10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
 
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
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)
 
 
 
 
State of Delaware
27-2992077
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
401 Congress Avenue, Suite 1850
Austin, Texas
78701
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (512) 960-1010
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)  
 
 
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  x   No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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  x   No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
x
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
 
Shares Outstanding at November 5, 2015
Common Stock, $0.0001 par value
 
15,554,588


Table of Contents

Upland Software, Inc.
Table of Contents
 
 
 
Page
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014
 
Condensed Consolidated Statements of Operations for the Three and Nine months ended September 30, 2015 and September 30, 2014
 
Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine months ended September 30, 2015 and September 30, 2014
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and September 30, 2014
 
 



Table of Contents

Item 1. Financial Statements
Upland Software, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
 
September 30,
2015
 
December 31, 2014
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
28,694

 
$
30,988

Accounts receivable, net of allowance of $896 and $890 at September 30, 2015 and December 31, 2014, respectively
10,433

 
14,559

Prepaid and other
1,778

 
2,069

Total current assets
40,905

 
47,616

Canadian tax credits receivable
2,167

 
3,959

Property and equipment, net
4,507

 
3,930

Intangible assets, net
29,972

 
34,751

Goodwill
43,098

 
45,146

Other assets
368

 
364

Total assets
$
121,017

 
$
135,766

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,241

 
$
2,258

Accrued compensation
3,064

 
2,372

Accrued expenses and other
3,111

 
4,304

Deferred revenue
18,749

 
21,182

Due to seller
1,898

 
4,365

Current maturities of notes payable (includes unamortized discount of $255 and $38 at September 30, 2015 and December 31, 2014, respectively, based on imputed interest rate of 6.3%)
1,495

 
10,964

Total current liabilities
30,558

 
45,445

Canadian tax credit liability to sellers
452

 
1,616

Notes payable, less current maturities (includes unamortized discount of $813 and $117 at September 30, 2015 and December 31, 2014, respectively, based on imputed interest rate of 6.3%)
22,624

 
12,407

Deferred revenue
21

 
194

Noncurrent deferred tax liability, net
2,712

 
3,006

Other long-term liabilities
1,847

 
1,701

Total liabilities
58,214

 
64,369

Stockholders’ equity:
 
 
 
Common stock, $0.0001 par value; 50,000,000 shares authorized: 15,554,588 and 15,249,118 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively
2

 
2

Additional paid-in capital
110,389

 
108,337

Accumulated other comprehensive loss
(2,961
)
 
(1,716
)
Accumulated deficit
(44,627
)
 
(35,226
)
Total stockholders’ equity
62,803

 
71,397

Total liabilities and stockholders’ equity
$
121,017

 
$
135,766

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1
Table of Contents

Upland Software, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Revenue:
 
 
 
 
 
 
 
Subscription and support
$
14,129

 
$
12,368

 
$
42,474

 
$
35,910

Perpetual license
540

 
850

 
2,197

 
1,947

Total product revenue
14,669

 
13,218

 
44,671

 
37,857

Professional services
2,436

 
3,057

 
7,640

 
10,242

Total revenue
17,105

 
16,275

 
52,311

 
48,099

Cost of revenue:
 
 
 
 
 
 
 
Subscription and support
4,771

 
3,488

 
14,344

 
10,092

Professional services
1,677

 
2,305

 
5,317

 
7,042

Total cost of revenue
6,448

 
5,793

 
19,661

 
17,134

Gross profit
10,657

 
10,482

 
32,650

 
30,965

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
2,929

 
3,767

 
9,907

 
10,918

Research and development
3,852

 
3,793

 
11,930

 
22,186

Refundable Canadian tax credits
(115
)
 
(138
)
 
(358
)
 
(412
)
General and administrative
4,494

 
3,555

 
14,327

 
9,231

Depreciation and amortization
1,130

 
1,067

 
3,207

 
3,188

Acquisition-related expenses
176

 
108

 
1,081

 
629

Total operating expenses
12,466

 
12,152

 
40,094

 
45,740

Loss from operations
(1,809
)
 
(1,670
)
 
(7,444
)
 
(14,775
)
Other expense:
 
 
 
 
 
 
 
Interest expense, net
(462
)
 
(397
)
 
(1,385
)
 
(1,231
)
Other expense, net
137

 
60

 
(387
)
 
(308
)
Total other expense
(325
)
 
(337
)
 
(1,772
)
 
(1,539
)
Loss before provision for income taxes
(2,134
)
 
(2,007
)
 
(9,216
)
 
(16,314
)
Provision for income taxes
(190
)
 
(438
)
 
(185
)
 
(1,128
)
Net loss
$
(2,324
)
 
$
(2,445
)
 
$
(9,401
)
 
$
(17,442
)
Preferred stock dividends and accretion
—

 
(445
)
 
—

 
(1,320
)
Net loss attributable to common shareholders
$
(2,324
)
 
$
(2,890
)
 
$
(9,401
)
 
$
(18,762
)
Net loss per common share, basic and diluted
$
(0.16
)
 
$
(0.80
)
 
$
(0.63
)
 
$
(5.60
)
Weighted-average common shares outstanding, basic and diluted
14,934,796

 
3,610,459

 
14,882,893

 
3,350,786

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2
Table of Contents

Upland Software, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Net loss
 
$
(2,324
)
 
$
(2,445
)
 
$
(9,401
)
 
$
(17,442
)
Foreign currency translation adjustment
 
(757
)
 
(502
)
 
(1,245
)
 
(426
)
Comprehensive loss
 
$
(3,081
)
 
$
(2,947
)
 
$
(10,646
)
 
$
(17,868
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3
Table of Contents

Upland Software, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
Operating activities
 
 
 
 
Net loss
 
$
(9,401
)
 
$
(17,442
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
 
6,077

 
5,463

Deferred income taxes
 
450

 
52

Foreign currency re-measurement loss
 
779

 
—

Non-cash interest and other expense
 
312

 
519

Non-cash stock compensation expense
 
1,990

 
617

Stock-based compensation—related party vendor
 
—

 
11,220

Changes in operating assets and liabilities, net of purchase business combinations:
 
 
 
 
Accounts receivable
 
3,689

 
(3,487
)
Prepaids and other
 
1,097

 
(3,643
)
Accounts payable
 
40

 
3,545

Accrued expenses and other liabilities
 
(2,069
)
 
250

Deferred revenue
 
(1,293
)
 
3,574

Net cash provided by operating activities
 
1,671

 
668

Investing activities
 
 
 
 
Purchase of property and equipment
 
(461
)
 
(544
)
Purchase of customer relationships
 
(372
)
 
—

Purchase business combinations, net of cash acquired
 
(2,714
)
 
—

Net cash used in investing activities
 
(3,547
)
 
(544
)
Financing activities
 
 
 
 
Payments on capital leases
 
(767
)
 
(384
)
Proceeds from notes payable, net of issuance costs
 
24,088

 
2,700

Payments on notes payable
 
(23,592
)
 
(3,753
)
Issuance costs
 
—

 
(97
)
Issuance of common stock, net of issuance costs
 
62

 
—

Additional consideration paid to sellers of businesses
 
(9
)
 
—

Net cash used in financing activities
 
(218
)
 
(1,534
)
Effect of exchange rate fluctuations on cash
 
(200
)
 
(103
)
Change in cash and cash equivalents
 
(2,294
)
 
(1,513
)
Cash and cash equivalents, beginning of period
 
30,988

 
4,703

Cash and cash equivalents, end of period
 
$
28,694

 
$
3,190

Supplemental disclosures of cash flow information
 
 
 
 
Cash paid for interest
 
$
1,108

 
$
1,035

Cash paid for taxes
 
$
327

 
$
34

Noncash investing and financing activities
 
 
 
 
Equipment acquired pursuant to capital lease obligations
 
$
1,796

 
$
1,059

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

Upland Software, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1. 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 the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
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 and include all adjustments necessary for a fair presentation. The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015 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 2014 Annual Report on Form 10-K filed with the SEC on March 31, 2015.
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 consolidated financial statements, and the reported amounts of revenues and expenses. Significant items subject to such estimates include allowance for doubtful accounts, stock-based compensation, warrant liabilities, acquired intangible assets, the useful lives of intangible assets and property and equipment, and income taxes. In accordance with GAAP, management bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Management regularly evaluates its estimates and assumptions using historical experience and other factors; however, actual results could differ from those estimates.
Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents and accounts receivable. The Company’s cash and cash equivalents are placed with high-quality financial institutions, which, at times, may exceed federally insured limits. The Company has not experienced any losses in these accounts, and the Company does not believe it is exposed to any significant credit risk related to cash and cash equivalents. The Company provides credit, in the normal course of business, to a number of its customers. The Company performs periodic credit evaluations of its customers and generally does not require collateral. No individual customer represented more than 10% of total revenues in the three and nine months ended September 30, 2015 or 2014 or for the year ended December 31, 2014, or more than 10% of accounts receivable as of September 30, 2015.
Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, and accounts payable, and long–term debt. The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value, primarily due to short maturities. The carrying values of the Company’s debt instruments approximated their fair value based on rates currently available to the Company.

5

Upland Software, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Recent Accounting Pronouncements
In May 2014, the FASB issued FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle. ASU 2014-09 requires disclosures enabling users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, using one of two retrospective application methods. Early application is permitted. The Company has not selected a transition method and is currently evaluating the impact of the provisions of ASC 606 as well as the timing of its adoption.
In August 2014, the FASB issued FASB ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. The new standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The adoption of this standard is not expected to have a material impact on our financial statements. The Company does not intend to adopt this standard prior to the effective date.
In April 2015, the FASB issued FASB ASU No. 2015-03 Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. Under this revised guidance, debt issuance costs should be presented in the balance sheet as a direct deduction from the carrying value of the associated debt, consistent with the presentation of a debt discount. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. This revised guidance is effective for annual periods beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. The Company has adopted this standard in the second quarter of 2015. The December 31, 2014 balance sheet was retrospectively adjusted to reclassify $0.1 million from Other non-current assets to a reduction of the Notes payable liability.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment. The guidance is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. The Company does not intend to adopt this standard prior to the effective date.
2. Acquisitions
2014 Acquisitions
On November 21, 2014, the Company acquired 100% of the outstanding capital of Solution Q Inc. (Solution Q). On December 10, 2014, the Company acquired 100% of the outstanding capital of Mobile Commons, Inc. (Mobile Commons).
The Company recorded the purchase of the acquisitions described above using the acquisition method of accounting and, accordingly, recognized the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The results of operations of the acquisitions are included in the Company’s consolidated results of operations beginning with the date of the acquisition. The purchase price allocations for the 2014 acquisitions are preliminary as the Company has not obtained and evaluated all of the detailed information necessary to finalize the opening balance sheet amounts. The Company has recorded the purchase price

6

Upland Software, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)

allocations based upon acquired company information that is currently available. The Company expects to finalize its purchase price allocations in late 2015.
3. 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, therefore, requiring an entity to develop its own assumptions.
Changes to the fair value of earnout liabilities are recorded to other expense, net. Liabilities measured at fair value on a recurring basis are summarized below (in thousands):
 
Fair Value Measurements at December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Earnout consideration liability
$
—

 
$
—

 
$
500

 
$
500

 
Fair Value Measurements at September 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Earnout consideration liability
$
—

 
$
—

 
$
500

 
$
500

The fair value of the earnout consideration was determined using the Binary Option model based on the present value of the probability-weighted earnout consideration.
4. Goodwill and Other Intangible Assets
Changes in the Company’s goodwill balance for the nine months ended September 30, 2015 are summarized in the table below (in thousands):
Balance at January 1, 2015
$
45,146

Adjustment of 2014 business combination
(153
)
Foreign currency translation adjustment
(1,895
)
Balance at September 30, 2015
$
43,098

Intangible assets, net, include the estimated acquisition-date fair values of customer relationships, marketing-related assets, and developed technology that the Company recorded as part of its business acquisitions and additional purchases of customer relationships, with useful lives of approximately 1 year, totaling $766,000 for the nine months ended September 30, 2015. The following is a summary of the Company’s intangible assets, net (in thousands):
 
Estimated Useful
Life (Years)
 
Gross
Carrying Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
December 31, 2014:
 
 
 
 
 
 
 
Customer relationships
10
 
$
30,053

 
$
5,813

 
$
24,240

Trade name
1-3
 
2,812

 
2,027

 
785

Developed technology
4-7
 
13,305

 
3,579

 
9,726

Total intangible assets
 
 
$
46,170

 
$
11,419

 
$
34,751


7

Upland Software, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 
Estimated Useful
Life (Years)
 
Gross
Carrying Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
September 30, 2015:
 
 
 
 
 
 
 
Customer relationships
1-10
 
$
29,683

 
$
8,041

 
$
21,642

Trade name
1-3
 
2,777

 
2,367

 
410

Developed technology
4-7
 
12,928

 
5,008

 
7,920

Total intangible assets
 
 
$
45,388

 
$
15,416

 
$
29,972

The following table summarizes the Company's weighted-average amortization period, in total and by major finite-lived intangible asset class (in years), as of:
 
September 30, 2015
 
December 31, 2014
Customer relationships
9.5
 
10
Trade name
3
 
3
Developed technology
6.4
 
6.6
Total weighted-average amortization period
8.3
 
8.7
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. There have been no indicators of impairment or change in the useful life during the three and nine months ended September 30, 2015 and 2014. Total amortization expense was $4.5 million and $3.8 million during the nine months ended September 30, 2015 and 2014, respectively.
Estimated annual amortization expense for the next five years and thereafter is as follows (in thousands):
 
Amortization
Expense
Year ending December 31:
 
Remainder of 2015
$
1,550

2016
5,828

2017
5,181

2018
4,947

2019 and thereafter
12,466

Total
$
29,972


8

Upland Software, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)

5. Income Taxes
The Company’s income tax provision for the three and nine months ended September 30, 2015 and 2014 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 reevaluated each quarter based on the estimated tax expense for the full year. The tax provision for the three and nine months ended September 30, 2015 and 2014 is primarily related to foreign income taxes associated with our Canadian 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.The Company has historically incurred operating losses in the United States 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 September 30, 2015 and 2014.
The Company has not taken any uncertain tax positions impacting current or deferred taxes. Federal, state, and foreign income tax returns have been filed in jurisdictions with varying statutes of limitations. Varying among the separate companies, tax years 1998 through 2014 remain subject to examination by federal and most state tax authorities due to our net operating loss carryforwards. In the foreign jurisdictions, tax years 2008 through 2014 remain subject to examination.

6. Net Loss Per Share
The following table sets forth the computations of loss per share (in thousands, except share and per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended   September 30,
 
2015
 
2014
 
2015
 
2014
 

 

 

 

Numerators:
 
 
 
 
 
 
 
Net Loss
$
(2,324
)
 
$
(2,445
)
 
$
(9,401
)
 
$
(17,442
)
Preferred stock dividends and accretion
—

 
(445
)
 
—

 
(1,320
)
Net loss attributable to common stockholders
$
(2,324
)
 
$
(2,890
)
 
$
(9,401
)
 
$
(18,762
)
Denominator:
 
 
 
 
 
 
 
Weighted–average common shares outstanding, basic and diluted
14,934,796

 
3,610,459

 
14,882,893

 
3,350,786

Net loss per common share, basic and diluted
$
(0.16
)
 
$
(0.80
)
 
$
(0.63
)
 
$
(5.60
)

9

Upland Software, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Due to the net losses for the three and nine months ended September 30, 2015 and 2014, basic and diluted loss per share were the same, as the effect of all potentially dilutive securities would have been anti–dilutive. The following table sets forth the anti–dilutive common share equivalents:
 
September 30,
 
2015
 
2014
Redeemable Convertible preferred stock:
 
 
 
Series A preferred stock
—

 
2,821,181

Series B preferred stock
—

 
1,701,909

Series B–1 preferred stock
—

 
237,740

Series B–2 preferred stock
—

 
155,598

Series C preferred stock
—

 
1,918,048

Stock options
718,434

 
702,849

Restricted stock
583,142

 
338,773

Total anti–dilutive common share equivalents
1,301,576

 
7,876,098

7. Commitments and Contingencies
Capital Leases
During the three months ended September 30, 2015, the Company entered into six capital lease agreements for computer equipment. The term of each lease is 48 months and the Company anticipates making approximately $554,000 in total payments throughout the lease term.
The current and long-term portion of capital lease obligations are recorded in the accrued expenses and other long-term liabilities line items on the balance sheet, respectively.
Purchase Commitments
The Company has an outstanding purchase commitment for software development services pursuant to a technology services agreement in the amount of $2.1 million in 2015, of which $1.4 million was incurred during the nine months ended September 30, 2015. For years after 2015, the purchase commitment amount for software development services will be equal to the prior year purchase commitment increased (decreased) by the percentage change in total revenue for the prior year as compared to the preceding year. For example, if 2015 total revenues increase by 10% as compared to 2014 total revenues, then the 2016 purchase commitment would increase by approximately $213,000 from the 2015 purchase commitment amount to $2.3 million. A similar 10% increase in 2016 total revenues as compared to 2015 total revenues would increase the 2017 purchase commitment amount from the 2016 purchase commitment amount of $2.3 million by approximately $234,000 to $2.6 million.
Litigation
In the normal course of business, the Company may become involved in various lawsuits and legal proceedings. While the ultimate results of these matters cannot be predicted with certainty, the Company does not expect them to have a material adverse effect on the consolidated financial position or results of operations of the Company.
8. Stockholders' Equity
Restricted Stock Awards
Restricted share activity during the nine months ended September 30, 2015 was as follows:

10

Upland Software, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 
 
Number of
Restricted Shares
Outstanding
 
Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2014
 
438,939

 
$
8.71

Shares granted
 
190,000

 
$
6.64

Shares vested
 
(45,797
)
 
$
5.25

Shares forfeited
 
—

 
$
—

Outstanding at September 30, 2015
 
583,142

 
$
8.31

Stock Option Activity
Stock option activity during the nine months ended September 30, 2015 was as follows:
 
 
Number of
Options
Outstanding
 
Weighted–
Average
Exercise
Price
Outstanding at December 31, 2014
 
665,210

 
$
4.39

Options granted
 
315,359

 
$
6.64

Options exercised
 
(105,545
)
 
$
2.18

Options forfeited
 
(156,590
)
 
$
6.07

Outstanding at September 30, 2015
 
718,434

 
$
5.33

Share-based Compensation
The Company recognized share-based compensation expense from all awards in the following expense categories (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Cost of subscription and support revenue
$
17

 
$
8

 
$
41

 
$
21

Cost of professional services revenue
1

 
5

 
(7
)
 
16

Sales and marketing
5

 
10

 
55

 
24

Research and development
69

 
16

 
189

 
45

General and administrative
563

 
211

 
1,712

 
511

Total
$
655

 
$
250

 
$
1,990

 
$
617


9. Domestic and Foreign Operations
Revenue by geography is based on the ship-to address of the customer, which is intended to approximate where the customer’s users are located. The ship-to country is generally the same as the billing country. The Company has operations in the U.S., Canada and Europe. Information about these operations is presented below (in thousands):

11

Upland Software, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2015
 
2014
2015
 
2014
Revenues:
 
 
 
 
 
 
U.S.
$
14,271

 
$
12,856

$
42,531

 
$
37,870

Canada
981

 
929

3,203

 
2,811

Other International
1,853

 
2,490

6,577

 
7,418

Total Revenues
$
17,105

 
$
16,275

$
52,311

 
$
48,099

10. Related Party Transactions
The Company purchased software development services pursuant to a technology services agreement with a company controlled by a non-management investor in the Company during the three months ended September 30, 2015 and 2014 in the amount of $550,000 and $532,000, and during the nine ended September 30, 2015 and 2014 in the amount of $1.4 million and $1.6m, respectively. In January 2014, the Company issued 1,803,574 shares of common stock to this company in connection with the amendment of such technology services agreement and took a noncash charge of $11.2 million recorded in research and development expenses. Refer to Note 7 for a description of purchase commitments to this company.
When the Company receives requested services as detailed by statements of work pursuant to the software development agreement, it determines whether such software development costs should be capitalized as either internally-used software or software to be sold or otherwise marketed. If such costs are not capitalizable, the Company expenses such costs as the services are received. If the Company anticipates that it will not utilize the full amount of the annual minimum fee, the estimated unused portion of the annual minimum fee is expensed at that time.
11. Subsequent Events
On November 13, 2015, the Company acquired all outstanding shares of Ultriva, Inc., a cloud-based supply chain work management software provider. The purchase price consideration paid in the transaction is approximately $4.9 million in cash payable at closing (net of approximately $0.5 million of cash acquired), a $0.1 million cash holdback payable in four (4) months (subject to working capital claims), a $0.6 million cash holdback payable in twelve (12) months (subject to indemnifications claims) and approximately 225,000 shares of the Company’s common stock (additionally, up to $0.2 million in shares are expected to be held for 12 months and subject to indemnification claims by the Company).



12
Table of Contents

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 our unaudited condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.
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 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. Factors or risks that could cause our actual results to differ from the results we anticipate include, but are not limited to:
•
our financial performance and our ability to achieve or sustain profitability or predict future results;
•
our ability to attract and retain customers;our ability to deliver high-quality customer service;
•
the growth of demand for enterprise work management applications;
•
our ability to effectively manage our growth;
•
our ability to consummate and integrate acquisitions;
•
maintaining our senior management team and key personnel;
•
our ability to maintain and expand our direct sales organization;
•
our ability to obtain financing in the future on acceptable terms or at all;
•
our ability to adapt to changing market conditions and competition;
•
our ability to successfully enter new markets and manage our international expansion;
•
the operation and reliability of our third-party data centers;
•
our ability to adapt to technological change and continue to innovate;
•
economic and financial conditions;
•
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 ability to comply with privacy laws and regulations; and
•
other risk factors included under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 31, 2015, as updated by this Quarterly Report on Form 10-Q.

13
Table of Contents

The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from our forward-looking statements, including those factors discussed in Part I: "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 31, 2015, as updated by Part II, Item 1A: “Risk Factors” of this Quarterly Report on Form 10-Q and other risks and uncertainties detailed in this and our other reports and filings with the SEC. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
Overview
Upland is a leading provider of cloud-based enterprise work management software. We define enterprise work management software as software applications that enable organizations to plan, manage and execute projects and work. Our software applications help organizations better optimize the allocation and utilization of their people, time and money. We provide a family of cloud-based enterprise work management software applications for the information technology, process excellence, finance, professional services and marketing functions within organizations. Our software applications address a broad range of enterprise work management needs, from strategic planning to task execution.
We are helping transform how work gets done by providing organizations and their knowledge workers with software applications that better align resources with business objectives and increase visibility, governance, collaboration, quality of customer experience and responsiveness to changes in the business environment. This results in increased work capacity, higher productivity, better execution and greater levels of customer engagement. Our applications are easy-to-use, highly scalable and offer real-time collaboration for knowledge workers distributed on a local or global scale. Our applications address enterprise work challenges in the following categories:
•
Program and Portfolio Management: Enables customers to gain high-level visibility across their organizations and improve top-down governance and management of programs, initiatives, investments and projects.
•
Project Management and Collaboration: Enables customers to improve collaboration and the execution of both projects and unstructured work.
•
Workflow Automation and Enterprise Content Management: Enables customers to automate document-based workflows and control access and distribution of their content to boost productivity, encourage collaboration, improve compliance and enhance and influence customer engagement.
•
Digital Engagement Management: Enables customers to automate the digital provision of personalized content to target audiences via website and mobile devices, providing a timely and highly relevant customer experience.
•
Professional Services Automation: Enables customers to more effectively manage their knowledge workers to better track work, expenses and client billing while improving scheduling, utilization and alignment of human capital.
•
Financial Management: Enables customers to have visibility into the cost, quality and value of internal services delivered within their organizations, which helps improve alignment during planning and budgeting processes, and better assess and validate proposed investments and initiatives of a particular line of business.
We sell our software applications primarily through a direct sales organization comprised of inside sales and field sales personnel. In addition to our direct sales organization, we have an indirect sales organization, which sells to distributors and value-added resellers. We employ a land-and-expand go-to-market strategy. After we demonstrate the value of an initial application to an organization, our sales and account management teams work to expand the

14
Table of Contents

adoption of that initial application across the organization, as well as cross-sell additional applications to address other enterprise work management needs of the organization. Our customer success organization supports our direct sales efforts by managing the post-sale customer lifecycle.
Our subscription agreements are typically sold either on a per-seat basis or on a minimum contracted volume basis with overage fees billed in arrears, depending on the application being sold. We service customers ranging from large global corporations and government agencies to small- and medium-sized businesses. As of December 31, 2014, we had more than 1,600 customers with over 225,000 users, excluding users under volume-based contracts, across a broad range of industries, including financial services, retail, technology, manufacturing, education, consumer goods, media, telecommunications, government, food and beverage, healthcare and life sciences.
We have achieved significant growth and scale in a relatively short period of time. Through a series of acquisitions, we have established a diverse family of software applications under the Upland brand, each of which addresses a specific enterprise work management need. For the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, our total revenue grew from $48.1 million to $52.3 million, representing a 9% period-over-period growth rate. For the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, our total revenue declined by $2.2 million due to lower total revenue from our Canada operations due to the change in the foreign currency exchange rate between the Canada dollar versus the U.S. dollar during those periods. Therefore, on a constant currency basis, total revenue increased by $6.4 million, or 13%. For the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, our subscription and support revenue grew from $35.9 million to $42.5 million, representing an 18% period-over-period growth rate. For the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, our subscription and support revenue declined by $1.7 million due to lower subscription and support revenue from our Canada operations due to the change in the foreign currency exchange rate between the Canada dollar versus the U.S. dollar during those periods. Therefore, on a constant currency basis, subscription and support revenue increased by $8.3 million, or 23%. See Note 9 of the Notes to Condensed Consolidated Financial Statements for more information regarding our revenue as it relates to domestic and foreign operations.
Our operating results in a given period can fluctuate based on the mix of subscription and support, perpetual license and professional services revenue. For the nine months ended September 30, 2015 and 2014, our subscription and support revenue accounted for 81% and 75% of total revenue, respectively. Our customer agreements for program and portfolio management, project management and collaboration, and professional services automation typically are sold on a per-seat basis with terms varying from one to three years, paid in advance. Our customer agreements for workflow automation and enterprise content management and financial management historically have been sold on a volume basis with a one-year term, paid in advance. We generally seek to enter into multi-year contracts with our customers when possible. In each case, our customer agreements provide us with revenue visibility over a number of quarters. We typically negotiate the total number of seats or total minimum contracted volume a customer is entitled to use as part of its subscription, but these seats or minimum contracted volume may not be fully utilized over the term of the agreement. In addition, where customers exceed the minimum contracted volume, additional overage fees are billed in arrears.
Historically, we have sold certain of our applications under perpetual licenses, which also are paid in advance. For the nine months ended September 30, 2015 and 2014, our perpetual license revenue accounted for 4% and 4% of total revenue, respectively. We expect perpetual license revenue to decrease as a percentage of revenue in the future. The support agreements related to our perpetual licenses are one-year in duration and entitle the customer to support and unspecified upgrades. The revenue related to such support agreements is included as part of our subscription and support revenue.
Professional services revenue consists of fees related to implementation, data extraction, integration and configuration and training on our applications. For the nine months ended September 30, 2015 and 2014, our professional services revenue accounted for 15% and 21% of total revenue, respectively. We expect professional services revenue to decrease as a percentage of revenue in future periods due to customer expansion initiatives

15
Table of Contents

which have driven more focus on expanding existing customer recurring revenue and less focus on new customer professional service projects.
We sell our software applications primarily through a direct sales organization comprised of inside sales and field sales personnel. In addition to our direct sales organization, we have an indirect sales organization, which sells to distributors and value-added resellers. We employ a land-and-expand go-to-market strategy. After we demonstrate the value of an initial application to an organization, our sales and account management teams work to expand the adoption of that initial application across the organization, as well as cross-sell additional applications to address other enterprise work management needs of the organization. Our customer success organization supports our direct sales efforts and our professional services organization by managing the post-sale customer life cycle. To support continued growth, we intend to pursue acquisitions of complementary technologies, products and businesses to enhance the features and functionalities of our applications, expand our customer base and provide access to new markets and increased benefits of scale. We will prioritize acquisitions within the enterprise functions we currently serve, including information technology, process excellence, finance, professional services and marketing, as well as pursue acquisitions that serve other enterprise functions. Consistent with our growth strategy, we made a total of eight acquisitions in 2014, 2013, and 2012.

Key Metrics
In addition to the GAAP financial measures described below in “—Components of Operating Results,” we regularly review the following key metrics to evaluate and identify trends in our business, measure our performance, prepare financial projections and make strategic decisions:
Adjusted EBITDA

Three Months Ended September 30,

Nine Months Ended September 30,

2015

2014

2015

2014

(dollars in thousands)
Adjusted EBITDA
$
1,059


$
546


$
2,075


$
3,154

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, 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 non-recurring litigation expenses.
The decrease in Adjusted EBITDA for the three and nine months ended September 30, 2015 is primarily due to additional operating expenses associated with being a new publicly traded company.
The following table presents a reconciliation of net loss from continuing operations, the most comparable GAAP measure, to Adjusted EBITDA for each of the periods indicated.

16
Table of Contents


Three Months Ended September 30,

Nine Months Ended September 30,

2015

2014

2015

2014

(dollars in thousands)

(dollars in thousands)
Reconciliation of Net loss to Adjusted EBITDA:







Net Loss
$
(2,324
)

$
(2,445
)

$
(9,401
)

$
(17,442
)
Depreciation and amortization expense
2,037


1,858


6,077


5,463

Interest expense, net
462


397


1,385


1,231

Other expense (income), net
(137
)

(60
)

387


308

Provision for income taxes
190


438


185


1,128

Stock-based compensation expense
655


250


1,990


617

Acquisition-related expense
176


108


1,081


629

Stock-based compensation expense --- related party vendor
—


—


—


11,220

Non-recurring litigation expense
—


—


371


—

Adjusted EBITDA
$
1,059


$
546


$
2,075


$
3,154









Total Revenue
$
17,105


$
16,275


$
52,311


$
48,099









Adjusted EBITDA margin
6
%

3
%

4
%

7
%
We believe that Adjusted EBITDA provides useful information to management, investors and others in understanding and evaluating our operating results for the following reasons:
•
Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired;
•
our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, in the preparation of our annual operating budget, as a measure of our operating performance, to assess the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance because Adjusted EBITDA eliminates the impact of items that we do not consider indicative of our core operating performance;
•
Adjusted EBITDA provides more consistency and comparability with our past financial performance, facilitates period-to-period comparisons of our operations and also facilitates comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and
•
we anticipate that our investor and analyst presentations will include Adjusted EBITDA as a supplemental measure of our overall operating performance. 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;

17
Table of Contents

•
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.

Non-GAAP Net Income (Loss)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(dollars in thousands, except share and per share data)
 
(dollars in thousands, except share and per share data)
Reconciliation of Non-GAAP net income (loss):
 
 
 
 
 
 
 
Net loss
$
(2,324
)
 
$
(2,445
)
 
$
(9,401
)
 
$
(17,442
)
Add:
 
 
 
 
 
 
 
Stock-based compensation expense
655

 
250

 
1,990

 
617

Amortization of purchased intangibles
1,535

 
1,275

 
4,451

 
3,820

Amortization of debt discount
66

 
—

 
99

 
—

Acquisition-related expense
176

 
108

 
1,081

 
629

Stock-based compensation expense --- related party vendor
—

 
—

 
—

 
11,220

Non-recurring litigation expense
—

 
—

 
371

 
—

Tax effect on non-GAAP adjustments above
(81
)
 
(73
)
 
(291
)
 
(220
)
Non-GAAP net income (loss)
$
27

 
$
(885
)
 
$
(1,700
)
 
$
(1,376
)
 
 
 
 
 
 
 
 
Weighted average ordinary shares outstanding - diluted
14,934,796

 
3,610,459

 
14,882,893

 
3,350,786

Non-GAAP earnings (loss) per share - diluted
$
—

 
$
(0.25
)
 
$
(0.11
)
 
$
(0.41
)
Non-GAAP net income (loss). We monitor our Non-GAAP net income (loss) to help us evaluate the effectiveness and efficiency of our operations. Non-GAAP net income (loss) is a non-GAAP financial measure. We define Non-GAAP net income (loss) as net loss, calculated in accordance with GAAP, stock-based compensation expense, amortization of purchased intangibles expense, amortization of debt discount, acquisition-related expense, non-recurring litigation expense, and the tax effect on these non-GAAP adjustments.

18
Table of Contents

Results of Operations
Consolidated Statements of Operations Data
The following tables set forth our results of operations for the specified periods, as well as our results of operations for the specified periods as a percentage of revenue. The period-to-period comparisons of results of operations are not necessarily indicative of results for future periods.


Three Months Ended September 30,

Nine Months Ended September 30,


2015

2014

2015

2014


Amount
Percent of Revenue

Amount
Percent of Revenue

Amount
Percent of Revenue

Amount
Percent of Revenue


(dollars in thousands, except share and per share data)
Revenue:


 













Subscription and support

$
14,129

 
83
 %

$
12,368


76
 %

$
42,474


81
 %

$
35,910


75
 %
Perpetual license

540

 
3
 %

850


5
 %

2,197


4
 %

1,947


4
 %
Total product revenue

14,669

 
86
 %

13,218


81
 %

44,671


85
 %

37,857


79
 %
Professional services

2,436

 
14
 %

3,057


19
 %

7,640


15
 %

10,242


21
 %
Total revenue

17,105

 
100
 %

16,275


100
 %

52,311


100
 %

48,099


100
 %
Cost of revenue:


 













Subscription and support (1)(3)

4,771

 
28
 %

3,488


21
 %

14,344


27
 %

10,092


21
 %
Professional services (1)

1,677

 
10
 %

2,305


15
 %

5,317


11
 %

7,042


15
 %
Total cost of revenue

6,448

 
38
 %

5,793


36
 %

19,661


38
 %

17,134


36
 %
Gross profit

10,657

 
62
 %

10,482


64
 %

32,650


62
 %

30,965


64
 %
Operating expenses:


 













Sales and marketing (1)

2,929

 
17
 %

3,767


23
 %

9,907


19
 %

10,918


23
 %
Research and development (1)

3,852

 
23
 %

3,793


23
 %

11,930


23
 %

22,186


46
 %
Refundable Canadian tax credits

(115
)
 
(1
)%

(138
)

(1
)%

(358
)

(1
)%

(412
)

(1
)%
General and administrative (1)(2)

4,494

 
26
 %

3,555


22
 %

14,327


27
 %

9,231


19
 %
Depreciation and amortization

1,130

 
7
 %

1,067


7
 %

3,207


6
 %

3,188


7
 %
Acquisition-related expenses

176

 
1
 %

108


1
 %

1,081


3
 %

629


1
 %
Total operating expenses

12,466

 
73
 %

12,152


75
 %

40,094


77
 %

45,740


95
 %
Loss from operations

(1,809
)
 
(11
)%

(1,670
)

(11
)%

(7,444
)

(15
)%

(14,775
)

(31
)%
Other Expense:


 













Interest expense, net

(462
)
 
(3
)%

(397
)

(2
)%

(1,385
)

(3
)%

(1,231
)

(3
)%
Other expense, net

137

 
1
 %

60


—
 %

(387
)

—
 %

(308
)

—
 %
Total other expense

(325
)
 
(2
)%

(337
)

(2
)%

(1,772
)

(3
)%

(1,539
)

(3
)%
Loss before provision for income taxes

(2,134
)
 
(13
)%

(2,007
)

(13
)%

(9,216
)

(18
)%

(16,314
)

(34
)%
Provision for income taxes

(190
)
 
(1
)%

(438
)

(2
)%

(185
)

—
 %

(1,128
)

(2
)%
Loss from continuing operations

(2,324
)
 
(14
)%

(2,445
)

(15
)%

(9,401
)

(18
)%

(17,442
)

(36
)%
Net loss

$
(2,324
)
 
(14
)%

$
(2,445
)

(15
)%

$
(9,401
)

(18
)%

$
(17,442
)

(36
)%
Preferred stock dividends and accretion

—

 
—
 %

(445
)

(3
)%

—


—
 %

(1,320
)

(3
)%
Net loss attributable to common shareholders

$
(2,324
)
 
(14
)%

$
(2,890
)

(18
)%

$
(9,401
)

(18
)%

$
(18,762
)

(39
)%
Net loss per common share:


 













Loss per common share, basic and diluted

$
(0.16
)
 


$
(0.80
)



$
(0.63
)



$
(5.60
)





 













(1) Includes stock-based compensation detailed under Share-based Compensation in Note 8 of the Notes to Condensed Consolidated Financial Statements.
(2) Includes General and administrative stock-based compensation of $563,000 and $211,000 for the three months ended September 30, 2015 and 2014, and $1,712,000 and $511,000 for the nine months ended September 30, 2015 and 2014, respectively.
(3) Includes depreciation and amortization of $907,000 and $792,000 for the three months ended September 30, 2015 and 2014, and $2,870,000 and $2,276,000 for the nine months ended September 30, 2015 and 2014, respectively.


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Comparison of the Three and Nine Months Ended September 30, 2015 and 2014
Revenue


Three Months Ended September 30,

Nine Months Ended September 30,


2015

2014

% Change

2015

2014

% Change


(dollars in thousands)



(dollars in thousands)


Revenue:












Subscription and support

$
14,129


$
12,368


14
 %

$
42,474


$
35,910


18
 %
Perpetual license

540


850


(36
)%

2,197


1,947


13
 %
Total product revenue

14,669


13,218


11
 %

44,671


37,857


18
 %
Professional services

2,436


3,057


(20
)%

7,640


10,242


(25
)%
Total revenue

$
17,105


$
16,275


5
 %

$
52,311


$
48,099


9
 %













Percentage of revenue:












Subscription and support

83
%

76
%




81
%

75
%



Perpetual license

3
%

5
%




4
%

4
%



Total product revenue

86
%

81
%




85
%

79
%



Professional services

14
%

19
%




15
%

21
%



Total revenue

100
%

100
%




100
%

100
%



For the Three Months Ended September 30, 2015
Total revenue was $17.1 million in the three months ended September 30, 2015, compared to $16.3 million in the three months ended September 30, 2014, an increase of $0.8 million, or 5%. Of the increase in total revenue, $3.1 million was due to the 2014 acquisitions which includes a $0.2 million decline due to the change in the foreign currency exchange rate between the Canada dollar versus the U.S. dollar during those periods. The organic businesses declined by $2.3 million of which $0.8 million was due to lower total revenue from our Canada operations for the same period due to the change in the foreign currency exchange rate between the Canada dollar versus the U.S. dollar during those periods. Therefore, on a constant currency basis, total revenue for the organic businesses declined by $1.5 million, or 9%, which is attributed primarily to the decline in professional services revenue further described below.

Subscription and support revenue was $14.1 million in the three months ended September 30, 2015, compared to $12.4 million in the three months ended September 30, 2014, an increase of $1.7 million, or 14%. Of the increase in subscription and support revenue, $2.7 million was due to the 2014 acquisitions which includes a $0.2 million decline due to the change in the foreign currency exchange rate between the Canada dollar versus the U.S. dollar during those periods. The organic businesses declined by $1.0 million of which $0.6 million was due to lower subscription and support revenue from our Canada operations for the same period due to the change in the foreign currency exchange rate between the Canada dollar versus the U.S. dollar during those periods. Therefore, on a constant currency basis, subscription and support revenue for the organic businesses declined by $0.4 million, or 3%.

Perpetual license revenue was $0.5 million in the three months ended September 30, 2015 as compared to $0.9 million in the three months ended September 30, 2014, a decrease of $0.4 million, or 36%. The organic portion of our business declined by $0.4 million, or 49%.


20
Table of Contents

Professional services revenue was $2.4 million in the three months ended September 30, 2015, compared to $3.1 million in the three months ended September 30, 2014, a decrease of $0.7 million, or 20%. Professional services revenue declined by $0.9 million for the organic businesses of which $0.2 million was due to lower professional services revenue from our Canada operations for the same period due to the change in the foreign currency exchange rate between the Canada dollar versus the U.S. dollar during those periods. Therefore, on a constant currency basis, professional services revenue for our organic businesses declined by $0.7 million, or 24%. The decline in professional services revenue for the organic businesses was partially offset by $0.2 million of revenue from the 2014 acquisitions which includes a $0.1 million decline due to the change in the foreign currency exchange rate between the Canada dollar versus the U.S. dollar during those periods.
For the Nine Months Ended September 30, 2015
Total revenue was $52.3 million in the nine months ended September 30, 2015, compared to $48.1 million in the nine months ended September 30, 2014, an increase of $4.2 million, or 9%. Of the increase in total revenue, $8.5 million was due to the 2014 acquisitions which includes a $0.5 million decline due to the change in the foreign currency exchange rate between the Canada dollar versus the U.S. dollar during those periods. The organic businesses declined by $4.3 million of which $1.7 million was due to lower total revenue from our Canada operations for the same period due to the change in the foreign currency exchange rate between the Canada dollar versus the U.S. dollar during those periods. Therefore, on a constant currency basis, total revenue for the organic businesses declined by $2.6 million, or 5%, which is attributed primarily to the decline in professional services revenue further described below.

Subscription and support revenue was $42.5 million in the nine months ended September 30, 2015, compared to $35.9 million in the nine months ended September 30, 2014, an increase of $6.6 million, or 18%. Of the increase in subscription and support revenue, $7.6 million was due to the 2014 acquisitions which includes a $0.4 million decline due to the change in the foreign currency exchange rate between the Canada dollar versus the U.S. dollar during those periods. The organic businesses declined by $1.0 million of which $1.4 million was due to lower total revenue from our Canada operations for the same period due to the change in the foreign currency exchange rate between the Canada dollar versus the U.S. dollar during those periods. Therefore, on a constant currency basis, subscription and support revenue for the organic businesses increased by $0.4 million, or 1%.

Perpetual license revenue was $2.2 million in the nine months ended September 30, 2015 as compared to $1.9 million in the nine months ended September 30, 2014, an increase of $0.3 million, or 13%. Of the increase in perpetual license revenue, $0.3 million was due to the 2014 acquisitions which includes a $0.1 million decline due to the change in the foreign currency exchange rate between the Canada dollar versus the U.S. dollar during those periods.

Professional services revenue was $7.6 million in the nine months ended September 30, 2015, compared to $10.2 million in the nine months ended September 30, 2014, a decrease of $2.6 million, or 25%. Professional services revenue declined by $3.3 million for the organic businesses of which $0.3 million was due to lower professional services revenue from our Canada operations for the same period due to the change in the foreign currency exchange rate between the Canada dollar versus the U.S. dollar during those periods. Therefore, on a constant currency basis, professional services revenue for our organic businesses declined by $2.9 million, or 29%. The decline in professional services revenue for the organic businesses was partially offset by $0.7 million of revenue from the 2014 acquisitions which includes a $0.1 million decline due to the change in the foreign currency exchange rate between the Canada dollar versus the U.S. dollar during those periods.




21
Table of Contents

Cost of Revenue and Gross Profit Percentage


Three Months Ended September 30,

Nine Months Ended September 30,


2015

2014

% Change

2015

2014

% Change


(dollars in thousands)



(dollars in thousands)


Cost of revenue:











Subscription and support (1)
$
4,771


$
3,488


37
 %

$
14,344


$
10,092


42
 %
Professional services
1,677


2,305


(27
)%

5,317


7,042


(24
)%
Total cost of revenue
6,448


5,793


11
 %

19,661


17,134


15
 %
Gross profit

$
10,657


$
10,482


2
 %

$
32,650


$
30,965


5
 %













Percentage of total revenue












Subscription and support (1)
28
%

21
%



27
%

21
%


Professional services
10
%

15
%



11
%

15
%


Total cost of revenue
38
%

36
%



38
%

36
%


Gross profit

62
%

64
%



62
%

64
%















(1) Includes depreciation and amortization expense as follows:










Depreciation

$
386

 
$
337

 
 
 
$
1,295

 
$
913




Amortization

$
521

 
$
455

 
 
 
$
1,575

 
$
1,363




For the Three Months Ended September 30, 2015
Cost of subscription and support revenue was $4.8 million in the three months ended September 30, 2015, compared to $3.5 million in the three months ended September 30, 2014, an increase of $1.3 million, or 37%. Of the increase in cost of subscription and support revenue, $0.9 million is due to the 2014 acquisitions. The acquisitions contributed $0.3 million in data center hosting fees, $0.3 million in personnel and related costs, $0.1 million in software and license expenses, and $0.1 million in amortization of intangible assets. Cost of subscription and support revenue for the organic portion of our business increased $0.4 million primarily due to personnel and related costs.

Cost of professional services revenue was $1.7 million in the three months ended September 30, 2015, compared to $2.3 million in the three months ended September 30, 2014, a decrease of $0.6 million, or 27%. The organic portion of our business decreased $0.7 million primarily due to a $0.6 million decrease in personnel and related costs and a $0.1 million decrease in outsourced contractor fees. These cost decreases in our organic business are due to the success of our 2015 customer expansion initiatives which have driven more focus on expanding existing customer recurring revenue and less focus on new customer professional service projects compared to the year ago period, and as a result professional services direct costs have been proportionately reduced in 2015 in order to maintain gross margin percentages on professional services revenue with normalized historical levels. The 2014 acquisitions contributed an increase in cost of professional services revenue of $0.1 million primarily due to personnel and related costs.

22
Table of Contents

For the Nine Months Ended September 30, 2015
Cost of subscription and support revenue was $14.3 million in the nine months ended September 30, 2015, compared to $10.1 million in the nine months ended September 30, 2014, an increase of $4.2 million, or 42%. Of the increase in cost of subscription and support revenue, $2.6 million is due to the 2014 acquisitions. The acquisitions contributed $0.8 million in data center hosting fees, $0.8 million in personnel and related costs, $0.7 million in software and license expenses, and $0.2 million in amortization of intangible assets. Cost of subscription and support revenue for the organic portion of our business increased $1.6 million primarily due to a $1.0 million increase in personnel and related costs, a $0.4 million increase in depreciation of data center equipment, and a $0.2 million increase in facility costs.

Cost of professional services revenue was $5.3 million in the nine months ended September 30, 2015, compared to $7.0 million in the nine months ended September 30, 2014, a decrease of $1.7 million, or 24%. The organic portion of our business decreased $2.1 million due to a $1.7 million decrease in personnel and related costs, a $0.5 million decrease in outsourced contractor fees, partially offset by a $0.1 million increase in facility costs. These cost decreases in our organic business are due to the success of our 2015 customer expansion initiatives which have driven more focus on expanding existing customer recurring revenue and less focus on new customer professional service projects compared to the year ago period, and as a result professional services direct costs have been proportionately reduced in 2015 in order to maintain gross margin percentages on professional services revenue with normalized historical levels. The 2014 acquisitions contributed a $0.4 million increase in cost of professional services revenue primarily due to personnel and related costs.

Operating Expenses
Sales and Marketing Expense


Three Months Ended September 30,

Nine Months Ended September 30,


2015

2014

% Change

2015

2014

% Change


(dollars in thousands)



(dollars in thousands)


Sales and marketing
$
2,929


$
3,767


(22
)%

$
9,907


$
10,918


(9
)%
Percentage of total revenue

17
%

23
%



19
%

23
%


For the Three Months Ended September 30, 2015
Sales and marketing expense was $2.9 million in the three months ended September 30, 2015, compared to $3.8 million in the three months ended September 30, 2014, a decrease of $0.9 million, or 22%. Sales and marketing expense for the organic portion of our business decreased $1.3 million primarily due to a $0.7 million decrease in personnel and related costs, a $0.2 million decrease in bad debt expense, a $0.1 million decrease in user conference expenses, a $0.1 million decrease in sales commissions, and a $0.1 million decrease in marketing program costs. The 2014 acquisitions contributed $0.4 million of sales and marketing cost primarily due to $0.2 million in personnel and related costs, $0.1 million in marketing program costs and $0.1 million in sales commissions.
For the Nine Months Ended September 30, 2015
Sales and marketing expense was $9.9 million in the nine months ended September 30, 2015, compared to $10.9 million in the nine months ended September 30, 2014, a decrease of $1.0 million, or 9%. Sales and marketing expense for the organic portion of our business decreased $2.4 million primarily due to a $0.9 million decrease in personnel and related costs, a $0.4 million decrease in marketing program costs, a $0.3 million decrease in sales commissions, a $0.3 decrease in user conference expenses, a $0.2 million decrease in outsourced marketing contractor fees, and a $0.2 million decrease in bad debt expense. The 2014 acquisitions contributed $1.4 million of sales and marketing cost primarily due to $0.7 million in personnel and related costs, $0.3 million in sales commissions, $0.2 million in marketing program costs, and $0.1 million in marketing contractor costs.

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Table of Contents

Research and Development Expense


Three Months Ended September 30,

Nine Months Ended September 30,


2015

2014

% Change

2015

2014

% Change


(dollars in thousands)



(dollars in thousands)


Research and development
$
3,852


$
3,793


2
 %

$
11,930


$
22,186


(46
)%
Refundable Canadian tax credits
(115
)

(138
)

(17
)%

(358
)

(412
)

(13
)%
Total research and development
$
3,737


$
3,655


2
 %

$
11,572


$
21,774


(47
)%













Percentage of total revenue












Research and development
23
 %

23
 %



23
 %

46
 %


Refundable Canadian tax credits
(1
)%

(1
)%



(1
)%

(1
)%


Total research and development
22
 %

22
 %



22
 %

45
 %


For the Three Months Ended September 30, 2015
Research and development expense was $3.9 million in the three months ended September 30, 2015, compared to $3.8 million in the three months ended September 30, 2014, an increase of $0.1 million, or 2%. The 2014 acquisitions contributed a $0.5 million increase to research and development expense primarily due to personnel and related costs. Research and development expense for our organic business decreased by $0.4 million primarily due to personnel and related costs.

Refundable Canadian tax credits were substantially unchanged in the three months ended September 30, 2015 as compared to the three months ended September 30, 2014.
For the Nine Months Ended September 30, 2015
Research and development expense was $11.9 million in the nine months ended September 30, 2015, compared to $22.2 million in the nine months ended September 30, 2014, a decrease of $10.3 million, or 46%. Research and development expenses for our organic business decreased by $11.7 million compared to the prior year period. In January 2014, we issued 1,803,574 shares of common stock in connection with an amendment of a technology services agreement with a related party and took a non-cash charge of $11.2 million in the first quarter of 2014. Our agreement with the related party is viewed as a fixed purchase commitment contract that obligates us to annual purchase commitments even if we do not take delivery of the contracted services. Since the amended agreement still requires payments for future services that we believe are not discounted from amounts charged to other customers, we believe the fair value of the common stock consideration provided to the related party to amend the agreement does not represent an asset and, accordingly, was expensed immediately. The remaining cost decrease for our organic business is due to a $0.8 million decrease in personnel and related costs partially offset by a $0.2 million increase in outsourced contractor costs. The 2014 acquisitions contributed an increase of $1.5 million in research and development expense primarily due to personnel and related costs.

Refundable Canadian tax credits were substantially unchanged in the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014.


24
Table of Contents

General and Administrative Expense


Three Months Ended September 30,

Nine Months Ended September 30,


2015

2014