Upland Software, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. Upland provides cloud-based enterprise work management software. This unaudited filing covers the quarter and nine months ended September 30, 2014, compared with the same 2013 periods. The company’s growth strategy relies substantially on acquisitions. Amounts below are in U.S. dollars.
Financial performance and position
- Revenue: Q3 revenue was $16.3 million, up 57% year over year; nine-month revenue was $48.1 million, up 66%. Subscription and support revenue grew 60% in Q3 and 64% for nine months, accounting for 76% and 75% of revenue, respectively.
- Growth mix: Management attributed $4.7 million of Q3 revenue growth to ComSci and Clickability, acquired in late 2013. For the nine-month comparison, $17.5 million of growth was attributed to 2013 acquisitions, net of the FileBound revenue already included in the prior-year period. Canadian subscription and support revenue was reduced by exchange-rate effects.
- Profitability and margins: Q3 gross profit was $10.5 million (65% margin, versus 67%); net loss was $2.4 million, versus $1.4 million. Nine-month gross profit was $31.0 million (64% margin, versus 67%); net loss was $17.4 million, versus $4.0 million. Adjusted EBITDA, a non-GAAP measure, was $0.5 million for Q3 and $3.2 million for nine months; margins were 3% and 7%, versus 5% and 9% in 2013.
- Cash flow: Nine-month operating cash flow was positive $0.7 million, versus negative $0.2 million. Investing cash outflow was $0.5 million, and financing cash outflow was $1.5 million. Cash declined by $1.5 million to $3.2 million.
- Liquidity and debt: Current assets were $23.6 million and current liabilities $60.6 million; the $37.1 million working-capital deficit includes deferred revenue and debt classified as current. Total notes payable were $27.6 million, of which $27.1 million was classified as current. Cash was $3.2 million at quarter-end.
Material changes versus prior period
- Revenue expanded substantially, but management said acquisitions accounted for a significant portion of the increase. Gross margin declined three percentage points for both Q3 and the nine-month period.
- Nine-month R&D expense rose to $22.2 million from $7.1 million, including an $11.2 million noncash charge for common shares issued to a related-party technology-services vendor in connection with an agreement amendment.
- General and administrative expense increased to $9.2 million for nine months from $4.6 million, partly reflecting acquisitions and costs of preparing to operate as a public company.
- Debt covenant compliance weakened: the company would have been in violation of certain U.S. and Canadian loan covenants at September 30. Comerica waived compliance through March 31, 2015; because the waiver did not extend more than one year beyond the balance-sheet date, the related loan balances were classified as current.
Outlook, commentary, and risks
- No specific revenue or earnings guidance is provided. Management expected post-IPO cash and available borrowing capacity to cover anticipated needs for at least 12 months, while noting that future capital needs depend on growth, investment and acquisitions.
- The November 2014 IPO generated approximately $42.9 million in net proceeds. The company planned to use about $11.5 million to repay Comerica debt and fund growth; it also subsequently acquired Solution Q and Mobile Commons. These events occurred after the reporting date.
- Management planned to expand sales, enhance products, grow internationally and pursue acquisitions. It cautioned that it might not achieve or sustain profitability and expected continued operating expenses and public-company costs.
- Key risks include covenant renegotiation or repayment needs, customer nonrenewals and downgrades, acquisition integration and execution, competition, foreign-exchange exposure, data-center availability, security and privacy incidents, and the company’s history of losses. The company reported no legal proceedings it believed would have a material adverse effect and said disclosure controls were effective as of September 30.
Important facts for investors to verify
- Whether the Comerica loan agreements were amended after the temporary covenant waiver, and the debt repayment made using IPO proceeds.
- How much of subsequent revenue growth was organic versus acquired, and whether acquisition integration improves margins.
- The effect of the $11.2 million related-party share-based charge and the terms and ongoing commitments under the technology-services agreement.
- Post-IPO cash, debt, liquidity and acquisition funding, including the costs and performance of Solution Q and Mobile Commons.
- Underlying cash generation relative to reported net losses and non-GAAP Adjusted EBITDA.