitments related to hosting services, third-party technology used in the Company's solutions and for other services the Company purchases as part of normal operations. In certain cases these arrangements require a minimum annual purchase commitment. As of December 31, 2020, the remaining aggregate minimum purchase commitment under these arrangements was approximately $48.9 million through 2025.
In addition, the Company has an outstanding purchase commitment in 2021 for software development services from DevFactory FZ-LLC (“DevFactory”) pursuant to a technology services agreement in the amount of $9.6 million. On March 28, 2017, the Company and DevFactory executed an amendment to extend the initial term of the agreement to December 31, 2021. Additionally, the Company amended the option for either party to renew annually for one additional year. The effective date of the amendment was January 1, 2017. For years after 2021, the 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 2021 total revenues increase by 10% as compared to 2020 total revenues, then the 2022 purchase commitment will increase by approximately $1.0 million from the 2021 purchase commitment amount to approximately $10.6 million.
Future minimum payments for purchase commitments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Commitments
|
2021
|
|
|
|
|
$
|
19,409
|
|
2022
|
|
|
|
|
9,765
|
|
2023
|
|
|
|
|
11,270
|
|
2024
|
|
|
|
|
11,379
|
|
2025
|
|
|
|
|
6,694
|
|
Thereafter
|
|
|
|
|
—
|
|
Total minimum payments
|
|
|
|
|
$
|
58,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation
In the normal course of business, the Company may become involved in various lawsuits and legal proceedings. As of December 31, 2020, the Company is not involved in any current or pending legal proceedings, and does not anticipate any legal proceedings, that may have a material adverse effect on the consolidated financial position or results of operations of the Company.
11. Property and Equipment, Net
Property and equipment consisted of the following (in thousands) at:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Equipment
|
$
|
13,515
|
|
|
$
|
12,936
|
|
Furniture and fixtures
|
645
|
|
|
633
|
|
Leasehold improvements
|
1,751
|
|
|
2,001
|
|
Accumulated depreciation
|
(13,133)
|
|
|
(11,653)
|
|
Property and equipment, net
|
$
|
2,778
|
|
|
$
|
3,917
|
|
Amortization of assets recorded under financing leases is included with depreciation expense. Depreciation and amortization expense on property and equipment was $2.2 million, $2.2 million and $2.3 million for the years ended December 31, 2020, 2019, and 2018, respectively. During 2020 we recognized a $0.6 million loss on disposal of assets related primarily to leasehold improvements associated with the consolidation and integration of our recent acquisitions.The Company recorded no impairment of property and equipment and recorded no losses on the disposal of property and equipment during the years ended December 31, 2019, and 2018.
12. Stockholders' Equity
Common and Preferred Stock
Our certificate of incorporation authorizes shares of stock as follows: 50,000,000 shares of common stock and 5,000,000 shares of preferred stock. The common and preferred stock have a par value of $0.0001 per share. No shares of preferred stock are issued or outstanding.
Each share of common stock is entitled to one vote at all meetings of stockholders. The number of authorized shares of common stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of shares of capital stock of the Company representing a majority of the votes represented by all outstanding shares of capital stock of the Company entitled to vote. The holders of common stock are also entitled to receive dividends, when, if and as declared by our board of directors, whenever funds are legally available therefore, subject to the priority rights of any outstanding preferred stock.
Registration Statements
On December 12, 2018, the Company filed a registration statement on Form S-3 (File No. 333-228767) (the “2018 S-3”), to register Upland securities in an aggregate amount of up to $250.0 million for offerings from time to time. In connection with the filing of the Form S-3 the Company withdrew its previous registration statement filed on May 12, 2017. On May 13, 2019, the Company completed a registered underwritten public offering pursuant to the S-3 of 3,795,000 shares of the Company's $0.0001 par value common stock for an offering price to the public of $42.00 per share. This included the 495,000 shares issuable pursuant to a fully exercised option to purchase additional shares granted to the underwriters of the offering. The net proceeds of the offering of $151.1 million, net of issuance costs of $8.3 million, were used for general business purposes, including the funding of acquisitions.
On August 10, 2020, we filed a registration statement on Form S-3 (File No. 333-243728) (the “2020 S-3”), which became effective automatically upon its filing and covers an unlimited amount of securities. The 2020 S-3 will remain effective through August 2023. On August 14, 2020, we completed a registered underwritten public offering pursuant to the 2020 S-3 of 3,500,000 shares of the Company's $0.0001 par value common stock for an offering price to the public of $34.00 per share. In addition, on August 27, 2020 we closed the sale of an additional 525,000 shares issuable pursuant to a fully exercised option to purchase additional shares granted to the underwriters of the offering. The total net proceeds of the offering, including shares issued pursuant to the fully exercised option, of $130.1 million, net of issuance costs of $6.8 million, will be used for general business purposes, including the funding of future acquisitions. There are no open outstanding security offerings at this time.
Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) consists of two elements, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) items are recorded in the stockholders’ equity section of our consolidated balance sheets and excluded from net income. Our other comprehensive income (loss) consists primarily of foreign currency translation adjustments for subsidiaries with functional currencies other than the U.S. dollar, unrealized translation gains (losses) on intercompany loans with foreign subsidiaries, and unrealized gains (losses) on interest rate swaps.
The following table shows the components of accumulated other comprehensive loss, net of income taxes, (“AOCI”) in the stockholders’ equity section of our consolidated balance sheets at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Foreign currency translation adjustment
|
$
|
644
|
|
|
$
|
(4,530)
|
|
Unrealized translation gain (loss) on intercompany loans with foreign subsidiaries
|
3,154
|
|
|
883
|
|
Unrealized gain (loss) on interest rate swaps
|
(30,032)
|
|
|
2,424
|
|
Total accumulated other comprehensive loss
|
$
|
(26,234)
|
|
|
$
|
(1,223)
|
|
The unrealized translation loss on intercompany loans with foreign subsidiaries as of December 31, 2020 is net of unrealized income tax expense of $2.0 million. The income tax expense/benefit allocated to each component of other comprehensive income (loss) for all other periods and components is not material.
The functional currency of our foreign subsidiaries are the local currencies. Results of operations for foreign subsidiaries are translated in United States dollars using the average exchange rates on a monthly basis during the year. The assets and liabilities of those subsidiaries are translated into United States dollars 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.
The Company had foreign currency denominated intercompany loans that were used to fund the acquisitions of foreign subsidiaries. As of April 1, 2020 the Company amended the loan agreements to be denominated in U.S dollars. Due to the long-term nature of the loans, the unrealized translation gains (losses) resulting from re-measurement are recognized as a component of accumulated other comprehensive income (loss).
Stock Compensation Plans
The Company maintains two stock-based compensation plans, the 2010 Stock Option Plan (the “2010 Plan”) and the 2014 Stock Option Plan (the “2014 Plan”), which are described below.
2010 Plan
At December 31, 2020, there were 85,114 options outstanding under the 2010 Plan. Following the effectiveness of the Company’s 2014 Plan in November 2014, no further awards have been made under the 2010 Plan, although each option previously granted under the 2010 Plan will remain outstanding subject to its terms. Any such shares of common stock that are subject to awards under the 2010 Plan which are forfeited or lapse unexercised and would otherwise have been returned to the share reserve under the 2010 Plan instead will be available for issuance under the 2014 Plan.
2014 Plan
In November 2014, the Company adopted the 2014 Plan, providing for the granting of incentive stock options, as defined by the Internal Revenue Code, to employees and for the grant of non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares to employees, directors and consultants. The 2014 Plan also provides for the automatic grant of option awards to our non-employee directors. As of December 31, 2020, there were 178,888 options outstanding under the 2014 Plan, and shares of common stock reserved for issuance under the 2014 Plan consist of 588,742 shares. In addition, the number of shares available for issuance under the 2014 Plan will be increased annually in an amount equal to the least of (i) 4% of the outstanding Shares on the last day of the immediately preceding Fiscal Year or (ii) such number of Shares determined by the Board. At December 31, 2020, there were 34,508 restricted stock awards, 1,261,290 restricted stock units and 66,297 performance based restricted stock units outstanding under the 2014 Plan.
Under both the 2010 Plan and 2014 Plan options granted to date generally vest over a four or three year period, with a maximum term of ten years. The Company also grants restricted stock awards (“RSAs”) which generally vest annually over a three or four year period. Shares issued upon any stock option exercise and restricted under the 2010 Plan or 2014 Plan will be issued from the Company's authorized but unissued shares.
Share-based Compensation
The Company recognized share-based compensation expense from all awards in the following expense categories (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Cost of revenue
|
$
|
1,951
|
|
|
$
|
1,000
|
|
|
$
|
654
|
|
Research and development
|
3,391
|
|
|
2,310
|
|
|
1,250
|
|
Sales and marketing
|
3,450
|
|
|
1,543
|
|
|
533
|
|
General and administrative
|
32,900
|
|
|
20,901
|
|
|
11,693
|
|
Total
|
$
|
41,692
|
|
|
$
|
25,754
|
|
|
$
|
14,130
|
|
Restricted Stock Units
During the twelve months ended December 31, 2020 the Company granted restricted stock units under its 2014 Stock Incentive Plan, in lieu of restricted stock awards, primarily for stock plan administrative purposes. Restricted stock unit activity during the year ended December 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted Stock Units Outstanding
|
|
Weighted-Average Grant Date Fair Value
|
Unvested balances at December 31, 2019
|
790,807
|
|
|
$
|
39.55
|
|
Units granted
|
1,353,791
|
|
|
40.30
|
|
Units vested
|
(751,668)
|
|
|
39.99
|
|
Awards forfeited
|
(131,640)
|
|
|
41.26
|
|
Unvested balances at December 31, 2020
|
1,261,290
|
|
|
$
|
39.92
|
|
The total fair value of restricted stock units vested during the years ended December 31, 2020, 2019, and 2018 was approximately $31.0 million, $10.6 million and $0.0 million , respectively. As of December 31, 2020, $49.5 million of unrecognized compensation cost related to unvested restricted stock awards and restricted stock units (including performance based awards) is expected to be recognized over a weighted-average period of 1.73 years. The vesting of restricted stock during the year ended December 31, 2020 resulted in an excess tax deduction of approximately $4.7 million. The expected tax benefit of approximately $3.6 million is included as part of the deferred tax asset associated with net operating loss carryforwards, currently fully offset by a valuation allowance.
Performance Based Restricted Stock Units
In 2020 fifty percent of the awards made to our Chief Executive Officer were performance based restricted stock units ("PRSUs"). The PRSU agreement provides that the quantity of units subject to vesting may range from 0% to 300% of the units granted per the table below based on the Company's absolute total shareholder return at the end of the eighteen month performance period. Units granted per the table below are based on a 100% target payout. Compensation expense is recognized over the required service period of the grant and is determined based on the grant date fair value of the award and is not subject to fluctuation due to achievement of the underlying market-based target. The Company did not grant PRSUs prior to 2020.
PRSU activity during the year ended December 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
PRSUs Outstanding
|
|
Weighted-Average Grant Date Fair Value (1)
|
Unvested balances at December 31, 2019
|
—
|
|
|
$
|
—
|
|
Units granted
|
66,297
|
|
|
79.72
|
|
|
|
|
|
|
|
|
|
Unvested balances at December 31, 2020
|
66,297
|
|
|
$
|
79.72
|
|
(1) Fair value is calculated based on the grant closing stock price of $41.48 as of February 24, 2020 multiplied by a fair value factor of 192.20% as determined using a Monte Carlo simulation.
Restricted Stock Awards
Restricted stock activity during the year ended December 31, 2020 is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted Shares
Outstanding
|
|
|
|
Weighted-Average Grant Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested balances at December 31, 2019
|
|
371,217
|
|
|
|
$28.26
|
|
|
Awards granted
|
|
—
|
|
|
|
$—
|
|
|
Awards vested
|
|
(305,704)
|
|
|
|
$28.02
|
|
|
Awards forfeited
|
|
(31,005)
|
|
|
|
$28.54
|
|
|
Unvested balances at December 31, 2020
|
|
34,508
|
|
|
|
$30.13
|
|
|
The total fair value of restricted stock awards vested during the years ended December 31, 2020, 2019, and 2018 was approximately $11.7 million, $24.7 million and $26.2 million , respectively.
Stock Option Activity
Stock option activity during the year ended December 31, 2020 is as follows:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
Outstanding
|
|
Weighted–
Average
Exercise
Price
|
|
Weighted–
Average
Remaining
Contractual Term (in Years)
|
|
Aggregate Intrinsic Value (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
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|
|
|
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|
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|
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|
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|
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|
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|
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|
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|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
329,698
|
|
|
$
|
8.57
|
|
|
|
|
|
Options granted
|
—
|
|
|
—
|
|
|
|
|
|
Options exercised
|
65,477
|
|
|
7.14
|
|
|
|
|
|
Options forfeited
|
—
|
|
|
—
|
|
|
|
|
|
Options expired
|
219
|
|
|
1.79
|
|
|
|
|
|
Outstanding at December 31, 2020
|
264,002
|
|
|
$
|
8.93
|
|
|
4.6
|
|
$
|
9,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at December 31, 2020
|
264,002
|
|
|
$
|
8.93
|
|
|
4.6
|
|
$
|
9,757
|
|
Options vested and exercisable at December 31, 2020
|
264,002
|
|
|
$
|
8.93
|
|
|
4.6
|
|
$
|
9,757
|
|
The aggregate intrinsic value of options exercised at December 31, 2020, 2019, and 2018, was approximately $2.3 million, $2.8 million and $3.7 million , respectively. The total fair value of options vested during the years ended December 31, 2020, 2019, and 2018 was approximately $0.0 million, $0.0 million and $0.4 million , respectively.
As of December 31, 2020, $0 unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 0 years.
The Company received approximately $0.5 million in cash from option exercises under the respective Plans in 2020. The Company issued shares from amounts reserved under the respective Plans upon the exercise of these stock options. The Company does not currently expect to repurchase shares from any source to satisfy such obligation under any of the Company’s stock option Plans. The exercise of stock options during the year ended December 31, 2020 resulted in an excess tax deduction of approximately $1.9 million. The expected tax benefit of approximately $0.8 million is included as part of the deferred tax asset associated with net operating loss carryforwards, currently fully offset by a valuation allowance.
13. Revenue Recognition
Revenue Recognition Policy
Revenues are recognized when control of the promised goods or services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services over the term of the agreement, generally when made available to the customers. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenues are recognized net of sales credits and allowances. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.
Revenue is recognized based on the following five step model in accordance with ASC 606, Revenue from Contracts with Customers:
•Identification of the contract with a customer
•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, the Company satisfies a performance obligation
Performance obligations under our contracts consist of subscription and support, perpetual licenses, and professional services revenues within a single operating segment.
Subscription and Support Revenues
The Company's software solutions are available for use as hosted application arrangements under subscription fee agreements without licensing perpetual rights to the software. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company's solution is made available to the customer. As our customers have access to use our solutions over the term of the contract agreement we believe this method of revenue recognition provides a faithful depiction of the transfer of services provided. Our subscription contracts are generally 1 to 3 years in length. Amounts that have been invoiced are recorded in accounts receivable and deferred revenues or subscription and support revenues, depending on whether the revenue recognition criteria have been met. Additional fees for monthly usage above the levels included in the standard subscription fee are recognized as subscription and support revenue at the end of each month and is invoiced concurrently. Subscription and support revenue includes revenue related to the Company’s digital engagement application which provides short code connectivity for its two-way short message service (“SMS”) programs and campaigns. As discussed further in the “Principal vs. Agent Considerations” section below, the Company recognizes revenue related to these messaging-related subscription contracts on a gross basis.
Perpetual License Revenues
The Company also records revenue from the sales of proprietary software products under perpetual licenses. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. The Company’s products do not require significant customization.
Professional Services Revenue
Professional services provided with subscription and support licenses and 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 over time as such services 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 are performed.
Significant Judgments
Performance Obligations and Standalone Selling Price
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of accounting. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. The Company has contracts with customers that often include multiple performance obligations, usually including professional services sold with either individual or multiple subscriptions or perpetual licenses. For these contracts, the Company records individual performance obligations separately if they are distinct by allocating the contract's total transaction price to each performance obligation in an amount based on the relative standalone selling price, (“SSP”), of each distinct good or service in the contract. We only include estimated amounts of variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.
Judgment is required to determine the SSP for each distinct performance obligation. A residual approach is only applied in limited circumstances when a particular performance obligation has highly variable and uncertain SSP and is bundled with other performance obligations that have observable SSP. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, historical standalone sales, customer demographics, geographic locations, and the number and types of users within our contracts.
Principal vs. Agent Considerations
The Company evaluates whether it is the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis) for vendor reseller agreements and messaging-related agreements. Where the Company is the principal, it first obtains control of the inputs to the specific good or service and directs their use to create the combined output. The Company's control is evidenced by its involvement in the integration of the good or service on its platform before it is transferred to its customers, and is further supported by the Company being primarily responsible to its customers and having a level of discretion in establishing pricing. 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.
Generally, the Company reports revenues from vendor reseller agreements on a gross basis, meaning the amounts billed to customers are recorded as revenues, and expenses incurred are recorded as cost of revenues. As the Company is primarily obligated in its messaging-related subscription contracts, has latitude in establishing prices associated with its messaging program management services, is responsible for fulfillment of the transaction, and has credit risk, we have concluded it is appropriate to record revenue on a gross basis with related telecom messaging costs incurred from third parties recorded as cost of revenues. Revenues provided from agreements in which the Company is an agent are immaterial.
Contract Balances
The timing of revenue recognition, billings and cash collections can result in billed accounts receivable, unbilled receivables, and deferred revenues. Billings scheduled to occur after the performance obligation has been satisfied and revenue recognition has occurred result in unbilled receivables, which are expected to be billed during the succeeding twelve-month period and are recorded in Unbilled receivables in our consolidated balance sheets. A contract liability results when we receive prepayments or deposits from customers in advance for implementation, maintenance and other services, as well as subscription fees. Customer prepayments are generally applied against invoices issued to customers when services are performed and billed. We recognize contract liabilities as revenues upon satisfaction of the underlying performance obligations. Contract liabilities that are expected to be recognized as revenues during the succeeding twelve-month period are recorded in Deferred revenue and the remaining portion is recorded in Deferred revenue noncurrent on the accompanying consolidated balance sheets at the end of each reporting period.
Deferred revenues primarily consist of amounts that have been billed to or received from customers in advance of revenue recognition and prepayments received from customers in advance for maintenance and other services, as well as initial subscription fees. We recognize deferred revenues as revenues when the services are performed, and the corresponding revenue recognition criteria are met. Customer prepayments are generally applied against invoices issued to customers when services are performed and billed. Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer.
Unbilled Receivables
Unbilled receivables represent amounts for which the Company has recognized revenue, pursuant to its revenue recognition policy, for software licenses already delivered and professional services already performed, but invoiced in arrears and for which the Company believes it has an unconditional right to payment. As of December 31, 2020 and 2019 unbilled receivables were $4.6 million and $5.1 million, respectively.
Deferred Commissions
Sales 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 new customer contracts are capitalized upon contract signing and amortized over the expected life of the customer relationships, which has been determined to be approximately 6 years based on historical data and management’s estimate in a pattern similar to how revenue is recognized. Commissions paid on renewal contracts are not commensurate with commissions paid on new customer contracts, as such, deferred commissions related to renewals are capitalized and amortized over the estimated contractual renewal term of 18 months. We utilized the 'portfolio approach' practical expedient, which allows entities to apply the guidance to a portfolio of contracts with similar characteristics as the effects on the financial statements of this approach would not differ materially from applying the guidance to individual contracts. The portion of capitalized costs expected to be amortized during the succeeding twelve-month period is recorded in current assets as deferred commissions, current, and the remainder is recorded in long-term assets as deferred commissions, net of current portion. Amortization expense is included in sales and marketing expenses in the accompanying consolidated statements of operations. Deferred commissions are reviewed for impairment whenever events or circumstances indicate their carrying value may not be recoverable consistent with the Company's long-lived assets policy as described in Note 2. No indicators of impairment were identified during the year ended December 31, 2020.
The following table presents the activity impacting deferred commissions for the year ended December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
|
Deferred commissions beginning balance
|
$
|
11,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized deferred commissions
|
11,464
|
|
|
|
|
|
|
|
Amortization of deferred commissions
|
(4,540)
|
|
|
|
|
|
|
|
Deferred commissions ending balance
|
$
|
18,746
|
|
|
|
|
|
|
|
Deferred Revenue
Deferred revenue represents either customer advance payments or billings for which the aforementioned revenue recognition criteria have not yet been met.
Deferred revenue is mainly unearned revenue related to subscription services and support services. During the twelve months ended December 31, 2020, we recognized $69.6 million and $3.3 million of subscription services and professional services revenue, respectively, that was included in the deferred revenue balances at the beginning of the period. In addition, during the twelve months ended December 31, 2020 we recognized $4.6 million in revenue that was included in the acquired deferred revenue balance of our 2020 acquisition as disclosed in Note 3. Acquisitions.
Remaining Performance Obligations
As of December 31, 2020, approximately $239.9 million of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 68% of these remaining performance obligations over the next 12 months, with the balance recognized thereafter.
Disaggregated Revenue
The Company disaggregates revenue from contracts with customers by geography and revenue generating activity, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Revenue by geography is based on the ship-to address of the customer, which is intended to approximate where the customers' users are located. The ship-to country is generally the same as the billing country. The Company has operations primarily in the U.S., United Kingdom and Canada. Information about these operations is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Revenues:
|
|
|
|
|
|
Subscription and support:
|
|
|
|
|
|
United States
|
$
|
206,320
|
|
|
$
|
140,882
|
|
|
$
|
106,628
|
|
United Kingdom
|
39,032
|
|
|
38,879
|
|
|
11,189
|
|
Canada
|
14,830
|
|
|
10,504
|
|
|
5,395
|
|
Other International
|
17,322
|
|
|
13,601
|
|
|
13,366
|
|
Total subscription and support revenue
|
277,504
|
|
|
203,866
|
|
|
136,578
|
|
Perpetual license:
|
|
|
|
|
|
United States
|
1,396
|
|
|
5,395
|
|
|
2,378
|
|
United Kingdom
|
16
|
|
|
42
|
|
|
94
|
|
Canada
|
76
|
|
|
111
|
|
|
303
|
|
Other International
|
396
|
|
|
190
|
|
|
1,127
|
|
Total perpetual license revenue
|
1,884
|
|
|
5,738
|
|
|
3,902
|
|
|
|
|
|
|
|
Professional services:
|
|
|
|
|
|
United States
|
8,721
|
|
|
9,250
|
|
|
7,321
|
|
United Kingdom
|
2,059
|
|
|
2,367
|
|
|
487
|
|
Canada
|
504
|
|
|
536
|
|
|
591
|
|
Other International
|
1,106
|
|
|
880
|
|
|
1,006
|
|
Total professional service revenue
|
12,390
|
|
|
13,033
|
|
|
9,405
|
|
Total revenue
|
$
|
291,778
|
|
|
$
|
222,637
|
|
|
$
|
149,885
|
|
14. Employee Benefit Plans
The Company has established one voluntary defined contribution retirement plan qualifying under Section 401(k) of the Internal Revenue Code. The Company made no contributions to the 401(k) plans for the years ended December 31, 2020, 2019, and 2018.
15. Segment and Geographic Information
ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. It defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker (“CODM”) in deciding how to allocate resources and in assessing performance. Our Chief Executive Officer is considered to be our CODM. Our CODM manages the business as a multi-product business that utilizes its model to deliver software products to customers regardless of their geography or IT environment. Operating results are reviewed by the CODM primarily at the consolidated entity level, with the exception of recurring product level revenue, for purposes of making resource allocation decisions and for evaluating financial performance. Accordingly, we considered ourselves to be in a single operating and reporting segment structure.
Revenue
See Note 13 Revenue Recognition for a detail of revenue by geography.
Identifiable Long-Lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
|
|
Identifiable long-lived assets:
|
|
|
|
|
|
United States
|
$
|
1,454
|
|
|
$
|
2,520
|
|
|
|
United Kingdom
|
429
|
|
|
584
|
|
|
|
Canada
|
606
|
|
|
663
|
|
|
|
Other International
|
289
|
|
|
150
|
|
|
|
Total identifiable long-lived assets
|
$
|
2,778
|
|
|
$
|
3,917
|
|
|
|
16. Related Party Transactions
We are a party to two agreements with companies controlled by a non-management investor in the Company:
•On March 28, 2017, the Company and DevFactory executed an amendment to the agreement 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 date of the amendment was January 1, 2017. DevFactory is an affiliate of ESW Capital LLC, which holds more than 5% of the Company's capital stock. The Company has an outstanding purchase commitment in 2021 for software development services pursuant to a technology services agreement in the amount of $9.6 million. For years after 2021, the 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 2021 total revenues increase by 10% as compared to 2020 total revenues, then the 2022 purchase commitment will increase by approximately $1.0 million from the 2021 purchase commitment amount to approximately $10.6 million. During the years ended December 31, 2020, 2019, and 2018, the Company purchased software development services pursuant to a technology services agreement with DevFactory FZ-LLC (“DevFactory”), in the amount of $7.4 million, $4.9 million, and $3.2 million, respectively. At December 31, 2020 and December 31, 2019, amounts included in accounts payable owed to this company totaled $0.0 million and $1.2 million, respectively.
•The Company purchased services from Crossover, Inc. (“Crossover”), a company controlled by ESW Capital, LLC (a non-management investor) of approximately $4.8 million, $3.5 million, and $3.2 million during the years ended December 31, 2020, 2019, and 2018, respectively. Crossover provides a proprietary technology system to help the Company identify, screen, select, assign, and connect with necessary resources from time to time to perform technology software development and other services throughout the Company, and track productivity of such resources. While there are no purchase commitments with Crossover, the Company will continue to use their services in 2021. As of December 31, 2020 and December 31, 2019 amounts included in accounts payable and accrued liabilities owed to this company totaled $0.6 million and $0.4 million, respectively.
The Company has an arrangement with a former subsidiary, Visionael Corporation (“Visionael”), to provide management, human resource/payroll, and administrative services. John T. McDonald, the Company's Chief Executive Officer and Chairman of the Board, beneficially holds an approximate 26.18% interest in Visionael. Fees earned from this arrangement during the years ended December 31, 2020, 2019, and 2018 were $45,000, $60,000, and $60,000, respectively. In connection with its arrangement with Visionael, the Company has provided advances to Visionael to help cover short term working capital needs. As of December 31, 2020 and December 31, 2019 advances to Visionael included in Prepaid and other on the Company’s condensed consolidated balance sheets totaled $0.4 million and $0.3 million, respectively, net of an allowance for credit losses of $0.3 million and $0.0 million respectively.
17. Subsequent Events
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”), pursuant to a Share Purchase Agreement dated January 19, 2021 (“Purchase Agreement”), by and among Upland, Second Street, and the company’s selling shareholders. Second Street will be integrated into and expand on the functionality offered in Upland’s Customer Experience Management product suite. The purchase price paid for Second Street was $25.4 million in cash at closing and a $5.0 million cash holdback payable in 12 months (subject to indemnification claims). The foregoing excludes any potential future earn-out payments tied to additional performance based goals with a maximum payout of $3.0 million.
The Company recorded the purchase of the acquisition described above using the acquisition method of accounting and, accordingly, recognized the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The purchase price allocation for the 2021 acquisition is preliminary as the Company has not obtained and evaluated all of the detailed information necessary to finalize the opening balance sheet amounts in all respects. Management expects to finalize its purchase price allocation for this acquisition in the last half of 2021.
In accordance with ASC Topic 855, “Subsequent Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, the Company has evaluated all events and transactions that occurred after December 31, 2020 through the date the consolidated financial statements were available for issuance. During this period the Company did not have any material reportable subsequent events other than the acquisitions disclosed above.