☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-36720
UPLAND SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware
27-2992077
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
401 Congress Ave., Suite 1850
Austin, Texas78701
(Address, including zip code, of registrant’s principal executive offices)
(512) 960-1010
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
UPLD
The Nasdaq Global Market
Preferred Stock Purchase Rights
-
The Nasdaq Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
☐
(Do not check if a smaller reporting company)
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
As of May 1, 2023, 32,441,010 shares of the registrant’s Common Stock were outstanding.
(in thousands, except for share and per share information)
March 31, 2023
December 31, 2022
ASSETS
(unaudited)
Current assets:
Cash and cash equivalents
$
257,720
$
248,653
Accounts receivable (net of allowance of $772 and $1,158 at March 31, 2023 and December 31, 2022, respectively)
40,475
47,594
Deferred commissions, current
10,901
10,961
Unbilled receivables
6,225
5,313
Prepaid expenses and other current assets
10,193
8,774
Total current assets
325,514
321,295
Tax credits receivable
1,719
2,411
Property and equipment, net
1,719
1,830
Operating lease right-of-use asset
5,088
5,719
Intangible assets, net
232,368
248,851
Goodwill
349,990
477,043
Deferred commissions, noncurrent
13,552
13,794
Interest rate swap assets
33,014
41,168
Other assets
2,502
1,348
Total assets
$
965,466
$
1,113,459
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
14,793
$
14,939
Accrued compensation
9,427
7,393
Accrued expenses and other current liabilities
7,758
10,644
Deferred revenue
106,974
106,465
Liabilities due to sellers of businesses
447
5,429
Operating lease liabilities, current
2,822
3,205
Current maturities of notes payable (includes unamortized discount of $2,291 and $2,264 at March 31, 2023 and December 31, 2022, respectively)
3,109
3,136
Total current liabilities
145,330
151,211
Notes payable, less current maturities (includes unamortized discount of $4,733 and $5,203 at March 31, 2023 and December 31, 2022, respectively)
510,967
511,847
Deferred revenue, noncurrent
4,411
4,707
Operating lease liabilities, noncurrent
4,391
4,947
Noncurrent deferred tax liability, net
18,691
18,416
Other long-term liabilities
1,237
1,170
Total liabilities
685,027
692,298
Series A Convertible Preferred stock, 0.0001 par value; 5,000,000 shares authorized: 115,000 shares issued and outstanding as of March 31, 2023; 115,000 shares issued and outstanding as of December 31, 2022, respectively.
113,606
112,291
Stockholders’ equity:
Common stock, $0.0001 par value; 50,000,000 shares authorized: 32,441,010 and 32,221,855 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively)
3
3
Additional paid-in capital
611,667
606,755
Accumulated other comprehensive income
4,206
11,110
Accumulated deficit
(449,043)
(308,998)
Total stockholders’ equity
166,833
308,870
Total liabilities, convertible preferred stock and stockholders’ equity
$
965,466
$
1,113,459
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
Upland Software, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except for share and per share information)
Three Months Ended March 31,
2023
2022
Revenue:
Subscription and support
$
72,914
$
73,627
Perpetual license
1,571
1,778
Total product revenue
74,485
75,405
Professional services
2,571
3,311
Total revenue
77,056
78,716
Cost of revenue:
Subscription and support
23,485
22,069
Professional services and other
2,051
2,686
Total cost of revenue
25,536
24,755
Gross profit
51,520
53,961
Operating expenses:
Sales and marketing
14,289
15,593
Research and development
12,530
12,067
General and administrative
17,189
19,614
Depreciation and amortization
15,094
11,051
Acquisition-related expenses
1,094
10,413
Impairment of goodwill
128,755
—
Total operating expenses
188,951
68,738
Loss from operations
(137,431)
(14,777)
Other expense:
Interest expense, net
(5,461)
(7,762)
Other income (expense), net
1,425
(418)
Total other expense
(4,036)
(8,180)
Loss before benefit from income taxes
(141,467)
(22,957)
Benefit from income taxes
1,422
126
Net loss
$
(140,045)
$
(22,831)
Preferred stock dividends
(1,315)
—
Net loss attributable to common stockholders
$
(141,360)
$
(22,831)
Net loss per common share:
Net loss per common share, basic and diluted
$
(4.38)
$
(0.73)
Weighted-average common shares outstanding, basic and diluted
32,259,110
31,163,273
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Upland Software, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
(in thousands)
Three Months Ended March 31,
2023
2022
Net loss
$
(140,045)
$
(22,831)
Other comprehensive income (loss):
Foreign currency translation adjustment
15
(1,047)
Unrealized translation gain (loss) on intercompany loans with foreign subsidiaries
1,235
(1,293)
Unrealized gain (loss) on interest rate swaps
(8,154)
26,213
Other comprehensive income (loss):
$
(6,904)
$
23,873
Comprehensive income (loss)
$
(146,949)
$
1,042
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Upland Software, Inc.
Condensed Consolidated Statements of Equity
(unaudited)
(in thousands, except share amounts)
Three Months Ended March 31, 2023
Preferred Stock
Common Stock
Additional Paid-In Capital
Accumulated Other Comprehensive Income (Loss)
Accumulated Deficit
Total Stockholders’ Equity
Shares
Amount
Shares
Amount
Balance at December 31, 2022
115,000
$
112,291
32,221,855
$
3
$
606,755
$
11,110
$
(308,998)
$
308,870
Dividends accrued - Convertible Preferred Stock
—
1,315
—
—
(1,315)
—
—
(1,315)
Issuance of stock under Company plans, net of shares withheld for tax
—
—
219,155
—
(235)
—
—
(235)
Stock-based compensation
—
—
—
—
6,462
—
—
6,462
Foreign currency translation adjustment
—
—
—
—
—
15
—
15
Unrealized translation gain on foreign currency denominated intercompany loans
—
—
—
—
—
1,235
—
1,235
Unrealized loss on interest rate swaps
—
—
—
—
—
(8,154)
—
(8,154)
Net loss
—
—
—
—
—
—
(140,045)
(140,045)
Balance at March 31, 2023
115,000
$
113,606
32,441,010
$
3
$
611,667
$
4,206
$
(449,043)
$
166,833
Three Months Ended March 31, 2022
Preferred Stock
Common Stock
Additional Paid-In Capital
Accumulated Other Comprehensive Income (Loss)
Accumulated Deficit
Total Stockholders’ Equity
Shares
Amount
Shares
Amount
Balance at December 31, 2021
—
$
—
31,096,548
$
3
$
568,384
$
(11,514)
$
(240,585)
$
316,288
Issuance of stock under Company plans, net of shares withheld for tax
—
—
224,217
—
(365)
—
—
(365)
Stock-based compensation
—
—
—
—
11,619
—
—
11,619
Foreign currency translation adjustment
—
—
—
—
—
(1,047)
—
(1,047)
Unrealized translation loss on foreign currency denominated intercompany loans
—
—
—
—
—
(1,293)
—
(1,293)
Unrealized gain on interest rate swaps
—
—
—
—
—
26,213
—
26,213
Net loss
—
—
—
—
—
—
(22,831)
(22,831)
Balance at March 31, 2022
—
$
—
31,320,765
$
3
$
579,638
$
12,359
$
(263,416)
$
328,584
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Upland Software, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended March 31,
(In thousands)
2023
2022
Operating activities
Net loss
$
(140,045)
$
(22,831)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
18,500
14,262
Change in fair value of liabilities due to sellers of businesses
—
(75)
Deferred income taxes
(1,975)
(1,341)
Amortization of deferred costs
3,352
2,896
Foreign currency re-measurement loss
(859)
—
Non-cash interest and other expense
573
555
Non-cash stock compensation expense
6,462
11,619
Non-cash loss on impairment of goodwill
128,755
—
Changes in operating assets and liabilities, net of purchase business combinations:
Accounts receivable
6,991
9,182
Prepaid expenses and other current assets
(4,845)
1,787
Accounts payable
(184)
(4,145)
Accrued expenses and other liabilities
(859)
(4,790)
Deferred revenue
(41)
1,103
Net cash provided by operating activities
15,825
8,222
Investing activities
Purchase of property and equipment
(215)
(176)
Purchase business combinations, net of cash acquired
—
(62,333)
Net cash used in investing activities
(215)
(62,509)
Financing activities
Proceeds from notes payable, net of issuance costs
(130)
(3)
Payments on notes payable
(1,350)
(1,350)
Taxes paid related to net share settlement of equity awards
(235)
(547)
Issuance of common stock, net of issuance costs
—
182
Additional consideration paid to sellers of businesses
(5,066)
(2,493)
Net cash used in financing activities
(6,781)
(4,211)
Effect of exchange rate fluctuations on cash
238
(217)
Change in cash and cash equivalents
9,067
(58,715)
Cash and cash equivalents, beginning of period
248,653
189,158
Cash and cash equivalents, end of period
$
257,720
$
130,443
Supplemental disclosures of cash flow information:
Cash paid for interest, net of interest rate swaps
$
7,134
$
7,207
Cash paid for taxes
$
2,507
$
772
Non-cash investing and financing activities:
Business combination consideration including holdbacks and earnouts
$
—
$
7,511
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Upland Software, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(unaudited)
1. Organization and Nature of Operations
Upland Software, Inc. (“Upland,” “we,” “us,” or the “Company”), a Delaware corporation, is a provider of cloud-based software that enables organizations to drive digital transformation in the following business functions: Marketing, Sales, Contact Center, Knowledge Management, Project Management, Information Technology, Business Operations, Human Resources and Legal.
To support continued growth, Upland intends to pursue acquisitions within its cloud offerings of complementary technologies and businesses. Upland expects that this will expand its product offerings, customer base and market access, resulting in increased benefits of scale.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The condensed consolidated financial statements include the accounts of Upland Software, Inc. and its wholly owned subsidiaries (collectively referred to as “Upland”, the “Company”, “we”, “us” or “our”). All intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation.
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. In the opinion of management of the Company, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, in all material respects, and include all adjustments of a normal recurring nature necessary for a fair presentation. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023 or for any other period.
The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2022 Annual Report on Form 10-K filed with the SEC on February 28, 2023.
Use of Estimates
The preparation of the accompanying condensed 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 condensed 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, impairment of goodwill, intangibles and long-lived assets, the useful lives of intangible assets and property and equipment, the fair value of the Company’s interest rate swaps and income taxes. In accordance with GAAP, management bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Management regularly evaluates its estimates and assumptions using historical experience and other factors; however, actual results could differ from those estimates.
Upland is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of May 9, 2023, the date of issuance of this Quarterly Report on Form 10-Q. 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.
Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, accounts receivable and the Company’s interest rate swap hedges. The Company’s cash and cash equivalents are
6
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. 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.
No individual customer represented more than 10% of total revenues for the three months ended March 31, 2023, or more than 10% of accounts receivable as of March 31, 2023 or December 31, 2022.
Derivatives
Cash Flow Hedges—Interest Rate Swap Agreements
In August 2019 and in connection with borrowing funds under the Company’s credit facility, the Company entered into a 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 original principal term loans from variable interest payments to fixed interest rate payments, based on an annualized fixed rate of 5.4%, for a 7-year term of debt. ASC 815, Derivatives and Hedging, requires entities to recognize derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. The Company assessed the effectiveness of the hedging relationship under the hypothetical derivative method and noted that all of the critical terms of the hypothetical derivative and hedging instrument were the same. The hedging relationship continues to limit the Company’s exposure to the variability in interest rates under the Company’s term loans and related cash outflows. As such, the Company has deemed this hedging relationship as highly effective in offsetting cash flows attributable to hedged risk (variability in forecasted monthly interest payments) for the term of the term loans and interest rate swap agreements. All derivative financial instruments are recorded at fair value as a net asset or liability in the accompanying condensed consolidated balance sheets. As of March 31, 2023 and December 31, 2022, the fair value of the interest rate swaps included in assets in the Company's condensed consolidated balance sheets was $33.0 million and $41.2 million, respectively.
The interest rate swap has been designated as a cash flow hedge. As such, the change in the fair value of the hedging instruments is recorded in Other comprehensive income (loss) in the accompanying condensed consolidated statements of comprehensive income (loss). Amounts deferred in Other comprehensive income (loss) will be reclassified to Interest expense in the accompanying condensed 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 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.
Preferred Stock
7
In August 2022, the Company closed on the issuance and sale of its Series A Convertible Preferred Stock (the “Series A Preferred Stock”). The Company issued 115,000 shares of Series A Preferred Stock, par value $0.0001 per share, at a price of $1,000 per share, for an initial investment amount of $115.0 million. Pursuant to the Certificate of Designation, cumulative preferred dividends accrue quarterly on the Series A Preferred Stock at a rate of (i) 4.5% per annum until but excluding the seven year anniversary of the closing, and (ii) 7% per annum on and after the seven year anniversary of the closing. See “Note 10. Series A Preferred Stock—Series A Convertible Preferred Stock” for further details.
The Series A Preferred Stock and cumulative preferred dividends, net of preferred issuance costs, is presented as Mezzanine Equity of $113.6 million as of March 31, 2023 in the Company’s condensed consolidated balance sheets. The Series A Preferred Stock is classified as Mezzanine Equity because it is redeemable at the option of its holders (upon a deemed liquidation event as defined in “Note 10. Series A Preferred Stock—Series A Convertible Preferred Stock—Deemed Liquidation Event Redemption”) and has a condition for redemption that is not solely within the control of the issuer.
Goodwill and Other Intangibles
We assess Goodwill for impairment annually on October 1st, or more frequently when an event occurs which could cause the carrying value (or GAAP basis book value) of our Company to exceed the estimated fair value of our Company. The Company adopted ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment during the first quarter of 2018.
As we operate as one reporting unit, the Goodwill impairment evaluation is performed at the consolidated entity level by comparing the estimated fair value of the Company to its carrying value. We 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, then we perform a quantitative analysis using a fair-value-based approach to determine if the fair value of our reporting unit is less than its carrying value. See “Note— 5. Goodwill and Other Intangible Assets” for more information regarding our first quarter 2023 Goodwill impairment.
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.
In August 2020, the Financial Standards Accounting Board (“FASB”) issued accounting standards update (“ASU”) 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This update also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. The update also requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The
8
guidance is effective for interim and annual periods beginning after December 15, 2021. The Company adopted this guidance in the first quarter of fiscal 2022.
In March 2020, the 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 the London Interbank Offer Rate (“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. We adopted Topic 848 during the first quarter of 2023. On February 21, 2023, the Company entered into an amended and restated credit agreement to, among other things, provide for the replacement of LIBOR with the Secured Overnight Financing Rate (“SOFR”), an index measuring the cost of borrowing cash overnight collateralized by Treasury securities. The Company has elected to apply the debt agreement modification expedients related to changes to the reference rate from LIBOR to SOFR in the Company's Credit Agreement, which it completed during the three months ended March 31, 2023. Application of these expedients allows the Company to account for the modification as not substantial. As a result, the debt agreement modification will be accounted for by prospectively adjusting the Credit Agreement’s effective interest rate, any existing unamortized debt discount will carry forward and continue to be amortized and no remeasurement of the Credit Agreement at the modification date is required.
The Company has also elected to apply the hedge accounting expedients and exceptions related to changes to the reference rate from LIBOR to SOFR in the Company's interest rate swaps, which it completed during the three months ended March 31, 2023. Application of these exceptions preserves the cash flow hedge designation of the interest rate swaps and the related accounting and presentation consistent with past presentation. The replacement of LIBOR with SOFR in the credit agreement did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures. See “Note—7. Debt” for additional information.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which creates an exception to the general recognition and measurement principle for contract assets and contract liabilities from contracts with customers acquired in a business combination. The new guidance will require companies to apply the definition of a performance obligation under accounting standard codification (“ASC”) Topic 606 to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers that are acquired in a business combination. Under current GAAP, an acquirer in a business combination is generally required to recognize and measure the assets it acquires and the liabilities it assumes at fair value on the acquisition date. The new guidance will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. These amendments are effective for fiscal years beginning after December 15, 2022, with early adoption permitted. We adopted ASU 2021-08 on January 1, 2023 and our adoption did not have a material impact on our condensed consolidated financial statements.
9
3. Acquisitions
The Company performs quantitative and qualitative analyses to determine the significance of each acquisition to the financial statements the Company. Based on these analyses the below acquisitions were deemed to be insignificant on an individual and cumulative basis.
2023 Acquisitions
The Company had no acquisitions during the three months ended March 31, 2023.
2022 Acquisition
The acquisitions completed during the year ended December 31, 2022 were:
•BA Insight - On February 22, 2022, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of BA Insight Inc., a Delaware corporation (“BA Insight”).
•Objectif Lune - On January 07, 2022, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Objectif Lune Inc., a Quebec proprietary company (“Objectif Lune”).
Consideration
The following table summarizes the consideration transferred for the acquisitions described above (in thousands):
BA Insight
Objectif Lune
Cash
$
33,355
$
29,750
Holdback (1)
645
5,250
Working capital and other adjustments
1,587
644
Total consideration
$
35,587
$
35,644
(1)Represents the cash holdbacks subject to indemnification claims that are payable 12 months following closing for Objectif Lune, and 15 months following closing for BA Insight. As of March 31, 2023, $0.4 million of the holdback remains outstanding, which is related to BA Insight.
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 has recognized the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. Management has recorded the purchase price allocations based upon acquired company information that is currently available. Management completed the purchase accounting for BA Insight and Objectif Lune during the first quarter of 2023.
10
The following condensed table presents the finalized acquisition-date fair value of the assets acquired and liabilities assumed for the acquisitions during the year ended December 31, 2022 and through the three months ended March 31, 2023 (in thousands):
Final
BA Insight
Objectif Lune
Year Acquired
2022
2022
Cash
$
4
$
745
Accounts receivable
2,466
5,677
Other current assets
4,080
7,183
Operating lease right-of-use asset
110
1,905
Property and equipment
3
248
Customer relationships
10,500
17,717
Trade name
150
362
Technology
2,000
5,512
Favorable Leases
—
291
Goodwill
25,495
23,797
Other assets
25
744
Total assets acquired
44,833
64,181
Accounts payable
(236)
(2,001)
Accrued expense and other
(4,083)
(9,431)
Deferred tax liabilities
—
(6,353)
Deferred revenue
(4,817)
(8,847)
Operating lease liabilities
(110)
(1,905)
Total liabilities assumed
(9,246)
(28,537)
Total consideration
$
35,587
$
35,644
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, the 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 three months ended March 31, 2023 and the year ended December 31, 2022 (in years):
Useful Life
Customer relationships
7.0
Trade name
2.0
Developed technology
6.2
Favorable Leases
6.3
Total weighted-average useful life
6.8
During the measurement period, which 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 goodwill of $49.3 million for the above acquisitions is primarily attributable to the synergies expected to arise after the acquisition and the value of the acquired workforce. Goodwill that is deductible for tax purposes at the time of the acquisitions was $4.6 million.
Total transaction related expenses incurred with respect to acquisition activity during the three months ended March 31, 2023 and March 31, 2022 was nil and $4.5 million, respectively. Transaction related expenses, excluding transformation costs, include expenses such as banker fees, legal and professional fees, insurance costs, and deal bonuses. Transaction costs are included in acquisition-related expenses in our condensed consolidated statement of operations.
11
Other Acquisitions and Divestitures
From time to time we may purchase or sell customer relationships that meet certain criteria. We had no purchase or sale of customer relationships during the three months ended March 31, 2023 and March 31, 2022.
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 March 31, 2023 and December 31, 2022, the Company had no accrued earnout business acquisition contingent 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, changes in assumed discount periods and rates and changes in foreign exchange 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 adjustment 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 condensed consolidated statement of operations based on management's assessment of the nature of the liability. Earnout consideration liabilities are reported in “Due to sellers in businesses” in the Company's condensed consolidated balance sheets.
In connection with entering into, and expanding, the Company's current credit facility, as discussed further in “Note 7. Debt—Credit Facility”, 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 $540 million of the original principal term loans. The fair value of the Company's swaps are 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 March 31, 2023 the fair value of the interest rate swap is included in the “Interest rate swap assets” section on the Company's condensed consolidated balance sheets as well as in December 31, 2022.
Assets measured at fair value on a recurring basis are summarized below (in thousands):
Fair Value Measurements at March 31, 2023
(unaudited)
Level 1
Level 2
Level 3
Total
Assets:
Cash equivalents - money market funds
$
202,707
$
—
$
—
$
202,707
Interest rate swap asset
$
—
$
33,014
$
—
$
33,014
Total:
$
202,707
$
33,014
$
—
$
235,721
Fair Value Measurements at December 31, 2022
(unaudited)
Level 1
Level 2
Level 3
Total
Assets:
Cash equivalents - money market funds
$
172,849
$
—
$
—
$
172,849
Interest rate swap asset
$
—
$
41,168
$
—
$
41,168
Total:
$
172,849
$
41,168
$
—
$
214,017
Money market funds are highly-liquid investments and are included in cash and cash equivalents on the consolidated balance sheets. The pricing information on these investment instruments is readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.
12
Debt
The Company believes the carrying value of its long-term debt at March 31, 2023 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 of the Company's debt, before debt discount, at March 31, 2023 and December 31, 2022 are $521.1 million and $522.5 million, respectively.
5. Goodwill and Other Intangible Assets
Changes in the Company’s goodwill balance for the three months ended March 31, 2023 are summarized in the table below:
($ in thousands)
Goodwill
Balance at December 31, 2022
$
477,043
Acquired in business combinations
—
Adjustment related to prior year business combinations
415
Adjustment related to finalization of current year business combinations
—
Impairment of goodwill
(128,755)
Foreign currency translation adjustment and other
1,287
Balance at March 31, 2023
$
349,990
We performed the annual goodwill impairment test, as of October 1, 2022 and did not identify an impairment; however, during the fourth quarter of 2022, an indicator did exist and we recorded a $12.5 million impairment. As a result of the continued decline of our stock price impacting our market capitalization during the quarter ended March 31, 2023, we performed another quantitative impairment evaluation as of March 31, 2023, which resulted in a Goodwill impairment of $128.8 million. This quantitative goodwill impairment analysis applied two methodologies to estimate the Company’s fair value which were: a) a discounted cash flow method and b) a guideline public company method. The two methods generated similar results and indicated that the fair value of the Company was less than its carrying value. The discounted cash flow method requires significant judgments, including estimation of future cash flows, which is dependent on internally developed forecasts, estimation of the long-term rate of growth for our business, and determination of our weighted average cost of capital. Under the guideline public company method, we estimate fair value based on a market multiple of revenues and earnings derived for comparable publicly traded companies with similar operating characteristics as the Company. We will continue to evaluate Goodwill for impairment.
Intangible assets, net include the estimated acquisition-date fair values of customer relationships, marketing-related assets, developed technology, and non-compete agreements that the Company recorded as part of its business acquisitions.
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
March 31, 2023:
Customer relationships
1-10
$
374,726
$
178,566
$
196,160
Trade name
1.5-10
9,903
7,057
2,846
Developed technology
4-9
93,115
59,972
33,143
Favorable Leases
6.3
273
54
219
Total intangible assets
$
478,017
$
245,649
$
232,368
Estimated Useful Life (Years)
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
December 31, 2022:
Customer relationships
1-10
$
372,162
$
162,995
$
209,167
Trade name
1.5-10
9,837
6,728
3,109
Developed technology
4-9
92,585
56,240
36,345
Favorable Leases
6.3
$
273
$
43
$
230
Total intangible assets
$
474,857
$
226,006
$
248,851
13
The Company periodically reviews the estimated useful lives of its identifiable intangible assets, taking into consideration any events or circumstances that might result in either a diminished fair value or revised useful life.
Management recorded no impairments of intangible assets during the three months ended March 31, 2023 and March 31, 2022.
Total amortization expense was $18.2 million and $13.8 million during the three months ended March 31, 2023 and March 31, 2022, respectively.
As of March 31, 2023, the estimated annual amortization expense for the next five years and thereafter is as follows (in thousands):
Amortization Expense
Year ending December 31:
Remainder of 2023
54,207
2024
56,180
2025
35,020
2026
32,797
2027
28,546
2028 and thereafter
25,618
Total
$
232,368
6. Income Taxes
The Company’s income tax benefit for the three months ended March 31, 2023 and March 31, 2022 reflects its estimate of the effective tax rates expected to be applicable for the full years, adjusted for any discrete events that are recorded in the period in which they occur. The estimates are re-evaluated each quarter based on the estimated tax expense for the full year.
The tax benefit from income taxes of $1.4 million for the three months ended March 31, 2023 is primarily related to the deferred tax impact of the goodwill impairment booked during the first quarter of 2023. This tax benefit is offset by the foreign income taxes associated with our combined non U.S. operations, changes in deferred tax liabilities associated with amortization of United States tax deductible goodwill, and state taxes in certain states in which the Company does not file on a consolidated basis or have net operating loss carryforwards.
The tax benefit for incomes taxes of $0.1 million for the three months ended March 31, 2022 is primarily related to foreign income taxes associated with our combined non-U.S. operations. These tax benefits are offset by changes in deferred tax liabilities associated with amortization of United States tax deductible goodwill and state taxes in certain states in which the Company does not file on a consolidated basis or have net operating loss carryforwards and the impact, recorded as discrete, of the deferred tax provision attributable to the tax gain associated with the transfer of goodwill between foreign and domestic jurisdictions.
The Company historically incurred operating losses in the United States prior to 2021 and, given its cumulative losses and limited history of profits, has recorded a valuation allowance against its United States net deferred tax assets, exclusive of tax deductible goodwill, at March 31, 2023 and March 31, 2022, respectively.
The Company has reflected any uncertain tax positions primarily within its long-term taxes payable and a portion within deferred tax assets. The Company and its subsidiaries file tax returns in the U.S. federal jurisdiction and in several U.S. state and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years ending before December 31, 2019 and is no longer subject to state and local or foreign income tax examinations by tax authorities for years ending before December 31, 2018, other than where cross-border transactions extend the statute of limitations.The Company is not currently under audit for federal, state or any foreign jurisdictions. U.S. operating losses generated in years prior to 2019 remain open to adjustment until the statute of limitations closes for the tax year in which the net operating losses are utilized.
14
7. Debt
Long-term debt consisted of the following at March 31, 2023 and December 31, 2022 (in thousands):
March 31, 2023
December 31, 2022
Senior secured loans (includes unamortized discount of $7,024 and $7,467 based on an imputed interest rate of 5.8% and 5.8%, at March 31, 2023 and December 31, 2022, respectively)
$
514,076
$
514,983
Less current maturities
(3,109)
(3,136)
Total long-term debt
$
510,967
$
511,847
Amendment No. 1 to the Credit Agreement
On February 21, 2023, the Company entered into that certain Amendment No.1 to the Credit Facility (as herein defined below) (the “Amendment”), which amends the Credit Facility. The Amendment amended the interest rate benchmark from LIBOR to SOFR. Other than the foregoing, the material terms of the Credit Agreement remain unchanged.
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 March 31, 2023. The Credit Facility replaced the Company's previous credit agreement. All outstanding balances under our previous credit facility were paid off using proceeds from our new 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 $350.0 million term loans outstanding under the Credit Facility and the $60.0 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%) published by CME Group Benchmark Administration Limited (CBA), 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 (iii) the Federal Funds Effective 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 Federal Funds Effective 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 March 31, 2023, the fair value of the interest rate swap was a $33.0 million asset as a result of a decrease in short term interest rates since December 31, 2022. In the next twelve months, the Company estimates that $9.9 million will be reclassified from Accumulated other comprehensive income to Interest expense, net on our condensed
15
consolidated statement of operations. Increases/decreases in cash paid for interest as a result of the Company’s interest rate swaps are included cash flows from operations.
Three Months Ended March 31,
2023
2022
Unrealized gain (loss) recognized in Other comprehensive income on derivative financial instruments
$
(8,154)
$
26,213
Gain (loss) on interest rate swap (included in Interest expense on our consolidated statement of operations)
$
3,831
$
(1,972)
Revolver
Loans under the Revolver are available up to $60 million. 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 March 31, 2023, 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 their assets;
•Make investments, including certain acquisitions;
•Enter into mergers or consolidations;
•Dispose of assets;
•Pay dividends and make other distributions on the Company’s capital stock, and redeem and repurchase the Company’s capital stock;
•Enter into transactions with affiliates; and
•Prepay indebtedness or make changes to certain agreements.
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.
In addition, the Credit Facility 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 March 31, 2023 the Company was in compliance with all covenants under the Credit Facility.
Cash interest costs averaged 5.4% and 5.4% for the three months ended March 31, 2023 and 2022, respectively. In addition, as of March 31, 2023 and December 31, 2022 the Company had $7.0 million and $7.5 million, respectively, of unamortized deferred financing costs associated with the Credit Facility. These financing costs will be amortized to non-cash interest expense over the remaining term of the Credit Facility.
16
8. Net Loss Per Share
We compute loss per share of our common stock, par value $0.0001 per share (“Common Stock”) and Series A Preferred Stock using the two-class method. The two-class method requires income available to common stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. We consider our Series A Preferred Stock to be a participating security, as its holders are entitled to fully participate in any dividends or other distributions declared or paid on our Common Stock on an as-converted basis.
The following table sets forth the computations of loss per share (in thousands, except share and per share amounts):
Three Months Ended March 31,
2023
2022
Numerator:
Net Loss
$
(140,045)
$
(22,831)
Preferred stock dividends and accretion
(1,315)
—
Net loss attributable to common stockholders
$
(141,360)
$
(22,831)
Denominator:
Weighted–average common shares outstanding, basic and diluted
32,259,110
31,163,273
Net loss per common share, basic and diluted
$
(4.38)
$
(0.73)
Due to the net losses for the three months ended March 31, 2023 and March 31, 2022, respectively, basic and diluted loss per share were the same. The Company adopted ASU 2020-06 on January 1, 2022 as detailed in “Note 2. Basis of Presentation and Summary of Significant Accounting Policies—Recent Accounting Pronouncements—Recently issued accounting pronouncements - Adopted.” As such, the Company is required to use the application of the if-converted method for calculating diluted earnings per share on our Series A Preferred Stock. The Company applies the treasury stock method for calculating diluted earnings per share on our stock options, restricted stock awards, restricted stock units and performance restricted stock units.
The following table sets forth the anti–dilutive common share equivalents as of March 31, 2023 and March 31, 2022:
March 31,
2023
2022
Stock options
152,683
191,212
Restricted stock units
2,507,689
2,318,089
Performance restricted stock units
193,750
155,187
Series A Preferred Stock on an as-converted basis(1)
6,752,038
—
Total anti–dilutive common share equivalents
9,606,160
2,664,488
(1) Per ASU 2020-06, the Company is applying the if-converted method to calculated diluted earnings per share. As of March 31, 2023, the Series A Preferred Stock plus accumulated dividends totaled $118.2 million. The Series A Preferred Stock has a conversion price of $17.50per share, as detailed in “Note 10. Series A Preferred Stock”
9. 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.
Litigation
In the normal course of business, the Company may become involved in various lawsuits and legal proceedings. At this time, 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 Company's condensed consolidated balances sheets or condensed consolidated statement of operations.
17
In addition, when we acquire companies, we require that the sellers provide industry standard indemnification for breaches of representations and warranties contained in the acquisition agreement and we will withhold payment of a portion of the purchase price for a period of time in order to satisfy any claims that we may make for indemnification. In certain transactions, we agree with the sellers to purchase a representation and warranty insurance policy that will pay such claims for indemnification. From time to time we may have one or more claims for indemnification pending. Similarly, we may have one or more ongoing negotiations related to the amount of an earnout. Gain contingencies related to indemnification claims are not recognized in our condensed consolidated financial statements until realized.
10. Series A Preferred Stock
On July 14, 2022, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Ulysses Aggregator, LP (the “Purchaser”), an affiliate of HGGC, LLC, to issue and sell at closing 115,000 shares of Series A Preferred Stock of the Company, par value $0.0001 per share, at a price of $1,000 per share (the “Initial Liquidation Preference”) for an aggregate purchase price of $115.0 million (the “Investment”). The Company will use the proceeds of the Investment (a) for general corporate purposes and (b) for transaction-related fees and expenses.
On August 23, 2022 (the “Closing Date”), the closing of the Investment (the “Closing”) occurred, and the Series A Preferred Stock was issued to the Purchaser. In connection with the issuance of the Series A Preferred Stock, the Company incurred direct and incremental expenses comprised of transaction fees, and financial advisory and legal expenses (the “Series A Preferred Stock Issuance Costs”), which reduced the carrying value of the Series A Preferred Stock. As of March 31, 2023, the Series A Preferred Stock Issuance Costs totaled $4.6 million. Cumulative preferred dividends accrue quarterly on the Series A Preferred Stock at a rate of 4.5% per year within the first seven years after the Closing Date regardless of whether declared or assets are legally available for the payment. Such dividends shall accrue and compound quarterly in arrears from the date of issuance of the shares. The dividend rate will increase to 7.0% on the seven-year anniversary of the Closing Date. The Series A Preferred Stock had accrued unpaid dividends of $3.2 million as of March 31, 2023.
Contemporaneous with the Closing Date, the Company and the Purchaser entered into a Registration Rights Agreement (the “Registration Rights Agreement”) and the Company filed a Certificate of Designation (the “Certificate of Designation”) setting out the powers, designations, preferences, and other rights of the Series A Preferred Stock with the Secretary of State of the State of Delaware in connection with the Closing. Pursuant to the Registration Rights Agreement, the Purchaser has certain customary registration rights with respect to any shares of Series A Preferred Stock or the Common Stock of the Company issuable upon conversion of the Series A Preferred Stock, including rights with respect to the filing of a shelf registration statement, underwritten offering rights and piggy back rights.
Dividend Provisions
The Series A Preferred Stock rank senior to the Company’s Common Stock with respect to payment of dividends and rights on the distribution of assets on any liquidation, dissolution or winding up of the affairs of the Company. The Series A Preferred Stock has an Initial Liquidation Preference of $1,000 per share, representing an aggregate Liquidation Preference (as defined below) of $1,000 upon issuance. Holders of the Series A Preferred Stock are entitled to the dividend at the rate of 4.5% per annum, within the first seven years after the Closing Date regardless of whether declared or assets are legally available for the payment. Such dividends shall accrue and compound quarterly in arrears from the date of issuance of the shares. The dividend rate will increase to 7.0% on the seven-year anniversary of the Closing Date. The dividend can be paid, in the Company’s sole discretion, in cash or dividend in kind by adding to the Liquidation Preference of each share of Series A Preferred Stock outstanding; provided that, until the stockholder approvals contemplated by Nasdaq Global Market Listing Standard Rules 5635(a), (b) and (d) are obtained, as applicable, the Company may not pay in kind if doing so would cause the common shares issuable upon conversion of the Preferred Stock to exceed 19.9% of the total outstanding Common Stock as of the Closing Date. The Series A Preferred Stock is also entitled to fully participate in any dividends paid to the holders of common stock in cash, in stock or otherwise, on an as-converted basis.
Liquidation Rights
In the event of any Liquidation, holders of the Series A Preferred Stock are entitled to receive an amount per share equal to the greater of (1) the Initial Liquidation Preference per share plus any accrued or declared but unpaid dividends on such shares (the “Liquidation Preference”) or (2) the amount payable if the Series A Preferred Stock were converted into Common Stock. The Series A Preferred Stock will have distribution and liquidation rights senior to all other equity interests of the Company. As of March 31, 2023, the Liquidation Preference of the Series A Preferred Stock was $118.2 million.
18
Optional Redemption
On or after the 7th anniversary of the original issue date of the Series A Preferred Stock, the Company has the right to redeem any outstanding shares of the Series A Preferred Stock for a cash purchase price equal to 105% of the Liquidation Preference plus accrued and unpaid dividends as of the date of redemption.
Deemed Liquidation Event Redemption
Upon a fundamental change, holders of the Series A Preferred Stock have the right to require the Company to repurchase any or all of its Series A Preferred Stock for cash equal to the greater of (1) 105% of the Liquidation Preference plus the present value of the dividend payments the holders would have been entitled to through the fifth anniversary of the issue date and (2) the amount that such Preferred Stock would have been entitled to receive as if converted into common shares immediately prior to the fundamental change.
A fundamental change (“Deemed Liquidation Event”) is defined as either the direct or indirect sale, lease, transfer, conveyance or other disposition of all or substantially all the properties or assets of the Company and its subsidiaries to any third party or the consummation of any transaction, the result of which is that any third party or group of third parties become the beneficial owner of more than 50% of the voting power of the Company.
Voting Rights
The Series A Preferred Stock will vote together with the Common Shares on all matters and not as a separate class (except as specifically provided in the Certificate of Designation or as otherwise required by law) on an as-if-converted basis.
The holders of the Series A Preferred Stock will have the right to elect one member of the Board of Directors for so long as holders of the Series A Preferred Stock own in the aggregate at least 5% of the shares of Common Stock on a fully diluted basis.
In addition, the holders of the Series A Preferred Stock will have the right to elect one non-voting observer to the Board of Directors for so long as they hold at least 10% of the shares of Convertible Preferred Stock outstanding as of the date of the issue date.
Conversion Feature
The Series A Preferred Stock may be converted, at any time in whole or in part at the option of the holder into a number of shares of Common Stock equal to the quotient obtained by dividing the sum of the Liquidation Preference plus all accrued and unpaid dividends by the conversion price of $17.50 (the “Conversion Price”). The Conversion Price is subject to adjustment in the following events:
•Stock splits and combinations
•Tender offers or exchange offers
•Distribution of rights, options, or warrants at a price per share that is less than the average of the last reported sale prices per share of Common Stock for the ten consecutive trading days
•Spin-offs and other distributed property
•Issuance of equity-linked securities at a price per share less than the conversion price
Anti-Dilution Provisions
The Series A Preferred Stock has customary anti-dilution provisions for stock splits, stock dividends, mergers, sales of significant assets, and reorganization events and recapitalization transactions or similar events, and weighted average anti-dilution protection, subject to customary exceptions for issuances pursuant to current or future equity-based incentive plans or arrangements (including upon the exercise of employee stock options).
19
11. Stockholders' Equity
Registration Statements
2022 S-3
On October 21, 2022 we filed a resale registration statement on Form S-3 (File No. 333-267973) (the “2022 S-3”), on behalf of the Purchaser and pursuant to the Registration Rights Agreement, which became effective on November 1, 2022 and covers (i) the issued Series A Preferred Stock and (ii) the number of shares of the Company’s Common Stock issuable upon conversion of such Series A Preferred Stock, which amount includes and assumes that dividends on the Series A Preferred Stock are paid by increasing the Liquidation Preference of the Series A Preferred Stock for a period of sixteen dividend payment periods from the initial issuance date. See “Note—10. Series A Preferred Stock” for further details.
Accumulated Other Comprehensive Income
Comprehensive income 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 condensed consolidated balance sheets and are excluded from net loss. Our other comprehensive income consists primarily of foreign currency translation adjustments for subsidiaries with functional currencies other than the U.S. dollar, unrealized translation gains on intercompany loans with foreign subsidiaries, and unrealized gains on interest rate swaps.
The following table shows the components of accumulated other comprehensive income (loss), net of income taxes, (“AOCI”) in the stockholders’ equity section of our condensed consolidated balance sheets at the dates indicated (in thousands):
March 31, 2023
December 31, 2022
Foreign currency translation adjustment
$
(22,617)
$
(22,632)
Unrealized translation loss on intercompany loans with foreign subsidiaries
(6,191)
(7,426)
Unrealized gain on interest rate swaps
33,014
41,168
Total accumulated other comprehensive income
$
4,206
$
11,110
The unrealized translation gains (losses) on intercompany loans with foreign subsidiaries as of March 31, 2023 is net of income tax expense of $0.9 million. The tax provision to unrealized translation gains (losses) on intercompany loans for the three months ended March 31, 2023 was $0.5 million. The tax benefit related to unrealized translation gains on intercompany loans for the three months ended March 31, 2022 was $0.5 million. The income tax expense/benefit allocated to each component of other comprehensive income for all other periods and components is not material. The Company reclassifies taxes from AOCI to earnings as the items to which the tax effects relate are similarly reclassified.
The functional currency of our foreign subsidiaries are primarily the local currencies. Results of operations for foreign subsidiaries are translated into United States dollars (“USD”) using the average exchange rates on a monthly basis during the year. The assets and liabilities of those subsidiaries are translated into USD using the exchange rates in effect at the balance sheet date. The related translation adjustments are recorded in a separate component of stockholders' equity in accumulated other comprehensive income.
The Company has intercompany loans that were used to fund the acquisitions of foreign subsidiaries. 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.
20
Stock-Based Compensation
The Company recognizes stock-based compensation expense from all awards in the following expense categories included in our condensed consolidated statements of income were as follows (in thousands):
Three Months Ended March 31,
2023
2022
Cost of revenue
$
302
$
402
Research and development
655
748
Sales and marketing
576
1,474
General and administrative
4,929
8,995
Total
$
6,462
$
11,619
2014 Equity Incentive Plan
Beginning in 2019, the Company began granting restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”) under its 2014 Equity Incentive Plan (the “2014 EIP”), in lieu of restricted stock awards, primarily for stock plan administrative purposes.
Restricted Stock Units (“RSU”) and Performance-Based Restricted Stock Units (“PSU”)
In 2023 and 2022, fifty percent of the awards granted to our Chief Executive Officer were PSUs. The 2023 and 2022 PSU agreements provide that the quantity of units subject to vesting may range from 0% to 200% and 0% to 300%, respectively, of the units granted per the table below based on the Company's absolute total shareholder return (“TSR”) at the end of the performance periods of thirty-four months and eighteen months, respectively.
The following table summarizes PSU and RSU activity during the three months ended March 31, 2023:
Number of Units
Weighted-Average Grant Date Fair Value
Unvested restricted units outstanding as of December 31, 2022
1,603,023
$
21.33
Granted
1,396,277
8.91
Vested
(267,994)
20.40
Forfeited
(29,867)
22.99
Unvested restricted units outstanding as of March 31, 2023
2,701,439
$
14.99
The PSU and RSU activity table above includes PSU units granted that are based on a 100% target payout. Compensation expense is recognized over the required service period of the grant. The fair value of the RSUs is determined based on the grant date fair value of the award. The fair value of the PSUs is determined using the Monte Carlo simulation model and is not subject to fluctuation due to achievement of the underlying market-based target.
21
Significant assumptions used in the Monte Carlo simulation model for the PSUs granted during the three months ended March 31, 2023 and year ended December 31, 2022 are as follows:
March 31, 2023
December 31, 2022
Expected volatility
55.5%
49.5%
Risk-free interest rate
4.4%
0.7%
Remaining performance period (in years)
2.86
1.46
Dividend yield
—
—
Stock Option Activity
Stock option activity during the three months ended March 31, 2023 was as follows:
Number of Options Outstanding
Weighted– Average Exercise Price
Outstanding at December 31, 2022
154,321
$
11.19
Options exercised
(819)
1.77
Options forfeited
—
—
Options expired
(819)
6.23
Outstanding at March 31, 2023
152,683
$
11.27
12. Revenue Recognition
Revenue Recognition Policy
Revenue is 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. Revenue is 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 Revenue
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 revenue or subscription and support revenue, 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
22
(“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 Revenue
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. Revenue from professional services are recognized over time as such services are performed. Revenue for fixed price services are generally recognized over time applying input methods to estimate progress to completion. Revenue 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.
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 subscription 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 revenue from vendor reseller agreements on a gross basis, meaning the amounts billed to customers are recorded as revenue, and expenses incurred are recorded as cost of revenue. 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, revenue is recorded on a gross basis with related telecom messaging costs incurred from third parties recorded as cost of revenue. Revenue 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 revenue. 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 condensed consolidated balance sheets. A contract liability results when we receive
23
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 revenue upon satisfaction of the underlying performance obligations. Contract liabilities that are expected to be recognized as revenue during the succeeding twelve-month period are recorded in Deferred revenue and the remaining portion is recorded in “Deferred revenue noncurrent” on the accompanying condensed consolidated balance sheets at the end of each reporting period.
Deferred revenue primarily consists 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 revenue as revenue 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 March 31, 2023 and December 31, 2022, unbilled receivables were $6.2 million and $5.3 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 on a systematic basis that is consistent with the transfer of goods and services over the expected life of the customer relationships, which has been determined to be approximately 6 years. The expected life of our customer relationships is based on historical data and management estimates, including estimated renewal terms and the useful life of the associated underlying technology. 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 average contractual renewal term of 18 months. We utilized the 'portfolio approach' practical expedient permitted under ASC 606-10-10-4, 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 condensed 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. No indicators of impairment were identified during the three months ended March 31, 2023.
The following table presents the activity impacting deferred commissions for the three months ended March 31, 2023 :
($ in thousands)
Deferred Commissions
Balance at December 31, 2022
$
24,755
Capitalized deferred commissions
2,987
Amortization of deferred commissions
(3,289)
Balance at March 31, 2023
$
24,453
Amortization of deferred commissions in excess of commissions capitalized for the three months ended March 31, 2023 was $0.3 million.
Deferred Revenue
Deferred revenue represents either customer advance payments or billings for which the aforementioned revenue recognition criteria have not yet been met.
24
Deferred revenue is mainly unearned revenue related to subscription services and support services. During the three months ended March 31, 2023, we recognized $48.2 million and $1.5 million of subscription services and professional services revenue, respectively, that was included in the deferred revenue balances at the beginning of the period.
Remaining Performance Obligations
As of March 31, 2023, approximately $275.1 million of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 69% 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 United States, United Kingdom and Canada. Information about these operations is presented below (in thousands):
Three Months Ended March 31,
2023
2022
Revenues:
Subscription and support:
United States
$
52,242
$
51,344
United Kingdom
9,675
11,590
Canada
3,491
3,468
Other International
7,506
7,225
Total subscription and support revenue
72,914
73,627
Perpetual license:
United States
656
737
United Kingdom
223
129
Canada
42
76
Other International
650
836
Total perpetual license revenue
1,571
1,778
Professional services:
United States
1,597
1,695
United Kingdom
258
790
Canada
229
204
Other International
487
622
Total professional service revenue
2,571
3,311
Total revenue
$
77,056
$
78,716
13. Related Party Transactions
The Company does not have any material related party transactions to report for the three months ended March 31, 2023 and March 31, 2022.
25
14. Subsequent Events
On May 2, 2023, the Board of Directors (the “Board of Directors”) of the Company, authorized and declared a dividend of one preferred stock purchase right (a “Right”) for each outstanding share of Common Stock. The dividend is payable on May 12, 2023 (the “Record Date”), to the holders of record of shares of Common Stock as of 5:00 P.M., New York City time, on the Record Date. The description and terms of the Rights are set forth in a Tax Benefit Preservation Plan, dated as of May 2, 2023, as the same may be amended from time to time (the “Plan”), between the Company and Broadridge Corporate Issuer Solutions, LLC, as Rights Agent.
By adopting the Plan, the Board of Directors is seeking to protect the Company’s ability to use its net operating loss carryforwards (“NOLs”) and other tax attributes to offset potential future income tax liabilities. The Company’s ability to use such NOLs and other tax attributes would be substantially limited if the Company experiences an “ownership change,” as defined in Section 382 of the Internal Revenue Code (the “Code”). Generally, an “ownership change” occurs if the percentage of the Company’s stock owned by one or more “five percent stockholders” increases by more than fifty percentage points over the lowest percentage of stock owned by such stockholders at any time during the prior three-year period or, if sooner, since the last “ownership change” experienced by the Company. The Plan is intended to make it more difficult for the Company to undergo an ownership change by deterring any person from acquiring 4.9% or more of the outstanding shares of stock without the approval of the Board of Directors. The Board of Directors believes it is in the best interest of the Company and its stockholders to reduce the likelihood of an ownership change, which could harm the Company’s future operating results by effectively increasing the Company future tax liabilities.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2022, filed on February 28, 2023. In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements generally relate to future events or our future financial or operating performance. 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. These forward-looking statements include, but are not limited to, statements concerning the following:
•our financial performance and our ability to achieve or sustain profitability or predict future results;
•our plans regarding future acquisitions and our ability to consummate and integrate acquisitions;
•our ability to expand our go to market operations, including our marketing and sales organization, and successfully increase sales of our products;
•our ability to obtain financing in the future on acceptable terms or at all;
•our expectations with respect to revenue, cost of revenue and operating expenses in future periods;
•our expectations with regard to revenue from perpetual licenses and professional services;
•our ability to adapt to macroeconomic factors impacting the global economy, including foreign currency exchange risk, inflation and supply chain constraints;
•our ability to attract and retain customers;
•our ability to successfully enter new markets and manage our international expansion;
•our ability to comply with privacy laws and regulations;
•our ability to deliver high-quality customer service;
•our plans regarding, and our ability to effectively manage, our growth;
•maintaining our senior management team and key personnel;
•the performance of our resellers;
•our ability to adapt to changing market conditions and competition;
•our ability to adapt to technological change and continue to innovate;
•global economic and financial market conditions and uncertainties;
•the growth of demand for cloud-based, digital transformation applications;
•our ability to integrate our applications with other software applications;
•maintaining and expanding our relationships with third parties;
•costs associated with defending intellectual property infringement and other claims;
•our ability to maintain, protect and enhance our brand and intellectual property;
•our expectations with regard to trends, such as seasonality, which affect our business;
•impairments to goodwill and other intangible assets;
•our beliefs regarding how our applications benefit customers and what our competitive strengths are;
•the operation, reliability and security of our third-party data centers;
•the risk that we did not consider another contingency included in this list;
•our expectations as to the payment of dividends; and
•other risk factors included under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 28, 2023, as updated by this Quarterly Report on Form 10-Q and periodically updated as necessary in our future quarterly reports on Form 10-Q and other filings that we make with the SEC.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors, including those described in the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 28, 2023. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
Overview
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, retail, technology, manufacturing, legal, education, consumer goods, media, telecommunications, government, non-profit, food and beverage, healthcare and life sciences.
Through a series of acquisitions and integrations, we have established a library of diverse, cloud-based software applications that address specific digital transformation needs. Our revenue has grown from $149.9 million in the year ended December 31, 2018 to $317.3 million in the year ended December 31, 2022, representing a compound annual growth rate of 21%. During the three months ended March 31, 2023 foreign revenue as a percent of total revenue decreased to 29% compared to 32% during the three months ended March 31, 2022. See “Note 12. Revenue Recognition” in the notes to our unaudited condensed consolidated financial statements for more information regarding our revenue as it relates to domestic and foreign operations.
To support continued growth, we intend to pursue acquisitions of complementary technologies and businesses. This will expand our product library, customer base, and market access resulting in increased benefits of scale. Consistent with our growth strategy, we have made 31 acquisitions from February 2012 through March 31, 2023.
Recent Developments
On May 2, 2023, the Board of Directors (the “Board of Directors”) of the Company, authorized and declared a dividend of one preferred stock purchase right (a “Right”) for each outstanding share of Common Stock. The dividend is payable on May 12, 2023 (the “Record Date”), to the holders of record of shares of Common Stock as of 5:00 P.M., New York City time, on the Record Date. The description and terms of the Rights are set forth in a Tax Benefit Preservation Plan, dated as of May 2, 2023, as the same may be amended from time to time (the “Plan”), between the Company and Broadridge Corporate Issuer Solutions, LLC, as Rights Agent. See “Note 14. Subsequent Events” for further details.
Acquisitions
2022 Acquisitions
During the three months ended March 31, 2022, we completed the two acquisitions summarized below. As a result, the impact of these two acquisitions are fully reflected in our results of operations for the three months ended March 31, 2023 but are not fully reflected in our results of operations for the three months ended March 31, 2022.
•BA Insight - On February 22, 2022, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of BA Insight Inc., a Delaware corporation.
•Objectif Lune - On January 7, 2022, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Objectif Lune Inc., a Quebec proprietary company.
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.
Three Months Ended March 31,
2023
2022
Amount
Percent of Revenue
Amount
Percent of Revenue
(dollars in thousands, except share and per share data)
Revenue:
Subscription and support
$
72,914
95
%
$
73,627
94
%
Perpetual license
1,571
2
%
1,778
2
%
Total product revenue
74,485
97
%
75,405
96
%
Professional services
2,571
3
%
3,311
4
%
Total revenue
77,056
100
%
78,716
100
%
Cost of revenue:
Subscription and support (1)(3)
23,485
30
%
22,069
28
%
Professional services and other (1)
2,051
3
%
2,686
3
%
Total cost of revenue
25,536
33
%
24,755
31
%
Gross profit
51,520
67
%
53,961
69
%
Operating expenses:
Sales and marketing (1)
14,289
19
%
15,593
20
%
Research and development (1)
12,530
16
%
12,067
15
%
General and administrative (1)(2)
17,189
22
%
19,614
25
%
Depreciation and amortization
15,094
20
%
11,051
14
%
Acquisition-related expenses
1,094
1
%
10,413
13
%
Impairment of goodwill
128,755
167
%
—
—
%
Total operating expenses
188,951
245
%
68,738
87
%
Loss from operations
(137,431)
(178)
%
(14,777)
(18)
%
Other Expense:
Interest expense, net
(5,461)
(7)
%
(7,762)
(10)
%
Other income (expense), net
1,425
2
%
(418)
(1)
%
Total other expense
(4,036)
(5)
%
(8,180)
(11)
%
Loss before provision for income taxes
(141,467)
(183)
%
(22,957)
(29)
%
Benefit from income taxes
1,422
1
%
126
—
%
Net loss
(140,045)
(182)
%
(22,831)
(29)
%
Preferred stock dividends and accretion
(1,315)
(2)
%
—
—
%
Net loss attributable to common shareholders
$
(141,360)
(184)
%
$
(22,831)
(29)
%
Net loss per common share:
Net loss per common share, basic and diluted
$
(4.38)
$
(0.73)
Weighted-average common shares outstanding, basic and diluted
32,259,110
31,163,273
(1) Includes stock-based compensation detailed under Share-based Compensation in “Item 1. Financial Statements—Note 11. Stockholders' Equity”.
(2) Includes General and administrative stock-based compensation of $4.9 million and $9.0 million for the three months March 31, 2023 and March 31, 2022, respectively. General and administrative expense excluding stock-based compensation as a percentage of total revenues was 16% and 13% for the three months ended March 31, 2023 and March 31, 2022.
(3) Includes depreciation and amortization of $3.4 million and $3.2 million for the three months ended March 31, 2023 and March 31, 2022, respectively.
Comparison of the Three Months Ended March 31, 2023 and 2022
Revenue
Three Months Ended March 31,
2023
2022
% Change
(dollars in thousands)
Revenue:
Subscription and support
$
72,914
$
73,627
(1)
%
Perpetual license
1,571
1,778
(12)
%
Total product revenue
74,485
75,405
(1)
%
Professional services
2,571
3,311
(22)
%
Total revenue
$
77,056
$
78,716
(2)
%
Percentage of revenue:
Subscription and support
95%
94%
Perpetual license
2%
2%
Total product revenue
97%
96%
Professional services
3%
4%
Total revenue
100%
100%
Total revenue was $77.1 million in the three months ended March 31, 2023, compared to $78.7 million in the three months ended March 31, 2022, a decrease of $1.6 million, or 2%. This decrease is attributable to a decline of $0.7 million in subscription and support revenue, a decline of $0.2 million in perpetual license revenue, and a decline of $0.7 million in professional services revenue.
The table below details the $0.7 million decrease in subscription and support revenue for the three months ended March 31, 2023, compared to the three months ended March 31, 2022.
Increase from acquisition not fully in the prior year comparative period (1)
$
1,697
Decrease related to Sunset Assets (2)
(2,668)
Increase related to overage charges (3)
563
Remaining decrease related to core organic business (4)
(305)
Total decrease in Subscription and support revenue
$
(713)
(1) Subscription and support revenue related to our acquisition not fully in the prior year comparative period was $2.4 million for the three months ended March 31, 2023, after the reduction of $0.1 million purchase accounting deferred revenue discount for the three months ended March 31, 2023.
(2) During the fourth quarter of 2022, in connection with the periodic review of its business, the Company decided to sunset certain non-strategic product offerings and customer contracts (collectively referred to as “Sunset Assets”). Subscription and support revenue related to these Sunset Assets was $8.9 million for the three months ended March 31, 2023. During future periodic reviews of our business we may determine to add additional non-strategic product offerings or customer contracts to Sunset Assets. Similarly, we may determine that a product offering or customer contract previously determined to be non-strategic in fact does have a strategic value to the Company and therefore we may remove that product offering or customer contract from the classification of Sunset Assets. In either case, we will adjust the revenues attributable to Sunset Assets for the then current period and properly reflect the year over year change for such addition or removal.
(3) Overage Charges are revenue earned in addition to contractual minimum customer commitments as a result of the usage volume of services including text and e-mail messaging and third party pass-through costs that exceed the levels stipulated in contracts with the Company. Subscription and support revenue related to Overage Charges was $2.4 million for the three months ended March 31, 2023.
(4) Subscription and support revenue for the three months ended March 31, 2022 excluding revenue from acquisitions not fully in the prior year comparative period, revenue from Sunset Assets and revenue from overage charges (all as disclosed in this table and footnotes) referred to here as subscription and support revenue from the core organic business declined by $0.3 million to $59.2 million for the three months ended March 31, 2023. However, using constant currency foreign exchange rates from the three months ended March 31, 2022, subscription and support revenue from the core organic business grew by $0.4 million to $59.9 million for the three months ended March 31, 2023.
The $0.2 million decrease in perpetual license revenue is normal quarterly variation as we do not expect an ongoing downtrend in perpetual license revenue.
The $0.7 million decrease in professional services revenue is related to the typical decline of professional services revenue of acquired businesses where we de-emphasize low margin or negative margin professional service projects along with the decline of professional service revenue from Sunset Assets.
Three Months Ended March 31,
2023
2022
% Change
(dollars in thousands)
Cost of revenue:
Subscription and support (1)
$
23,485
$
22,069
6
%
Professional services and other
2,051
2,686
(24)
%
Total cost of revenue
25,536
24,755
3
%
Gross profit
$
51,520
$
53,961
Percentage of total revenue:
Subscription and support (1)
30%
28%
Professional services and other
3%
3%
Total cost of revenue
33%
31%
Gross profit
67%
69%
(1) Includes depreciation, amortization and stock compensation expense as follows:
Depreciation
$
2
$
2
Amortization
$
3,404
$
3,209
Stock Compensation
$
302
$
402
Cost of subscription and support revenue was $23.5 million in the three months ended March 31, 2023, compared to $22.1 million in the three months ended March 31, 2022, an increase of $1.4 million, or 6%. The acquisitions not fully in the comparable period contributed $0.2 million to cost of subscription and support revenue, primarily related to costs associated with the delivery of the newly acquired products. Cost of subscription and support revenue related to our Sunset Assets decreased by $1.2 million as a result of decreased sales and marketing focus on those Sunset Assets. The remaining increase in cost of subscription and support revenue of $2.4 million is primarily related to an increase in personnel related costs, carrier pass-through costs, hosting costs and amortization partially offset by a decrease in stock compensation.
Cost of professional services and other revenue was $2.1 million in the three months ended March 31, 2023, compared to $2.7 million in the three months ended March 31, 2022, a decrease of $0.6 million, or 24%. Cost of professional services related to our Sunset Assets decreased by $0.4 million as a result of decreased sales and marketing focus on those Sunset Assets. The remaining decrease in cost of professional services of $0.2 million was related to a decrease in personnel related costs.
(1) Includes stock compensation expense as follows:
Stock Compensation
$
576
$
1,474
Sales and marketing expense was $14.3 million in the three months ended March 31, 2023, compared to $15.6 million in the three months ended March 31, 2022, a decrease of $1.3 million, or 8%. The acquisitions not fully in the comparable period contributed an increase of $0.2 million to sales and marketing expense, primarily consisting of personnel related costs. Sales and marketing expense related to our Sunset Assets decreased by $1.0 million as a result of decreased sales and marketing focus on those Sunset Assets. A decrease in sales and marketing expense of $0.9 million is attributable to a reduction in non-cash stock compensation expense. The remaining increase in sales and marketing expense of $0.4 million is primarily attributable to increased personnel related costs associated with our growth investments.
Research and Development Expense
Three Months Ended March 31,
2023
2022
% Change
(dollars in thousands)
Research and development (1)
$
12,530
$
12,067
4
%
Percentage of total revenue
16%
15%
(1) Includes stock compensation expense as follows:
Stock Compensation
$
655
$
748
Research and development expense was $12.5 million in the three months ended March 31, 2023, compared to $12.1 million in the three months ended March 31, 2022, an increase of $0.4 million, or 4%. The acquisitions not fully in the comparable period contributed $0.1 million to the increase in research and development expense primarily consisting of personnel related costs. Research and development expense related to our Sunset Assets decreased by $0.9 million as a result of decreased engineering focus on those Sunset Assets. The remaining increase of $1.2 million in research and development expense is primarily related to personnel related costs associated with our growth investments.
General and Administrative Expense
Three Months Ended March 31,
2023
2022
% Change
(dollars in thousands)
General and administrative (1)
$
17,189
$
19,614
(12)
%
Percentage of total revenue
22%
25%
(1) Includes stock compensation expense as follows:
Stock Compensation
$
4,929
$
8,995
General and administrative expense was $17.2 million in the three months ended March 31, 2023, compared to $19.6 million in the three months ended March 31, 2022, a decrease of $2.4 million, or 12%. General and administrative expense decreased by $0.2 million due to lower personnel related expenses related to our Sunset Assets. In addition, general and administrative expense decreased by $4.1 million due to lower non-cash stock compensation expense, which was partially offset by a $1.9 million increase in personnel related expenses and outside professional expenses.
Depreciation and amortization expense was $15.1 million in the three months ended March 31, 2023, compared to $11.1 million in the three months ended March 31, 2022, an increase of $4.0 million, or 37%. The acquisitions not fully in the comparable period increased depreciation and amortization expense by $0.2 million, primarily related to acquired intangible assets such as customer relationships, developed technology and tradenames. Depreciation and amortization expense related to our Sunset Assets increased by $4.6 million. The remaining decrease in depreciation and amortization expense of $0.8 million resulted from assets becoming fully depreciated and amortized.
Acquisition-related Expenses
Three Months Ended March 31,
2023
2022
% Change
(dollars in thousands)
Acquisition-related expenses
$
1,094
$
10,413
(89)
%
Percentage of total revenue
1%
13%
Acquisition-related expenses are typically one-time expenses 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, vendor cancellations, and adjustments to the fair value of earnouts due to sellers. Generally, without new acquisition activity, acquisition related expenses decline in subsequent sequential quarters and may no longer be incurred after the first anniversary of the last closed acquisition.
Acquisition-related expense was $1.1 million in the three months ended March 31, 2023, compared to $10.4 million in the three months ended March 31, 2022, a decrease of $9.3 million, or 89%. During the three months ended March 31, 2023, transaction related expense was nil compared to $4.5 million for the three months ended March 31, 2022. Transformational expenses were $1.1 million and $5.9 million during the three months ended March 31, 2023 and 2022, respectively. The transformational expenses in both the current and year ago periods were primarily related to temporary transitional personnel 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. We have had no new acquisitions since our two acquisitions during the three months ended March 31, 2022. Transformation expenses in the three months ended March 31, 2022 include expenses related to acquisitions closed in the three months ended March 31, 2022 as well the three acquisitions closed in 2021.
Goodwill impairment is recognized on a non-recurring basis when the carrying value (or GAAP basis book value) of our Company (which is our only reporting unit) exceeds the estimated fair value of our Company as determined by reference to a number of factors and assumptions, including the spot closing price of our Common Stock as of a certain reporting or measurement date. We assess Goodwill for impairment annually on October 1st, or more frequently when an event occurs which could cause the carrying value of our Company to exceed the estimated fair value of our Company. As a result of the decline of our stock price during the three months ended March 31, 2023, we performed a Goodwill impairment evaluation, which resulted in a Goodwill impairment of $128.8 million. See “Note 5. Goodwill and Other Intangible Assets” in the notes to our condensed consolidated financial statements for more information regarding our first quarter 2023 Goodwill impairment. We will continue to evaluate Goodwill for impairment in 2023 and future impairments of Goodwill could occur if our stock price continues to decline.
Other Income (Expense)
Three Months Ended March 31,
2023
2022
% Change
(dollars in thousands)
Other expense:
Interest expense, net
$
(5,461)
$
(7,762)
(30)
%
Other income (expense), net
1,425
(418)
(441)
%
Total other expense
$
(4,036)
$
(8,180)
(51)
%
Percentage of total revenue:
Interest expense, net
(7)%
(10)%
Other income (expense), net
2%
(1)%
Total other expense
(5)%
(11)%
Interest expense, net was $5.5 million in the three months ended March 31, 2023 compared to $7.8 million in the three months ended March 31, 2022 a decrease in interest expense of $2.3 million or 30%, due primarily to higher interest income on our interest-bearing cash balances as well as a decrease in interest expense due to scheduled principal payments lowering outstanding borrowings on our Credit Facility.
Other income was $1.4 million in the three months ended March 31, 2023, compared to other expense of $0.4 million in the three months ended March 31, 2022. Other income recognized during the three months ended March 31, 2023 was related primarily to foreign currency exchange gains.
Benefit from Income Taxes
Three Months Ended March 31,
2023
2022
% Change
(dollars in thousands)
Benefit from income taxes
$
1,422
$
126
1,029
%
Percentage of total revenue
1%
—%
Benefit from income taxes was $1.4 million in the three months ended March 31, 2023, compared to a benefit for income taxes of $0.1 million in the three months ended March 31, 2022, resulting in an increase in benefit from income taxes of $1.3 million. The benefit from income taxes for the three months ended March 31, 2023 related primarily related to the deferred tax impact of the goodwill impairment booked during the first quarter of 2023. This tax benefit is offset by the foreign income taxes associated with our combined non U.S. operations, changes in deferred tax liabilities associated with amortization of United States tax deductible goodwill, and U.S. state taxes in certain states in which the Company does not file on a consolidated basis or have net operating loss carryforwards. The benefit from income taxes for the three months ended March 31, 2022 related primarily to foreign income taxes associated with our combined non-U.S. operations. These tax benefits were offset by changes in deferred tax liabilities associated with amortization of United States tax deductible goodwill and state taxes in certain U.S. states in which the Company does not file on a consolidated basis or have net operating loss carryforwards and the impact, recorded as discrete, of the deferred tax provision attributable to the tax gain associated with the transfer of goodwill between foreign and domestic jurisdictions.
Inflation may further effect our business, financial condition or results of operations. If our costs were to continue to become subject to significant inflationary pressures, we may be further challenged in our ability to offset such higher costs through price increases. Our inability or failure to do so could further harm our business, financial condition and results of operations.
Non-GAAP Financial Measures
Key Metrics
In addition to the GAAP financial measures described in “Results of Operations,” 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.
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 loss, calculated in accordance with GAAP, plus depreciation and amortization expense, interest expense, net, other expense (income), net, provision for (benefit from) income taxes, stock-based compensation expense, acquisition-related expenses, and purchase accounting adjustments for deferred revenue.
The following table represents a reconciliation of net loss from continuing operations, the most comparable GAAP measure, to Adjusted EBITDA for each of the periods indicated.
Three Months Ended March 31,
2023
2022
(dollars in thousands)
Reconciliation of net loss to Adjusted EBITDA:
Net loss
$
(140,045)
$
(22,831)
Add:
Depreciation and amortization expense
18,500
14,262
Interest expense, net
5,461
7,762
Other expense (income), net
(1,425)
418
Benefit from income taxes
(1,422)
(126)
Stock-based compensation expense
6,462
11,619
Acquisition-related expense
1,086
10,413
Purchase accounting deferred revenue discount
228
1,929
Impairment of goodwill
128,755
—
Adjusted EBITDA
$
17,600
$
23,446
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.
Adjusted EBITDA should not be considered as an alternative to net loss or any other measure of financial performance calculated and presented in accordance with GAAP. The use of Adjusted EBITDA as an analytical tool has limitations such as:
•Depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect cash requirements for such replacements; however, much of the depreciation and amortization currently reflected relates to amortization of acquired intangible assets as a result of business combination purchase accounting adjustments, which will not need to be replaced in the future;
•Adjusted EBITDA may not reflect changes in, or cash requirements for, our working capital needs or contractual commitments;
•Adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation;
•Adjusted EBITDA does not reflect interest or tax payments that could reduce cash available for use; and
•Other companies, including companies in our industry, might calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as comparative measures.
Because of these limitations, you should consider Adjusted EBITDA together with other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.
Liquidity and Capital Resources
To date, we have financed our operations primarily through the raising of capital including sales of our common stock or our convertible preferred stock, cash from operating activities, and borrowings under our credit facility. We believe that current cash and cash equivalents, cash flows from operating activities, availability under our existing credit facility will be sufficient to fund our operations for at least the next twelve months. In addition, we may utilize the sources of capital available to us under our Credit Facility to support our continued growth via acquisitions.
As of March 31, 2023, we had cash and cash equivalents of $257.7 million, $60.0 million of available borrowings under our credit facility, as discussed below, and $521.1 million of borrowings outstanding under our credit facility. As of December 31, 2022, we had cash and cash equivalents of $248.7 million, $60.0 million of available borrowings under our Credit Facility, and $522.5 million of borrowings outstanding under our credit facility. The $9.1 million increase in cash and cash equivalents from December 31, 2022 to March 31, 2023 was due primarily to the seasonality of our customer cash receipts in the three months ended March 31, 2023 from our customer contract renewals in the three months ended December 31, 2022.
Our cash and cash equivalents held by our foreign subsidiaries was $53.5 million as of March 31, 2023 and $34.8 million as of December 31, 2022. If these funds held by our foreign subsidiaries are needed for our domestic operations, a repatriation of these funds may require us to accrue and pay dividend withholding taxes in the foreign jurisdictions where applicable and accrue and pay U.S. taxes to the extent such dividend income exceeds our ability to utilize our net operating loss carryforwards. 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 March 31, 2023 and December 31, 2022, we had a working capital surplus of $180.2 million and surplus of $170.1 million, respectively.
Series A Preferred Stock
The Series A Preferred Stock as discussed in “Note 10. Series A Preferred Stock” provided us an additional $115.0 million in liquidity during the three months ended March 31, 2023, which we intend to use for (a) for general corporate purposes and (b) for transaction-related fees and expenses. As of March 31, 2023, the Series A Preferred Stock Issuance Costs totaled $4.6 million.
The holders of Series A Convertible Preferred Stock are entitled to dividends (i) at the rate of 4.5% per annum until but excluding the seven year anniversary of the closing, and (ii) at the rate of 7.0% per annum on and after the seven year anniversary of the closing, and are also entitled to fully participate in any dividends or other distributions declared or paid on our common stock on an as-converted basis. Dividends will be payable quarterly in arrears, and may be paid, at our option, in cash or by paying dividends in kind. Our ability to pay cash dividends is subject to the restrictions under the Credit Facility (as defined below). The Series A Preferred Stock had accrued unpaid dividends of $3.2 million as of March 31, 2023.
The Series A Preferred Stock will rank senior to our common stock with respect to distribution rights and rights upon our liquidation, dissolution or winding up (“Liquidation”), on parity with any class or series of our capital stock expressly designated as ranking on parity with the Series A Preferred Stock with respect to distribution rights and rights upon Liquidation, junior to any class or series of our capital stock expressly designated as ranking senior to the Series A Preferred
Stock with respect to distribution rights and rights upon Liquidation and junior in right of payment to our existing and future indebtedness, including the Credit Facility.
On October 21, 2022 we filed a resale registration statement on Form S-3 (File No. 333-267973), on behalf of Ulysses Aggregator, LP (the “Purchaser”) and pursuant to the Registration Rights Agreement between us and the Purchaser, which became effective on November 1, 2022 and covers (i) the issued Series A Preferred Stock and (ii) the number of shares of the Company’s common stock issuable upon conversion of such Series A Preferred Stock, which amount includes and assumes that dividends on the Series A Preferred Stock are paid by increasing the Liquidation Preference of the Series A Preferred Stock for a period of sixteen dividend payment periods from the initial issuance date. See “Note—10. Series A Preferred Stock” in the notes to our consolidated financial statements for more information regarding our Series A Preferred Stock.
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 March 31, 2023.
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 Facility 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 Facility and the $60 million Revolver under the Credit Facility.
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 March 31, 2023 we were in compliance with all covenants under the Credit Facility. See “Note 7. Debt—Credit Facility” for more information regarding our Credit Facility and outstanding debt as of March 31, 2023.
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 $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 March 31, 2023, the fair value of the interest rate swap was a $33.0 million asset. The decrease in the fair value of the interest rate swap assets during the three months ended March 31, 2023 is the result of the change in the yield curve for our interest rate swaps compared to December 31, 2022.
The following table summarizes our cash flows for the periods indicated:
Three Months Ended March 31,
2023
2022
(dollars in thousands)
Consolidated Statements of Cash Flow Data:
Net cash provided by operating activities
$
15,825
$
8,222
Net cash used in investing activities
(215)
(62,509)
Net cash used in financing activities
(6,781)
(4,211)
Effect of exchange rate fluctuations on cash
238
(217)
Change in cash and cash equivalents
9,067
(58,715)
Cash and cash equivalents, beginning of period
248,653
189,158
Cash and cash equivalents, end of period
$
257,720
$
130,443
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 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 on those bookings and renewals, 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 $15.8 million for the three months ended March 31, 2023 compared to cash provided by operating activities of $8.2 million for the three months ended March 31, 2022, an increase of $7.6 million. Working capital sources of cash for the three months ended March 31, 2023 included a $7.0 million decrease in accounts receivable related to the timing of collections. Working capital uses of cash for the three months ended March 31, 2023 included a $4.8 million increase in prepaid expenses and other current assets, partially offset by amortization of previously deferred costs of $3.4 million. In addition, working capital uses of cash for the three months ended March 31, 2023 included a $0.9 million decrease in accrued expenses and a $0.2 million decrease in accounts payable.
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 condensed consolidated balance sheets 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 and businesses. As our business grows, we expect our primary investing activities to continue to expand our product library, customer base, and market access.
For the three months ended March 31, 2023, cash used in investing activities consisted of purchases of property and equipment of $0.2 million. Cash used in investing activities decreased $62.3 million for the three months ended March 31, 2023 compared to the same period in 2022 primarily as a result of no acquisitions closed during the period compared to the two acquisitions in the comparable prior year period.
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 employee payroll tax payment activity.
Cash used in financing activities increased $2.6 million for the three months ended March 31, 2023 compared to the same period in 2022 due to a $2.6 million increase in additional consideration paid to sellers (i.e. acquisition holdbacks).
Critical Accounting Policies and the Use of Estimates
We prepare our condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of our condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We 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;
•income taxes;
•deferred sales commissions and sales commission expense;
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 May 9, 2023, the date of issuance of this Quarterly Report on Form 10-Q. 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.
Other Key Accounting Policies
Our unaudited interim financial statements and other financial information for the three months ended March 31, 2023, as presented herein and in “Item 1. Financial Statements” to this Quarterly Report on Form 10-Q, reflect no material changes in our critical accounting policies and estimates as set forth in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 28, 2023 (the “Annual Report”). Please refer to our Annual Report for a detailed description of our critical accounting policies that involve significant management judgment.
We evaluate our estimates, judgments and assumptions on an ongoing basis, and while we believe that our estimates, judgments and assumptions are reasonable, they are based upon information available at the time. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our condensed consolidated financial statements, refer to “Note 2. Basis of Presentation and Summary of Significant Accounting Policies—Recent Accounting Pronouncements” to our condensed consolidated financial statements.
Item 3. 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 the lender under our Credit 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 our $350 million, 7 year, term loan, and subsequent entry into an additional $190 million in incremental term loans under the Credit Facility, we entered into interest rate swap agreement for the full seven-year term, effectively fixing our interest rate at 5.4%. However, the interest rate associated with our $60 million, 5 year, revolving credit facility remains floating. As of March 31, 2023, we had an outstanding balance of $521.1 million under our Credit Facility. As there was no debt outstanding under our revolving credit facility as of March 31, 2023, a hypothetical change of 100 basis points would result in no change to total 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 Australian dollars, 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. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business could have resulted in a change in revenue of $1.7 million for the three months ended March 31, 2023. To date, we have not engaged in any currency hedging strategies. 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. 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 income (loss). In addition, we have intercompany loans that are used to fund the acquisition of foreign subsidiaries. Due to the long-term nature of these loans, the foreign currency gains (losses) resulting from remeasurement are recognized as a component of accumulated other comprehensive income (loss).
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2023, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of such date. Our management has concluded that the condensed consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with GAAP.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules 13a- 15(f) and 15d- 15(f) of the Exchange Act) during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, the risk.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2022 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. Except as set forth below, there have been no material changes during 2023 to the risk factors that were included in the Company's Annual Report on Form 10-K filed with the SEC on February 28, 2023.
Our Board has adopted a Tax Benefit Preservation Plan, which may not protect the future availability of the Company’s tax assets in all circumstances and which could delay or discourage takeover attempts that some shareholders may consider favorable.
As of March 31, 2023, we had approximately $147 million of U.S. federal net operating losses (“NOLs”) as well as other tax attributes that could be available in certain circumstances to reduce future U.S. corporate income tax liabilities. Pursuant to Section 382 (“Section 382”) of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), and the Treasury Regulations issued thereunder, a corporation that undergoes an “ownership change” is subject to limitations on its use of its existing NOL and interest expense carryforwards and certain other tax attributes (collectively, “Tax Assets”), which can be utilized in certain circumstances to offset future U.S. tax liabilities. Generally, an “ownership change” occurs if the percentage of the Company’s stock owned by one or more “five percent stockholders” increases by more than fifty percentage points over the lowest percentage of stock owned by such stockholders at any time during the prior three-year period or, if sooner, since the last “ownership change” experienced by the Company. In the event of such an “ownership change,” Section 382 imposes an annual limitation on the amount of post-change taxable income a corporation may offset with pre-change Tax Assets. Similar rules apply in various U.S. state and local jurisdictions. However, with respect to the substantial majority of our Tax Assets, while we have in recent years experienced significant changes in the ownership of our stock, we do not believe we have undergone an “ownership change” that would limit our ability to use these Tax Assets. However, there can be no assurance that the Internal Revenue Service will not challenge this position.
On May 2, 2023, our Board of Directors authorized and declared a dividend of one preferred stock purchase right for each outstanding share of Common Stock. See “Note 14. Subsequent Events” for additional information on the terms and operation of the Plan. By adopting the Plan, the Board of Directors is seeking to protect the Company’s ability to use its NOLs and other tax attributes to offset potential future income tax liabilities. The Company’s ability to use such NOLs and other tax attributes would be substantially limited if the Company experiences an “ownership change,” as defined in Section 382. The Plan is intended to make it more difficult for the Company to undergo an ownership change by deterring any person from acquiring 4.9% or more of the outstanding shares of stock without the approval of the Board of Directors. However, there can be no assurance that the Plan will prevent an “ownership change” from occurring for purposes of Section 382, and events outside of our control and which may not be subject to the Plan, such as sales of our stock by certain existing shareholders, may result in such an “ownership change” in the future. While we currently have a full valuation allowance against our NOLs and other historic Tax Assets for financial accounting purposes, if we have undergone or in the future undergo an ownership change that applies to our Tax Assets, our ability to use these Tax Assets could be substantially limited after the ownership change, and this limit could have a substantial adverse effect on our cash flows and financial position.
While the Plan is not principally intended to prevent a takeover, it may have an anti-takeover effect because an “acquiring person” thereunder may be diluted upon the occurrence of a triggering event. Accordingly, the Plan may complicate or discourage a merger, tender offer, accumulations of substantial blocks of our stock, or assumption of control by a substantial holder of our securities. The Plan should not interfere with any merger or other business combination approved by the Board of Directors. Because the Board of Directors may consent to certain transactions, the Plan gives our Board of Directors significant discretion to act in the best interests of shareholders.
Item 6. Exhibits
See the Exhibit Index immediately following this page, which is incorporated herein by reference.
Inline XBRL (Extensible Business Reporting Language). The following materials from this Quarterly Report on Form 10-Q for the periods ended March 31, 2023, formatted in Inline XBRL: (i) condensed consolidated balance sheets of Upland Software, Inc., (ii) condensed consolidated statements of operations of Upland Software, Inc., (iii) condensed consolidated statements of comprehensive income/(loss) of Upland Software, Inc., (iv) condensed consolidated statement of stockholders’ equity of Upland Software, Inc., (v) condensed consolidated statements of cash flows of Upland Software, Inc. and (vi) notes to unaudited condensed consolidated financial statements of Upland Software, Inc. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
104*
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
