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
March 31, 2018
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)
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State of Delaware
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27-2992077
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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401 Congress Avenue, Suite 1850
Austin, Texas
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78701
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (512) 960-1010
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, 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.
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Large accelerated filer
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¨
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Accelerated filer
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x
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Non-accelerated filer
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¨
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(Do not check if a smaller reporting company)
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Smaller reporting company
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¨
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Emerging growth company
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x
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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.
x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
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Class
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Shares Outstanding at May 2, 2018
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Common Stock, $0.0001 par value
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21,532,565
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Upland Software, Inc.
Table of Contents
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Page
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Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017
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Condensed Consolidated Statements of Operations for the Three months ended March 31, 2018 and March 31, 2017
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Condensed Consolidated Statements of Comprehensive Loss for the Three months ended March 31, 2018 and March 31, 2017
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Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and March 31, 2017
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Item 1. Financial Statements
Upland Software, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except for share and per share information)
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March 31, 2018
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December 31, 2017
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(unaudited)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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32,505
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$
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22,326
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Accounts receivable (net of allowance of $985 and $1,069 at March 31, 2018 and December 31, 2017, respectively)
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27,578
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26,504
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Deferred commissions, current
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2,062
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—
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Prepaid and other
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3,892
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2,856
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Total current assets
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66,037
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51,686
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Canadian tax credits receivable
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1,388
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1,196
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Property and equipment, net
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3,081
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2,927
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Intangible assets, net
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115,199
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70,043
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Goodwill
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148,051
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154,607
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Deferred commissions, noncurrent
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4,676
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—
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Other assets
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201
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800
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Total assets
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$
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338,633
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$
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281,259
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Liabilities and stockholders’ equity
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Current liabilities:
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Accounts payable
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$
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3,446
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$
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3,887
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Accrued compensation
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3,379
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5,157
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Accrued expenses and other
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13,503
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12,148
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Deferred revenue
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45,370
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43,807
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Due to sellers
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11,462
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7,839
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Current maturities of notes payable (includes unamortized discount of $843 and $699 at March 31, 2018 and December 31, 2017, respectively)
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3,282
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2,301
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Total current liabilities
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80,442
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75,139
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Notes payable, less current maturities (includes unamortized discount of $2,260 and $1,969 at March 31, 2018 and December 31, 2017, respectively)
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156,584
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108,843
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Deferred revenue
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1,301
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1,570
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Noncurrent deferred tax liability, net
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3,353
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3,262
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Other long-term liabilities
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865
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1,030
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Total liabilities
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242,545
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189,844
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Stockholders’ equity:
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Common stock, $0.0001 par value; 50,000,000 shares authorized: 21,526,426 and 20,768,401 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively)
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2
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2
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Additional paid-in capital
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176,939
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174,944
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Accumulated other comprehensive loss
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(2,856
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(2,403
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Accumulated deficit
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(77,997
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(81,128
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Total stockholders’ equity
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96,088
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91,415
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Total liabilities and stockholders’ equity
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$
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338,633
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$
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281,259
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Upland Software, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except for share and per share information)
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Three Months Ended March 31,
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2018
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2017
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Revenue:
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Subscription and support
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$
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27,729
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$
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18,135
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Perpetual license
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1,626
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694
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Total product revenue
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29,355
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18,829
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Professional services
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2,260
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1,923
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Total revenue
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31,615
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20,752
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Cost of revenue:
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Subscription and support
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9,249
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5,893
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Professional services
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1,396
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1,135
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Total cost of revenue
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10,645
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7,028
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Gross profit
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20,970
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13,724
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Operating expenses:
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Sales and marketing
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4,408
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3,221
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Research and development
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4,891
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3,477
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Refundable Canadian tax credits
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(102
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(117
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General and administrative
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7,000
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5,904
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Depreciation and amortization
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2,130
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1,164
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Acquisition-related expenses
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3,102
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3,691
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Total operating expenses
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21,429
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17,340
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Loss from operations
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(459
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(3,616
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Other expense:
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Interest expense, net
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(2,494
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(935
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Other income (expense), net
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303
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(112
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Total other expense
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(2,191
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(1,047
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Loss before provision for income taxes
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(2,650
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(4,663
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Provision for income taxes
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(511
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(951
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Net loss
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$
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(3,161
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$
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(5,614
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Net loss per common share:
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Net loss per common share, basic and diluted
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$
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(0.16
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$
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(0.33
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Weighted-average common shares outstanding, basic and diluted
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19,759,203
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16,971,393
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Upland Software, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(unaudited)
(in thousands)
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Three Months Ended March 31,
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2018
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2017
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(unaudited)
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(unaudited)
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Net loss
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$
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(3,161
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$
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(5,614
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Foreign currency translation adjustment
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(453
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78
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Comprehensive loss
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$
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(3,614
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$
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(5,536
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)
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Upland Software, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
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Three Months Ended March 31,
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2018
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2017
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Operating activities
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Net loss
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$
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(3,161
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$
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(5,614
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Adjustments to reconcile net loss to net cash provided by operating activities:
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Depreciation and amortization
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4,172
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2,398
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Deferred income taxes
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132
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178
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Amortization of deferred costs
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539
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—
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Foreign currency re-measurement (gain) loss
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142
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(59
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Non-cash interest and other expense
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190
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75
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Non-cash stock compensation expense
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2,577
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2,304
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Changes in operating assets and liabilities, net of purchase business combinations:
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Accounts receivable
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555
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3,935
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Prepaids and other
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(1,811
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)
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6
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Accounts payable
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(1,124
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460
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Accrued expenses and other liabilities
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(3,569
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)
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1,211
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Deferred revenue
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883
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33
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Net cash provided by (used in) operating activities
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(475
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4,927
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Investing activities
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Purchase of property and equipment
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(426
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(348
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Purchase of customer relationships
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—
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(55
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Purchase business combinations, net of cash acquired
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(34,320
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(19,256
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)
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Net cash used in investing activities
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(34,746
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)
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(19,659
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Financing activities
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Payments on capital leases
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(298
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)
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(331
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)
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Proceeds from notes payable, net of issuance costs
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49,375
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15,927
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Payments on notes payable
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(844
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)
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(6,755
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)
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Taxes paid related to net share settlement of equity awards
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(668
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)
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(73
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)
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Issuance of common stock, net of issuance costs
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87
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171
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Additional consideration paid to sellers of businesses
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(1,978
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)
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(3,585
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)
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Net cash provided by financing activities
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45,674
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5,354
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Effect of exchange rate fluctuations on cash
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(274
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)
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37
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Change in cash and cash equivalents
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10,179
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(9,341
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)
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Cash and cash equivalents, beginning of period
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22,326
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28,758
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Cash and cash equivalents, end of period
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$
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32,505
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$
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19,417
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Supplemental disclosures of cash flow information:
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Cash paid for interest
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$
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2,316
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$
|
864
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Cash paid for taxes
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$
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1,044
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$
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591
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Noncash investing and financing activities:
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Equipment acquired pursuant to capital lease obligations
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$
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—
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$
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144
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Upland Software, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(unaudited)
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 ("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 of a normal recurring nature necessary for a fair presentation. The results of operations for the
three months ended March 31, 2018
are not necessarily indicative of the results to be expected for the year ending
December 31, 2018
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
2017
Annual Report on Form 10-K filed with the SEC on March 9,
2018
.
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, contingent consideration, acquired intangible assets, the useful lives of intangible assets and property and equipment, and income taxes. In accordance with GAAP, management bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Management regularly evaluates its estimates and assumptions using historical experience and other factors; however, actual results could differ from those estimates.
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 months ended March 31, 2018
or for the year ended
December 31, 2017
, or more than 10% of accounts receivable as of
March 31, 2018
or
December 31, 2017
.
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.
Recent Accounting Pronouncements
Recently issued accounting pronouncements not yet adopted
In February 2016, the FASB issued ASU 2016-02, Leases. The core change with ASU 2016-2 is the requirement for the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect that the adoption of ASU 2016-02 will have on its financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company is currently evaluating the effect that the adoption of ASU 2016-13 will have on its financial statements.
Recently adopted accounting pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Updated (“ASU”) 2014-09, “Revenue from Contracts with Customers”, to replace existing revenue recognition rules with a single comprehensive model to use in accounting for revenue arising from contracts with customers. Under this ASU and the associated subsequent amendments (collectively, “ASC 606”), revenue is recognized when a customer obtains control of promised goods or services for an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, ASC 606 requires expanded disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
The Company adopted ASC 606 on January 1, 2018 for all contracts using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We expect the impact of the adoption of the new revenue standard to be immaterial to our net income on an ongoing basis.
A majority of our sales revenue continues to be recognized ratably over the applicable term of the respective subscription or maintenance contracts. For most sales commissions formerly expensed as incurred, other than for perpetual license commissions which will continue to be expensed as incurred, we are now amortizing these costs to the consolidated statements of income over the shorter of 1) the expected life of our customer relationships, which we have determined to be approximately 6 years, or 2) the life of the related technology.
For further discussion about changes to Significant Accounting Policies impacted by the adoption of
2014-09 (Topic 606)
, see Note
10. Revenue
.
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASC 606 were as follows (in thousands):
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Balance Sheet
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Balance at December 31, 2017
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Adjustments Due to ASC 606
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Balance at January 1, 2018
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Assets
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Deferred commissions, current
|
$
|
—
|
|
|
$
|
2,070
|
|
|
$
|
2,070
|
|
|
Deferred commissions, noncurrent
|
—
|
|
|
4,447
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|
|
4,447
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|
|
|
|
|
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Liabilities
|
|
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Deferred revenue (current)
|
43,807
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|
225
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44,032
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Equity
|
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Accumulated deficit
|
$
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(81,128
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)
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$
|
6,292
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|
|
$
|
(74,836
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)
|
In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated income statement and balance sheet for the periods ended March 31, 2018 was as follows (in thousands):
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Three months ending March 31, 2018
|
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Income statement
|
As Reported
|
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Balances Without Adoption of ASC 606
|
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Effect of Change
Higher/ (Lower)
|
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Revenues
|
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Perpetual license
|
$
|
1,626
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|
|
$
|
1,307
|
|
|
$
|
319
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
Sales & marketing
|
$
|
4,408
|
|
|
$
|
4,629
|
|
|
$
|
(221
|
)
|
During the
three months ended March 31, 2018
, the effect on earnings per share of the adoption of ASC 606 was an increase in earnings per share of
$.03
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018
|
|
Balance Sheet
|
As Reported
|
|
Balances Without Adoption of ASC 606
|
|
Effect of Change
Higher/ (Lower)
|
|
Assets
|
|
|
|
|
|
|
Deferred commissions, current
|
$
|
2,062
|
|
|
$
|
—
|
|
|
$
|
2,062
|
|
|
Deferred commissions, noncurrent
|
4,676
|
|
|
—
|
|
|
4,676
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Deferred revenue (current)
|
45,370
|
|
|
45,053
|
|
|
(317
|
)
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
Accumulated deficit
|
$
|
(77,997
|
)
|
|
$
|
(83,749
|
)
|
|
$
|
(5,752
|
)
|
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which revises the definition of a business and assists in the evaluation of when a set of transferred assets and activities is a business. ASU 2017-01 is effective for interim and annual reporting periods beginning after December 15, 2017, and should be applied prospectively. Early adoption is permitted under certain circumstances. The Company adopted ASU 2017-01 during the first quarter of 2018.
No
impact on the financial statements was recorded as a result of the adoption of ASU 2017-01.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets should be disclosed. ASU 2017-04 is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019; early adoption is permitted. The Company adopted ASU 2017-04 during the first quarter of 2018.
No
impact on the financial statements was recorded as a result of the adoption of ASU 2017-04.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 is intended to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows and to eliminate the diversity in practice related to such classifications. The guidance in ASU 2016-15 is required for annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company adopted ASU 2016-15 during the first quarter of 2017. No additional disclosure was deemed necessary upon the adoption of ASU 2016-15.
No
impact on the financial statements was recorded as a result of the adoption of ASU 2016-15.
2. Acquisitions
2018 Acquisitions
On March 21, 2018, the Company’s wholly owned subsidiary, PowerSteering Software Limited, a limited company organized and existing under the laws of England and Wales (“PowerSteering UK”), completed its purchase of the shares comprising the entire issued share capital of Interfax Communications Limited ("Interfax"), an Irish-based software company providing secured
cloud-based messaging solutions, including enterprise cloud fax and secure document distribution.
In connection with this acquisition, the Company also acquired certain assets related to Interfax’s business from a United States based reseller of Interfax’s products.
The purchase price consideration paid for Interfax and the U.S. reseller's assets was
$37.0 million
in cash at closing, net of cash acquired, and a
$5.0 million
cash holdback payable over
18 months
(subject to reduction for indemnification claims). The foregoing excludes any potential earnout payments tied to performance-based goals. No revenues have been recorded since the acquisition of Interfax through
March 31, 2018
.
2017 Acquisitions
On January 10, 2017, the Company completed its purchase of Omtool, Ltd ("Omtool"), a document capture, fax and workflow solution company. The purchase price consideration paid was approximately
$19.3 million
in cash payable at closing (net of
$3.0 million
of cash acquired).
On April 21, 2017, the Company acquired RightAnswers, Inc. ("RightAnswers"), a cloud-based knowledge management system. The purchase price was
$17.4 million
, in cash at closing (net of
$0.1 million
cash acquired) and a
$2.5 million
cash holdback payable in
one
year (subject to reduction for indemnification claims) and excludes potential future earn-out payments tied to additional performance-based goals.
On July 12, 2017, the Company acquired Waterfall International Inc. (“Waterfall”), a cloud-based mobile messaging platform. The purchase price consideration paid was approximately
$24.4 million
in cash at closing (net of
$0.4 million
of cash acquired) and a
$1.5 million
cash holdback payable in
18 months
(subject to reduction for indemnification claims). The foregoing excludes additional potential
$3.0 million
in earnout payments tied to performance-based conditions.
On November 16, 2017, the Company completed its acquisition of Qvidian Corporation, a Delaware corporation (“Qvidian”), a Massachusetts-based provider of cloud-based RFP and sales-proposal automation software. The purchase price consideration paid by the Company was
$50 million
in cash.
The pro forma statements of operations data for
three months ended March 31, 2018 and March 31, 2017
, shown in table below, give effect to the Qvidian acquisition, described above, as if it had occurred at January 1, 2016. These amounts have been calculated after applying our accounting policies and adjusting the results of Qvidian to reflect: the costs of debt financing incurred to acquire Qvidian, the additional intangible amortization and the adjustments to acquired deferred revenue that would have been occurred assuming the fair value adjustments had been applied and incurred since January 1, 2016. This pro forma data is presented for informational purposes only and does not purport to be indicative of our future results of operations. The table below shows the Pro forma statements of operations data for the respective years ending December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
Revenue
|
$
|
31,615
|
|
|
$
|
25,135
|
|
|
Loss from continuing operations
(1)
|
$
|
(3,161
|
)
|
|
$
|
(4,511
|
)
|
(1) While some recurring adjustments impact the pro forma figures presented, the decrease in pro forma loss from continuing operations compared to our loss from continuing operations presented on the consolidated statements of operations for the
three months ended March 31, 2018 and March 31, 2017
includes nonrecurring adjustments removing acquisition costs from 2017 and reflects these costs in the year ended 2016, the year the acquisition was assumed to be completed for pro forma purposes.
The following condensed table presents the preliminary and finalized acquisition-date fair value of the assets acquired and liabilities assumed for the acquisitions in 2017 and through the
three months ended March 31, 2018
, as well as assets and liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary
|
|
Finalized
|
|
|
Interfax
|
|
Qvidian
|
|
Waterfall
|
|
RightAnswers
|
|
Omtool
|
|
Year Acquired
|
2018
|
|
2017
|
|
2017
|
|
2017
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
2,680
|
|
|
$
|
468
|
|
|
$
|
100
|
|
|
$
|
139
|
|
|
$
|
2,957
|
|
|
Accounts receivable
|
1,708
|
|
|
1,907
|
|
|
1,477
|
|
|
2,164
|
|
|
784
|
|
|
Other current assets
|
100
|
|
|
334
|
|
|
608
|
|
|
246
|
|
|
464
|
|
|
Property and equipment
|
292
|
|
|
108
|
|
|
23
|
|
|
408
|
|
|
58
|
|
|
Customer relationships
|
28,142
|
|
|
30,160
|
|
|
6,400
|
|
|
10,500
|
|
|
4,400
|
|
|
Trade name
|
191
|
|
|
227
|
|
|
110
|
|
|
180
|
|
|
170
|
|
|
Technology
|
4,822
|
|
|
5,739
|
|
|
2,800
|
|
|
2,300
|
|
|
3,180
|
|
|
Goodwill
|
8,628
|
|
|
21,414
|
|
|
18,575
|
|
|
15,680
|
|
|
14,081
|
|
|
Other assets
|
14
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
33
|
|
|
Total assets acquired
|
46,577
|
|
|
60,365
|
|
|
30,093
|
|
|
31,617
|
|
|
26,127
|
|
|
Accounts payable
|
(689
|
)
|
|
(388
|
)
|
|
(605
|
)
|
|
(139
|
)
|
|
(219
|
)
|
|
Accrued expense and other
|
(3,088
|
)
|
|
(460
|
)
|
|
(1,136
|
)
|
|
(2,108
|
)
|
|
(915
|
)
|
|
Deferred revenue
|
—
|
|
|
(9,517
|
)
|
|
(1,220
|
)
|
|
(5,479
|
)
|
|
(2,779
|
)
|
|
Total liabilities assumed
|
(3,777
|
)
|
|
(10,365
|
)
|
|
(2,961
|
)
|
|
(7,726
|
)
|
|
(3,913
|
)
|
|
Total consideration
|
$
|
42,800
|
|
|
$
|
50,000
|
|
|
$
|
27,132
|
|
|
$
|
23,891
|
|
|
$
|
22,214
|
|
Tangible assets were valued at their respective carrying amounts, which approximates their estimated fair value. The valuation of identifiable intangible assets reflects management’s estimates based on, among other factors, use of established valuation methods. Customer relationships were valued using an income approach, which estimates fair value based on the earnings and cash flow capacity of the subject asset. The value of the marketing-related intangibles was determined using a relief-from-royalty method, which estimates fair value based on the value the owner of the asset receives from not having to pay a royalty to use the asset. Developed technology was valued using a cost-to-recreate approach.
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 purchase price allocations for the 2017 acquisitions of Omtool, RightAnswers are final, and Waterfall, Qvidian, and Interfax are preliminary as the Company has not obtained and evaluated all of the detailed information necessary to finalize the opening balance sheet amounts in all respects. Management has recorded the purchase price allocations based upon acquired company information that is currently available. Management expects to complete its purchase price allocations for Waterfall and Qvidian during the first half of 2018 and for Interfax in the second half of 2018.
The goodwill of
$78.4 million
for the above acquisitions is primarily attributable to the synergies expected to arise after the acquisition.
Goodwill deductible for tax purposes is
$3.7 million
for Waterfall. The Company expects there will be tax deductible goodwill for Interfax, however, the final value should be determined during the second quarter of 2018. There was
no
Goodwill deductible for tax purposes for our Omtool, RightAnswers, and Qvidian acquisitions.
Total transaction costs incurred with respect to acquisition activity in the
three months ended March 31, 2018
and the
three months ended March 31, 2017
were
$1.4 million
and
$1.6 million
, respectively.
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, which therefore requires 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, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Earnout consideration liability
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,576
|
|
|
$
|
3,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2018
|
|
|
(unaudited)
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Earnout consideration liability
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,398
|
|
|
$
|
2,398
|
|
The Level 3 earnout consideration liability consists of amounts associated with the acquisitions of RightAnswers in April 2017, and Waterfall in July 2017. The
December 31, 2017
Level 3 earnout consideration liability associated with RightAnswers of
$2.0 million
was settled in February 2018. In addition, the
December 31, 2017
Level 3 earnout consideration liability associated with Waterfall of
$1.6 million
was unchanged during the
three months ended March 31, 2018
, which is primarily based on the achievement of maintaining certain revenue during a limited period after the acquisition. Finally, a Level 3 earnout consideration liability of
$0.8 million
was added associated with the acquisition of Interfax in March 2018, the basis of which is entirely the achievement of certain revenue growth rates during a limited period after the acquisition.
The following table presents additional information about liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value (in thousands):
|
|
|
|
|
|
|
|
Ending balance at December 31, 2017
|
$
|
3,576
|
|
|
Additions - cash earnouts
|
800
|
|
|
Settlements - cash earnouts
|
(1,978
|
)
|
|
Ending balance at March 31, 2018
|
$
|
2,398
|
|
The fair value of the cash earnout consideration was determined using the Binary Option model based on the present value of the probability-weighted earnout consideration.
Debt
The Company believes the carrying value of its long-term debt at
March 31, 2018
approximates its fair value based on the variable interest rate feature or based upon interest rates currently available to the Company.
The estimated fair value and carrying value of the Company's debt at
March 31, 2018
and
December 31, 2017
are
$163.0 million
and
$113.8 million
, respectively, based on valuation methodologies using interest rates currently available to the Company, which are Level 2 inputs.
4. Goodwill and Other Intangible Assets
Changes in the Company’s goodwill balance for the
three
months ended
March 31, 2018
are summarized in the table below (in thousands):
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
$
|
154,607
|
|
|
Acquired in business combinations
|
8,629
|
|
|
Adjustment due to prior year business combinations
|
(14,837
|
)
|
|
Foreign currency translation adjustment
|
(348
|
)
|
|
Balance at March 31, 2018
|
$
|
148,051
|
|
Net intangible assets 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. The
$14.8 million
adjustment due to
prior year business combinations was primarily related to a change in the ASC 805 value of Qvidian customer relationships during the
three months ended March 31, 2018
.
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, 2018:
|
|
|
|
|
|
|
|
|
Customer relationships
|
1-10
|
|
$
|
112,693
|
|
|
$
|
20,337
|
|
|
$
|
92,356
|
|
|
Trade name
|
1.5-3
|
|
3,524
|
|
|
2,990
|
|
|
534
|
|
|
Developed technology
|
4-7
|
|
34,179
|
|
|
11,870
|
|
|
22,309
|
|
|
Total intangible assets
|
|
|
$
|
150,396
|
|
|
$
|
35,197
|
|
|
$
|
115,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful
Life (Years)
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
December 31, 2017:
|
|
|
|
|
|
|
|
|
Customer relationships
|
5-10
|
|
$
|
69,061
|
|
|
$
|
18,040
|
|
|
$
|
51,021
|
|
|
Trade name
|
1.5
|
|
3,431
|
|
|
2,900
|
|
|
531
|
|
|
Developed technology
|
4-7
|
|
29,308
|
|
|
10,817
|
|
|
18,491
|
|
|
Total intangible assets
|
|
|
$
|
101,800
|
|
|
$
|
31,757
|
|
|
$
|
70,043
|
|
The following table summarizes the Company's weighted-average amortization period, in total and by major finite-lived intangible asset class (in years):
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
Customer relationships
|
9.5
|
|
9.0
|
|
Trade name
|
0.8
|
|
1.5
|
|
Developed technology
|
6.6
|
|
6.4
|
|
Total weighted-average amortization period
|
8.6
|
|
8.2
|
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 months ended March 31, 2018 and March 31, 2017
, respectively. Total amortization expense during the
three months ended March 31, 2018 and March 31, 2017
was
$3.6 million
and
$1.8 million
, 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 2018
|
$
|
13,162
|
|
|
2019
|
16,518
|
|
|
2020
|
15,371
|
|
|
2021
|
14,961
|
|
|
2021
|
12,815
|
|
|
2022 and thereafter
|
42,372
|
|
|
Total
|
$
|
115,199
|
|
5. Income Taxes
The Company’s income tax provision for the
three months ended March 31, 2018 and March 31, 2017
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 provision for the
three months ended March 31, 2018 and March 31, 2017
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 or have net operating loss carryforwards. 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
March 31, 2018
and
March 31, 2017
, respectively.
The Company has reflected any uncertain tax positions within its current taxes payable, but none in 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
2017
remain subject to examination by federal and most state tax authorities due to our net operating loss carryforwards. In foreign jurisdictions, tax years 2008 through
2017
remain subject to examination.
The Tax Act enacted in December 2017 introduced significant changes to U.S. income tax law. Effective 2018, the Tax Act reduced the U.S. statutory tax rate from 35% to 21% and created new taxes on certain foreign-sourced earnings and certain intercompany payments.
Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. As we collect and prepare necessary data, and interpret the Tax Act and any additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service (IRS), and other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments may materially affect our provision for income taxes and effective tax rate in the period in which the adjustments are made. The adjustments made in the first quarter of 2018 were not significant. The accounting for the tax effects of the Tax Act will be completed later in 2018.
6. Deb
t
Long-term debt consisted of the following at
March 31, 2018
and
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
Senior secured loans (includes unamortized discount of $3,103 and $2,668 based on an imputed interest rate of 7.0% and 7.5%, at March 31, 2018 and December 31, 2017, respectively)
|
$
|
159,866
|
|
|
$
|
111,144
|
|
|
Less current maturities
|
(3,282
|
)
|
|
(2,301
|
)
|
|
Total long-term debt
|
$
|
156,584
|
|
|
$
|
108,843
|
|
Loan and Security Agreements
Sixth Amendment to Credit Facility
On March 21, 2018, the Company amended and expanded its Credit Agreement dated May 14, 2015, as amended, among,
inter alia
, the Company, certain of its subsidiaries, and each of the lenders named in the Credit Agreement (the “Credit Facility”). The Company entered into a sixth amendment to the Credit Facility with Wells Fargo Capital Finance and CIT Bank, N.A. as joint lead arrangers, and including Goldman Sachs Bank USA, Regions Bank, and Citizens Bank, N.A. (collectively, the "Lenders"), with a Consent and Sixth Amendment to Credit Agreement (the “Sixth Amendment”).
Loans
The Sixth Amendment to the Credit Facility provides for a
$258.7 million
credit facility, including (i) a fully drawn
$163.0 million
term loan, (ii) a fully available
$30.0 million
delayed draw term loan commitment (the "DDTL"), (iii) a fully available
$10.0 million
revolving loan commitment, and (iv) a
$55.0 million
uncommitted accordion.
Specifically, the Credit Facility provides for
$163.7 million
of term debt comprised of (i) a fully drawn U.S. term loan facility in an aggregate principal amount of
$158.4 million
(the “U.S. Term Loan”), (ii) a fully drawn Canadian term loan facility in an aggregate principal amount of
$5.3 million
(the “Canadian Term Loan” together with the U.S. and Canadian Term Loans, the “Term Loans”).
In addition, the Credit Facility also provides for revolvers of
$10.0 million
, comprised of (i) a U.S. revolving credit facility in an aggregate principal amount of up to
$9.0 million
(the “U.S. Revolver”), (ii) a Canadian revolving credit facility in an aggregate principal amount of up to
$1.0 million
(the “Canadian Revolver” and, together with the U.S. Revolver, the “Revolver”).
As of
March 31, 2018
, there were no amounts drawn on its U.S. Revolver or Canadian Revolver loans outstanding under the Credit Facility, and there was
$163.0 million
outstanding on the Term Loans comprised of (i)
$157.7 million
in the U.S. Term Loans outstanding under the Credit Facility; and (ii)
$5.3 million
in the Canadian Term Loans outstanding under the Credit Facility.
Terms of Term Loans
Under the terms of the Sixth Amendment, the Term Loans are repayable, on a quarterly basis by an amount equal to
2.5%
per annum on or before June 30, 2019, after which the existing
5.0%
per annum is due thereafter until the facility’s maturity date of August 2, 2022.
The Sixth Amendment also provides for other improvements including, among other things, (i) a favorable adjustment to decrease the overall applicable interest rate for accounts outstanding under the Credit Agreement by 50 to 150 basis points resulting in a current effective interest rate of approximately
6.15%
down from the previous effective interest rate of approximately
7.1%
; (ii) a favorable adjustment to the leverage ratio to increase the amount of funded indebtedness to EBITDA (as defined in the Amendment) to
4.25
to 1.00 as of March 31, 2018, along with additional leverage ratio improvements throughout the remainder of the loan term; and (iii) a favorable increase to the recurring revenue ratio future draw condition to the delayed draw term loan facility from
1.25
:1.0 to
1.50
:1.0.
Also, the maximum amount of purchase consideration payable in respect of an individual permitted acquisition is
$25.0 million
and in respect of all permitted acquisitions is
$175.0 million
. In addition, the amount of
permitted indebtedness to sellers of businesses increased is
$20.0 million
.
Terms of Delay Draw Term Loan
Pursuant to the terms of the Credit Facility, the undrawn
$30.0 million
DDTL is to be used to finance acquisitions. The DDTL, if all or a portion is drawn, is repayable, on a quarterly basis, by an amount equal to
2.5%
per annum on or before June 30, 2019, after which the existing
5.0%
per annum is due thereafter until the facility’s maturity date of August 2, 2022.
Terms of Revolver
Loans under the Revolver are available up to the lesser of (i)
$10.0 million
(the “Maximum Revolver Amount”) or (ii) the maximum facility amount of
$203.7 million
, less the sum of any amount of Revolver usage plus the outstanding balance of the Term Loans and other uses of the capacity made under the Credit Facility (such amount, the “Credit Amount”). The Revolver provides a subfacility whereby the Company may request letters of credit (the “Letters of Credit”) in an aggregate amount not to exceed, at any one time outstanding,
$0.5 million
and
$0.25 million
, from the U.S and Canadian facilities, respectively. The aggregate amount of outstanding Letters of Credit is reserved against the credit availability under the Maximum Revolver Amount and the Credit Amount.
Loans under the Revolver may be borrowed, repaid and reborrowed until August 2, 2022 (the “Maturity Date”), at which time all amounts borrowed under the Credit Facility must be repaid.
Other Terms of Credit Facility
At the option of the Company, U.S. loans accrue interest at a per annum rate based on (i) the U.S. base rate plus a margin ranging from
3.00%
to
4.00%
depending on the leverage ratio or (ii) the U.S. LIBOR rate determined in accordance with the Credit Facility (based on 1, 2, 3 or 6-month interest periods) plus a margin ranging from
4.00%
to
5.00%
depending on the leverage ratio. The U.S. base rate is a rate equal to the highest of (i) the federal funds rate plus a margin equal to
0.5%
, the U.S. LIBOR rate for a 1-month interest period plus
1.0%
, and (ii) Wells Fargo Capital Finance’s prime rate.
At the option of the Company, the Canadian loans accrue interest at a per annum rate based on (i) the Canadian prime rate or the U.S. base rate plus a margin ranging from
3.00%
to
4.00%
depending on the leverage ratio or (ii) the U.S. LIBOR rate determined in accordance with the Credit Facility (based on 1, 2, 3 or 6-month interest periods) (or the Canadian Bankers' Acceptance ("Canadian BA") rate determined in accordance with the Credit Facility for obligations in Canadian dollars) plus a margin ranging from
4.00%
to
5.00%
depending on the leverage ratio.
Accrued interest on the loans will be paid monthly, or, with respect to loans that are accruing interest based on the U.S. LIBOR rate or Canadian BA rate, at the end of the applicable U.S. LIBOR or Canadian BA interest rate period.
Lenders are entitled to a premium (the “Prepayment Premium”) in the event of certain prepayments of the outstanding loans in place at the time of the Sixth Amendment totaling in an amount equal to
$113.0 million
(i) August 2, 2017 to August 1, 2018,
2.0%
times the sum of (a) the Maximum Revolver Amount plus (b) the outstanding principal amount of the Term Loans and DDTL on the date immediately prior to the date of the prepayment (such sum, the “Prepayment Amount”) (ii) from August 2, 2018 to August 1, 2019,
1.0%
times the Prepayment Amount and (iii) from August 2, 2019 to the Maturity Date,
0.0%
times
the Prepayment Amount. The Company may also be subject to prepayment fees in the case of commitment reductions of the Revolver and also may be obligated to prepay loans upon the occurrence of certain events.
The Company is also obligated to pay other customary servicing fees, letter of credit fees and unused credit facility fees.
The Credit Facility contains customary affirmative and negative covenants. The negative covenants limit the ability of the Company and its subsidiaries to, among other things (in each case subject to customary exceptions for a credit facility of this size and type):
|
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•
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Incur additional indebtedness or guarantee indebtedness of others;
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•
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Create liens on their assets;
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•
|
Make investments, including certain acquisitions;
|
|
|
|
|
•
|
Enter into mergers or consolidations;
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|
•
|
Pay dividends and make other distributions on the Company’s capital stock, and redeem and repurchase the Company’s capital stock;
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•
|
Enter into transactions with affiliates; and
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•
|
Prepay indebtedness or make changes to certain agreements.
|
There are certain financial covenants that became more restrictive starting March 31, 2019. If an event of default occurs, 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 Credit Facility permits the Company to buyback up to
$10.0 million
of its capital stock, subject to
restrictions including a
minimum liquidity requirement of
$25.0 million
before and after any such buyback.
Interest Rate and Debt Discount
Cash interest costs averaged
7.1%
and
6.3%
under the Credit
Facility
for the
three months ended March 31, 2018
and for the
year ended December 31, 2017
, respectively. In addition, the Company has
$3.1 million
and
$2.7 million
of unamortized debt discount associated with the Credit
Facility
as of
March 31, 2018
and
December 31, 2017
, respectively. These debt discount costs will be amortized to non-cash interest expense over the term of the Credit Facility.
Debt Maturities
Under the terms of the Sixth Amendment, future debt maturities of long-term debt (excluding financing costs) at
March 31, 2018
are as follows (in thousands):
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|
|
|
|
|
Year ending December 31:
|
|
|
Remaining 2018
|
$
|
3,094
|
|
|
2019
|
6,188
|
|
|
2020
|
8,250
|
|
|
2021
|
8,250
|
|
|
2022
|
137,187
|
|
|
Thereafter
|
—
|
|
|
Total debt maturities
|
162,969
|
|
|
Less current maturities
|
(3,282
|
)
|
|
Less unamortized debt discount
|
(3,103
|
)
|
|
Notes Payable, less current maturities and unamortized debt discount
|
$
|
156,584
|
|
7. Net Loss Per Share
The following table sets forth the computations of loss per share (in thousands, except share and per share amounts):
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|
|
|
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Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
Numerator:
|
|
|
|
|
Net Loss
|
$
|
(3,161
|
)
|
|
$
|
(5,614
|
)
|
|
Denominator:
|
|
|
|
|
Weighted–average common shares outstanding, basic and diluted
|
19,759,203
|
|
|
16,971,393
|
|
|
Net loss per common share, basic and diluted
|
$
|
(0.16
|
)
|
|
$
|
(0.33
|
)
|
Due to the net losses for the
three
months ended
March 31, 2018
and
March 31, 2017
, respectively, 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 as of
March 31, 2018
and
March 31, 2017
:
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|
|
|
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|
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|
March 31,
|
|
|
2018
|
|
2017
|
|
Stock options
|
530,099
|
|
|
731,971
|
|
|
Restricted stock
|
1,748,481
|
|
|
1,410,247
|
|
|
Total anti–dilutive common share equivalents
|
2,278,580
|
|
|
2,142,218
|
|
8. Commitments and Contingencies
Purchase Commitments
During the
three months ended March 31, 2018 and March 31, 2017
, the Company purchased software development services pursuant to a technology services agreement with DevFactory FZ-LLC, in the amount of
$0.8 million
and
$0.6 million
, respectively. See Note
12
— Related Party Transactions for more information regarding our purchase commitment to this related party.
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 affect on the consolidated financial position or results of operations of the Company.
9. Stockholders' Equity
On May 12, 2017, the Company filed a registration statement on Form S-3 (File No. 333-217977) (the "S-3"), to register Upland securities in an aggregate amount of up to
$75.0 million
for offerings from time to time. The S-3 was amended on May 22, 2017 and declared effective on May 26, 2017. On June 6, 2017, the Company completed a registered underwritten public offering pursuant to the S-3. The net proceeds of the offering were approximately
$42.7 million
, net of issuance costs, in exchange for
2,139,534
shares of common stock. See Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources for more information related to the public underwritten offering.
As of
March 31, 2018
, the Company may issue up to approximately
$29.0 million
of securities under the remaining capacity of its S-3 shelf registration.
Restricted Stock Awards
Restricted share activity during the
three months ended March 31, 2018
was as follows:
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|
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|
|
|
|
Number of
Restricted Shares
Outstanding
|
|
Weighted-Average Grant Date Fair Value
|
|
Unvested balances at December 31, 2017
|
1,047,480
|
|
|
$
|
13.35
|
|
|
Awards granted
|
762,250
|
|
|
28.79
|
|
|
Awards vested
|
(60,249
|
)
|
|
22.01
|
|
|
Awards forfeited
|
(1,000
|
)
|
|
23.60
|
|
|
Unvested balances at March 31, 2018
|
1,748,481
|
|
|
$
|
19.78
|
|
Stock Option Activity
Stock option activity during the
three
months ended
March 31, 2018
was as follows:
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|
|
|
|
|
|
|
|
|
|
|
Number of
Options
Outstanding
|
|
Weighted–
Average
Exercise
Price
|
|
Outstanding at December 31, 2017
|
549,907
|
|
|
$
|
7.36
|
|
|
Options exercised
|
(19,808
|
)
|
|
5.46
|
|
|
Outstanding at March 31, 2018
|
530,099
|
|
|
$
|
7.44
|
|
Share-based Compensation
The Company recognized share-based compensation expense from all awards in the following expense categories (in thousands):
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|
|
|
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|
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|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
Cost of revenue
|
$
|
77
|
|
|
$
|
18
|
|
|
Research and development
|
113
|
|
|
60
|
|
|
Sales and marketing
|
46
|
|
|
23
|
|
|
General and administrative
|
2,341
|
|
|
2,203
|
|
|
Total
|
$
|
2,577
|
|
|
$
|
2,304
|
|
10. Revenue
Revenues are recognized when control of the promised goods or services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services over the term of the agreement, generally when made available to the customers. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenues are recognized net of sales credits and allowances. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.
Revenue-generating activities consist of subscription and support, perpetual licenses, and professional services revenues within a single operating segment.
Subscription and Support Revenues
The Company's software solutions are available for use as hosted application arrangements under subscription fee agreements without licensing perpetual rights to the software. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company's solution is made available to the customer.
Our subscription contracts are generally one to three years in length.
Amounts that have been invoiced are recorded in accounts receivable and deferred revenues or revenues, depending on whether the revenue recognition criteria have been met. Additional fees for monthly usage above the levels included in the standard subscription fee are recognized as revenue at the end of each month and is invoiced concurrently.
Perpetual License Revenues
The Company also records revenue from the sales of proprietary software products under perpetual licenses. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. The Company’s products do not require significant customization.
Professional Services Revenue
Professional services provided with subscription and support licenses and perpetual licenses consist of implementation fees, data extraction, configuration, and training. The Company’s implementation and configuration services do not involve significant customization of the software and are not considered essential to the functionality. Revenues from professional services are recognized over time as such services are performed.
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 in the new revenue standard. 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 perpetual licenses, multiple subscriptions and professional services. For these contracts, the Company accounts for 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, or 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 would only be applied when a particular performance obligation has highly variable and uncertain SSP and such 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.
Other 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. Generally, the Company reports revenues from these types of contracts on a gross basis, meaning the amounts billed to customers are recorded as revenues, and expenses incurred are recorded as cost of revenues. 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. Revenues provided from agreements in which the Company is an agent are immaterial.
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. Example includes invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period.
Unearned revenue comprises mainly unearned revenue related to subscription services. During the
three months ended March 31, 2018
, we recognized
$22.5 million
of subscription services revenue, that was included in the unearned revenue balances at the beginning of the period. Professional services revenue recognized in the same period from unearned revenue balances at the beginning of the period was not material.
Remaining Performance Obligations
As of
March 31, 2018
, approximately
$92.4 million
of revenue is expected to be recognized from remaining performance obligations for subscription contracts. We expect to recognize revenue on approximately
85%
of these remaining performance obligations over the next
21 months
, with the balance recognized thereafter. Revenue from remaining performance obligations for professional services contracts as of
March 31, 2018
was not material.
Deferred Commissions
The Company capitalizes sales commissions related to its customer agreements. Under the new revenue standard, the Company capitalizes commissions and bonuses for those involved in the sale, as these are incremental to the sale. The Company begins amortizing deferred solution and other costs for a particular customer agreement once the revenue recognition criteria are met and amortizes those deferred costs over the expected life of the customer relationships, which has been determined to be approximately 6 years. 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.
11. 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):
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
Revenues:
|
|
|
|
|
U.S.
|
$
|
24,527
|
|
|
$
|
17,609
|
|
|
Canada
|
1,525
|
|
|
845
|
|
|
Other International
|
5,563
|
|
|
2,298
|
|
|
Total Revenues
|
$
|
31,615
|
|
|
$
|
20,752
|
|
12. Related Party Transactions
We are a party to two agreements with companies controlled by a non-management investor in the Company:
|
|
|
|
•
|
During the
three months ended March 31, 2018 and March 31, 2017
, the Company purchased software development services pursuant to a technology services agreement with DevFactory FZ-LLC ("DevFactory"), in the amount of
$0.8 million
and
$0.6 million
, respectively. On March 28, 2017, the Company entered into an amendment to the Amended and Restated Technology Services Agreement to extend the initial term end date from December 31, 2017 to December 31, 2021. Additionally, the Company amended the option for either party to renew annually for
one
additional year. The effective date of the amendment is January 1, 2017.
DevFactory is an affiliate of ESW Capital LLC, which holds more than
5%
of the Company's capital stock.
The Company has an outstanding purchase commitment in
2018
for software development services pursuant to a technology services agreement in the amount of
$3.2 million
. For years after
2018
, 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
2018
total revenues increase by 10% as compared to
2017
total revenues, then the
2019
purchase commitment will increase by approximately
$0.4 million
from the
2018
purchase commitment amount to approximately
$3.6 million
.
|
|
|
|
|
•
|
The Company purchased approximately
$0.8 million
in services from Crossover, Inc. ("Crossover"),
a company controlled by ESW Capital, LLC (a non-management investor),
during the
three months ended March 31, 2018 and
|
March 31, 2017
, in both periods, respectively.
Crossover provides a proprietary technology system to help the Company identify, screen, select, assign, and connect with necessary resources from time to time to perform technology software development and other services throughout the Company, and track productivity of such resources.
While there are no purchase commitments with Crossover, the Company continues to use its services in
2018
.
The Company has an arrangement with a former subsidiary,
Visionael Corporation ("Visionael"),
to provide management, human resource, payroll and administrative services.
John T. McDonald, the Company's Chief Executive Officer and Chairman of the Board, beneficially holds an approximate
26.18%
interest in Visionael.
The Company received fees from this arrangement during the
three months ended March 31, 2018 and March 31, 2017
totaling
$15,000
and
$90,000
, resp
ectively.
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 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. Factors or risks that could cause our actual results to differ from the results we anticipate include, but are not limited to:
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|
|
|
•
|
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;
|
|
|
|
|
•
|
the performance of our resellers;
|
|
|
|
|
•
|
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 and hosting providers;
|
|
|
|
|
•
|
our ability to manage our consultants and contractors;
|
|
|
|
|
•
|
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, 2017, filed with the SEC on March 9, 2018, 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.
|
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 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
We provide cloud-based enterprise work management software. We define enterprise work management software as software applications that enable organizations to plan, manage and execute projects and work. Our family of applications enables users to manage their projects, professional workforce and IT investments, automate document-intensive business processes, and effectively engage with their customers, prospects, and community via the web and mobile technologies.
The continued growth of an information-based economy has given rise to a large and growing group of knowledge workers who operate in dynamic work environments as part of geographically dispersed and virtual teams. We believe that manual processes and legacy on- premise enterprise systems are insufficient to address the needs of the modern work environment. In order for knowledge workers to be successful, they need to interact with intuitive enterprise work systems in a collaborative way, including real-time access. Today, legacy processes and systems are being disrupted and replaced by cloud-based enterprise work management software that improves visibility, collaboration and productivity.
In response to these changes, we are providing organizations and their knowledge workers with software applications that better align resources with business objectives and increase visibility, governance, collaboration, quality of customer experience, and responsiveness to changes in the business environment. This results in increased work capacity, higher productivity, better execution, and greater levels of customer engagement. Our applications are easy-to-use, scalable, and offer real-time collaboration for knowledge workers distributed on a local or global scale. Our applications address enterprise work challenges in the following categories:
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•
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Project & Information Technology (IT) Management
. Enables users to manage their organization’s projects, professional workforce and IT costs.
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•
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Workflow Automation
. Enables users to streamline, optimize, automate and secure document-intensive workflow business processes across their enterprise and supply chain.
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•
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Digital Engagement
. Enables users to effectively engage with their customers, prospects and community via the web and mobile technologies.
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We sell our software applications primarily through a direct sales organization comprised of inside sales and field sales personnel. In addition to our direct sales organization, we have an indirect sales organization, which sells to distributors and value-added resellers. We employ a land-and-expand go-to-market strategy. After we demonstrate the value of an initial application to a customer, our sales and account management teams work to expand the adoption of that initial application across the customer, as well as cross-sell additional applications to address other enterprise work management needs of the customer. Our customer success organization supports our direct sales efforts by managing the post-sale customer lifecycle.
Our subscription agreements are typically sold either on a per-seat basis or on a minimum contracted volume basis with overage fees billed in arrears, depending on the application being sold. We service customers ranging from large global corporations and government agencies to small- and medium-sized businesses. We have more than
4,000
customers with over
450,000
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 diverse family of software applications under the Upland brand and in three product categories (Project & IT Management, Workflow Automation, and Digital Engagement), each of which addresses a specific enterprise work management need. Our revenue has grown from
$22.8 million
in
2012
to
$98.0 million
in
2017
(and to
$31.6 million
for the
three months ended March 31, 2018
), representing a
330%
period-over-period growth rate. See Note
11
— Domestic and Foreign Operations in Notes to 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, products and businesses. This will expand our product families, customer base, and market access resulting in increased benefits of scale. We will prioritize acquisitions within our current core product categories including Project & IT Management, Workflow Automation, and Digital Engagement. Consistent with our growth strategy, we have made
seventeen
acquisitions from February 2012 through
March 31, 2018
.
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
We monitor our Adjusted EBITDA to help us evaluate the effectiveness and efficiency of our operations. Adjusted EBITDA is a non-GAAP financial measure.
We define Adjusted EBITDA as net income (loss), calculated in accordance with GAAP, plus depreciation and amortization expense, interest expense, net, other expense (income), net, provision for income taxes, stock-based compensation expense, acquisition-related expenses, and
purchase accounting adjustments for deferred revenue
.
The following table presents a reconciliation of net loss from continuing operations, the most comparable GAAP measure, to Adjusted EBITDA for each of the periods indicated.
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Three Months Ended March 31,
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2018
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2017
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(dollars in thousands)
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Reconciliation of Net loss to Adjusted EBITDA:
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Net Loss
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$
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(3,161
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)
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$
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(5,614
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)
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Add:
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Depreciation and amortization expense
|
4,172
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|
2,398
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Interest expense, net
|
2,494
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|
|
935
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|
|
Other expense (income), net
|
(303
|
)
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|
112
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Provision for income taxes
|
511
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|
951
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Stock-based compensation expense
|
2,577
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2,304
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Acquisition-related expense
|
3,102
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3,691
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Purchase accounting deferred revenue discount
|
1,389
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|
679
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Adjusted EBITDA
|
$
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10,781
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$
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5,456
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Weighted average ordinary shares outstanding - basic
|
19,759,203
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16,971,393
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Weighted average ordinary shares outstanding - diluted
|
20,952,589
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17,761,803
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Adjusted EBITDA per share - basic
|
$
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0.55
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$
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0.32
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Adjusted EBITDA per share - diluted
|
$
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0.51
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$
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0.31
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Total revenue- plus purchase accounting deferred revenue discount
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$
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33,004
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$
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21,431
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Adjusted EBITDA margin (using Total revenue plus purchase accounting deferred revenue discount)
|
33
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%
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|
26
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%
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Total revenue
|
$
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31,615
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$
|
20,752
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Adjusted EBITDA margin
|
34
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%
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|
26
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%
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We believe that Adjusted EBITDA provides useful information to management, investors and others in understanding and evaluating our operating results for the following reasons:
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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;
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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;
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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
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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:
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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;
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Adjusted EBITDA may not reflect changes in, or cash requirements for, our working capital needs or contractual commitments;
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Adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation;
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Adjusted EBITDA does not reflect interest or tax payments that could reduce cash available for use; and,
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other companies, including companies in our industry, might calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as comparative measures.
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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.
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.
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Three Months Ended March 31,
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2018
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2017
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Amount
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Percent of Revenue
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Amount
|
Percent of Revenue
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(dollars in thousands, except share and per share data)
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Revenue:
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Subscription and support
|
$
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27,729
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|
88
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%
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$
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18,135
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|
87
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%
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Perpetual license
|
1,626
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5
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%
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|
694
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3
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%
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Total product revenue
|
29,355
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|
93
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%
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18,829
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|
|
90
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%
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Professional services
|
2,260
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|
7
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%
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1,923
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|
10
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%
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Total revenue
|
31,615
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|
|
100
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%
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|
20,752
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|
100
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%
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Cost of revenue:
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Subscription and support
(1)(3)
|
9,249
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|
29
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%
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|
5,893
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|
28
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%
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Professional services
(1)
|
1,396
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|
|
5
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%
|
|
1,135
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|
6
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%
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Total cost of revenue
|
10,645
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|
|
34
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%
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|
7,028
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|
|
34
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%
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Gross profit
|
20,970
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|
66
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%
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|
13,724
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|
66
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%
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Operating expenses:
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Sales and marketing
(1)
|
4,408
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|
14
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%
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|
3,221
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|
16
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%
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Research and development
(1)
|
4,891
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15
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%
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|
3,477
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17
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%
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Refundable Canadian tax credits
|
(102
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)
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—
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%
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(117
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)
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(1
|
)%
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General and administrative
(1)(2)
|
7,000
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|
22
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%
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|
5,904
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|
28
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%
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Depreciation and amortization
|
2,130
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|
7
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%
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|
1,164
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6
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%
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Acquisition-related expenses
|
3,102
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|
10
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%
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|
3,691
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|
18
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%
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Total operating expenses
|
21,429
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|
68
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%
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|
17,340
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|
84
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%
|
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Loss from operations
|
(459
|
)
|
|
(2
|
)%
|
|
(3,616
|
)
|
|
(18
|
)%
|
|
Other Expense:
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|
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|
Interest expense, net
|
(2,494
|
)
|
|
(8
|
)%
|
|
(935
|
)
|
|
(5
|
)%
|
|
Other income (expense), net
|
303
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|
|
1
|
%
|
|
(112
|
)
|
|
—
|
%
|
|
Total other expense
|
(2,191
|
)
|
|
(7
|
)%
|
|
(1,047
|
)
|
|
(5
|
)%
|
|
Loss before provision for income taxes
|
(2,650
|
)
|
|
(9
|
)%
|
|
(4,663
|
)
|
|
(23
|
)%
|
|
Provision for income taxes
|
(511
|
)
|
|
(1
|
)%
|
|
(951
|
)
|
|
(4
|
)%
|
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Net loss
|
$
|
(3,161
|
)
|
|
(10
|
)%
|
|
$
|
(5,614
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)
|
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(27
|
)%
|
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Net loss per common share, basic and diluted
|
$
|
(0.16
|
)
|
|
|
|
$
|
(0.33
|
)
|
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|
Weighted-average common shares outstanding, basic and diluted
|
19,759,203
|
|
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|
|
16,971,393
|
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(1) Includes stock-based compensation detailed under Share-based Compensation in Note 9 — Stockholders' Equity.
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(2)
Includes General and administrative stock-based compensation of $2,341 and $2,203 for the three months ended March 31, 2018 and March 31, 2017, respectively. General and administrative expense excluding stock-based compensation as a percentage of total revenues is 15% and 18% for the three months March 31, 2018 and March 31, 2017, respectively.
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(3)
Includes depreciation and amortization of $2,042 and $1,234 for the three months ended March 31, 2018 and March 31, 2017, respectively.
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Comparison of the
Three
Months Ended
March 31, 2018
and
2017
Revenue
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|
Three Months Ended March 31,
|
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|
2018
|
|
2017
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|
% Change
|
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|
(dollars in thousands)
|
|
Revenue:
|
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|
|
|
|
|
Subscription and support
|
$
|
27,729
|
|
|
$
|
18,135
|
|
|
53
|
%
|
|
Perpetual license
|
1,626
|
|
|
694
|
|
|
134
|
%
|
|
Total product revenue
|
29,355
|
|
|
18,829
|
|
|
56
|
%
|
|
Professional services
|
2,260
|
|
|
1,923
|
|
|
18
|
%
|
|
Total revenue
|
$
|
31,615
|
|
|
$
|
20,752
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
Percentage of revenue:
|
|
|
|
|
|
|
Subscription and support
|
88
|
%
|
|
87
|
%
|
|
|
|
Perpetual license
|
5
|
%
|
|
3
|
%
|
|
|
|
Total product revenue
|
93
|
%
|
|
90
|
%
|
|
|
|
Professional services
|
7
|
%
|
|
10
|
%
|
|
|
|
Total revenue
|
100
|
%
|
|
100
|
%
|
|
|
For the Three Months Ended March 31, 2018
Total revenue was
$31.6 million
in the
three months ended March 31, 2018
, compared to
$20.8 million
in the
three months ended March 31, 2017
,
an increase of
$10.9 million
, or
52%
. The acquisitions that closed after March 31, 2017 contributed to the increase of $9.7 million after the reduction of
$1.4 million
purchase accounting deferred revenue discount in the three months ended March 31, 2018. Therefore, total revenue for the organic business increased by $1.2 million, or 6%.
Subscription and support revenue was
$27.7 million
in the
three months ended March 31, 2018
, compared to
$18.1 million
in the
three months ended March 31, 2017
,
an increase of
$9.6 million
, or
53%
. The acquisitions that closed after March 31, 2017 contributed to the
increase
in subscription and support revenue of $8.6 million after the reduction of
$1.4 million
purchase accounting deferred revenue discount in the three months ended March 31, 2018. Therefore, subscription and support revenue for the organic business increased by $1.0 million, or 6%.
Perpetual license revenue was
$1.6 million
in the
three months ended March 31, 2018
, as compared to
$0.7 million
in the
three months ended March 31, 2017
,
an increase of
$0.9 million
, or
134%
. The acquisitions that closed after March 31, 2017 contributed to the increase of $0.4 million in perpetual license revenue in the three months ended March 31, 2018. Therefore, perpetual license revenue for the organic business increased by $0.5 million, or 81%.
Professional services revenue was
$2.3 million
in the
three months ended March 31, 2018
, compared to
$1.9 million
in the
three months ended March 31, 2017
,
an increase of
$0.3 million
, or
18%
. The acquisitions that closed after March 31, 2017 contributed to the $0.7 million increase in professional services revenue in the three months ended March 31, 2018. Therefore, professional services revenue for the organic business decreased by $0.4 million, or 20%.
Cost of Revenue and Gross Profit Percentage
|
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|
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|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
% Change
|
|
|
(dollars in thousands)
|
|
Cost of revenue:
|
|
|
|
|
|
|
Subscription and support
(1)
|
$
|
9,249
|
|
|
$
|
5,893
|
|
|
57
|
%
|
|
Professional services
|
1,396
|
|
|
1,135
|
|
|
23
|
%
|
|
Total cost of revenue
|
10,645
|
|
|
7,028
|
|
|
51
|
%
|
|
Gross profit
|
$
|
20,970
|
|
|
$
|
13,724
|
|
|
53
|
%
|
|
|
|
|
|
|
|
|
Percentage of total revenue:
|
|
|
|
|
|
|
Subscription and support
(1)
|
29
|
%
|
|
28
|
%
|
|
|
|
Professional services
|
5
|
%
|
|
6
|
%
|
|
|
|
Total cost of revenue
|
34
|
%
|
|
34
|
%
|
|
|
|
Gross profit
|
66
|
%
|
|
66
|
%
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes depreciation, amortization and stock compensation expense as follows:
|
|
Depreciation
|
$
|
436
|
|
|
$
|
449
|
|
|
|
|
Amortization
|
$
|
1,606
|
|
|
$
|
785
|
|
|
|
|
Stock Compensation
|
$
|
77
|
|
|
$
|
18
|
|
|
|
For the Three Months Ended March 31, 2018
Cost of subscription and support revenue was
$9.2 million
in the
three months ended March 31, 2018
, compared to
$5.9 million
in the
three months ended March 31, 2017
, an increase of
$3.4 million
, or
57%
. The acquisitions that closed after March 31, 2017 contributed to the increase to cost of subscription and support revenue of $3.5 million, primarily related to an increase of mobile messaging costs associated with the Waterfall product line and increased amortization of acquired intangible assets in the three months ended March 31, 2018. Therefore, cost of subscription and support revenue for the organic portion of our business decreased by $0.1 million, primarily related to hosting infrastructure costs.
Cost of professional services revenue was
$1.4 million
in the
three months ended March 31, 2018
, compared to
$1.1 million
in the
three months ended March 31, 2017
,
an increase of
$0.3 million
, or
23%
. The acquisitions that closed after March 31, 2017 contributed to the increase to cost of professional services revenue of $0.5 million, primarily related to an increase in personnel and related costs in the three months ended March 31, 2018. Therefore, cost of subscription and support revenue for the organic portion of our business decreased by $0.2 million, primarily related to outsourced contractor expenses, most of which were the result of our planned operating efficiencies.
Operating Expenses
Sales and Marketing Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
% Change
|
|
|
(dollars in thousands)
|
|
Sales and marketing
(1)
|
$
|
4,408
|
|
|
$
|
3,221
|
|
|
37
|
%
|
|
Percentage of total revenue
|
14
|
%
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes stock compensation expense as follows:
|
|
Stock Compensation
|
$
|
46
|
|
|
$
|
23
|
|
|
|
For the Three Months Ended March 31, 2018
Sales and marketing expense was
$4.4 million
in the
three months ended March 31, 2018
, compared to
$3.2 million
in the
three months ended March 31, 2017
,
an increase of
$1.2 million
, or
37%
. The acquisitions that closed after March 31, 2017 contributed to the $1.6 million of increased sales and marketing cost, primarily consisting of personnel and related costs in the three months ended March 31, 2018. Therefore, sales and marketing expense for the organic portion of our business decreased by $0.4 million and consisted primarily of personnel and related costs, most of which were the result of our planned operating efficiencies.
Research and Development Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
% Change
|
|
|
(dollars in thousands)
|
|
Research and development
(1)
|
$
|
4,891
|
|
|
$
|
3,477
|
|
|
41
|
%
|
|
Refundable Canadian tax credits
|
(102
|
)
|
|
(117
|
)
|
|
(13
|
)%
|
|
Total research and development
|
$
|
4,789
|
|
|
$
|
3,360
|
|
|
43
|
%
|
|
|
|
|
|
|
|
|
Percentage of total revenue:
|
|
|
|
|
|
|
Research and development
|
15
|
%
|
|
17
|
%
|
|
|
|
Refundable Canadian tax credits
|
—
|
%
|
|
(1
|
)%
|
|
|
|
Total research and development
|
15
|
%
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes stock compensation expense as follows:
|
|
Stock Compensation
|
$
|
113
|
|
|
$
|
60
|
|
|
|
For the Three Months Ended March 31, 2018
Research and development expense was
$4.9 million
in the
three months ended March 31, 2018
, compared to
$3.5 million
in the
three months ended March 31, 2017
,
an increase of
$1.4 million
,
or
41%
. The acquisitions that closed after March 31, 2017 contributed to the $1.2 million of increased research and development costs primarily consisting of personnel and related costs in the three months ended March 31, 2018. Therefore, research and development costs for the organic portion of our business increased by $0.2 million due to an increase in outsourced contractor costs.
Refundable Canadian tax credits were $
0.1 million
in the
three months ended March 31, 2018
, compared to
$0.1 million
in the
three months ended March 31, 2017
.
General and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
% Change
|
|
|
(dollars in thousands)
|
|
General and administrative
(1)
|
$
|
7,000
|
|
|
$
|
5,904
|
|
|
19
|
%
|
|
Percentage of total revenue
|
22
|
%
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes stock compensation expense as follows:
|
|
Stock Compensation
|
$
|
2,341
|
|
|
$
|
2,203
|
|
|
|
For the Three Months Ended March 31, 2018
General and administrative expense was
$7.0 million
in the
three months ended March 31, 2018
, compared to
$5.9 million
in the
three months ended March 31, 2017
,
an increase of
$1.1 million
, or
19%
. An increase in general administrative expense of $0.3 million was due to the acquisitions that closed after March 31, 2017, which consisted primarily of personnel and related costs in the three months ended March 31, 2018. Therefore, general and administrative expense for the organic portion of our business increased by $0.8 million, which was driven primarily by personnel and related costs.
Depreciation and Amortization Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
% Change
|
|
|
(dollars in thousands)
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
Depreciation
|
$
|
120
|
|
|
$
|
113
|
|
|
6
|
%
|
|
Amortization
|
2,010
|
|
|
1,051
|
|
|
91
|
%
|
|
Total depreciation and amortization
|
$
|
2,130
|
|
|
$
|
1,164
|
|
|
83
|
%
|
|
|
|
|
|
|
|
|
Percentage of total revenue:
|
|
|
|
|
|
|
Depreciation
|
1
|
%
|
|
1
|
%
|
|
|
|
Amortization
|
6
|
%
|
|
5
|
%
|
|
|
|
Total depreciation and amortization
|
7
|
%
|
|
6
|
%
|
|
|
For the Three Months Ended March 31, 2018
Depreciation and amortization expense was
$2.1 million
in the
three months ended March 31, 2018
, compared to
$1.2 million
in the
three months ended March 31, 2017
,
an increase of
$1.0 million
, or
83%
. The acquisitions that closed after March 31, 2017 increased the depreciation and amortization expense by $1.1 million in the three months ended March 31, 2018, while the depreciation and amortization expense for the organic portion of our business decreased by $0.1 million as a result of assets acquired in earlier years becoming fully amortized or depreciated.
Acquisition-related Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
% Change
|
|
|
(dollars in thousands)
|
|
Acquisition-related expenses
|
$
|
3,102
|
|
|
$
|
3,691
|
|
|
(16
|
)%
|
|
Percentage of total revenue
|
10
|
%
|
|
18
|
%
|
|
|
For the Three Months Ended March 31, 2018
Acquisition related expense was
$3.1 million
in the
three months ended March 31, 2018
, compared to
$3.7 million
in the
three months ended March 31, 2017
,
a decrease of
$0.6 million
, or
16%
. These one-time acquisition related expenses vary by acquisition and are expensed as incurred. The level of acquisition activity varies from period to period so, as a result, year-over-year comparison of these expenses are not necessarily meaningful due to the one-time nature of these expenses.
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
% Change
|
|
|
(dollars in thousands)
|
|
Other expense:
|
|
|
|
|
|
|
Interest expense, net
|
$
|
(2,494
|
)
|
|
$
|
(935
|
)
|
|
167
|
%
|
|
Other income (expense), net
|
303
|
|
|
(112
|
)
|
|
(371
|
)%
|
|
Total other expense
|
$
|
(2,191
|
)
|
|
$
|
(1,047
|
)
|
|
109
|
%
|
|
|
|
|
|
|
|
|
Percentage of total revenue:
|
|
|
|
|
|
|
Interest expense, net
|
(8
|
)%
|
|
(5
|
)%
|
|
|
|
Other income (expense), net
|
1
|
%
|
|
—
|
%
|
|
|
|
Total other expense
|
(7
|
)%
|
|
(5
|
)%
|
|
|
For the Three Months Ended March 31, 2018
Interest
expense
was
$2.5 million
in the
three months ended March 31, 2018
, compared to
$0.9 million
in the
three months ended March 31, 2017
, an increase in interest
expense
of
$1.6 million
, or
167%
. The increase was due to an increase in borrowing on our debt facility for the RightAnswers, Waterfall, Qvidian, and InterFAX acquisitions in April 2017, July 2017, November 2017, and March 2018 respectively.
Other
income
was
$0.3 million
in the
three months ended March 31, 2018
, compared to other
expense
of
$0.1 million
in the
three months ended March 31, 2017
. Other income was generated in the
three months ended March 31, 2018
due to a claim on the holdback related to the acquisition of RightAnswers.
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
% Change
|
|
|
(dollars in thousands)
|
|
Provision for income taxes
|
(511
|
)
|
|
(951
|
)
|
|
(46
|
)%
|
|
Percentage of total revenue
|
—
|
|
|
—
|
|
|
|
For the Three Months Ended March 31, 2018
Provision for income taxes was
$0.5 million
in the
three months ended March 31, 2018
, compared to the provision for income taxes of
$1.0 million
in the
three months ended March 31, 2017
, due to the reduction in the US federal tax rate per the Tax Act as applied to tax deductible goodwill and a reduction in state tax provision.
Liquidity and Capital Resources
To date, we have financed our operations primarily through capital raising including sales of our common stock, cash from operating activities, borrowing under our credit facility, and the issuance of notes to sellers in some of our acquisitions.
On May 12, 2017, the Company filed a registration statement on Form S-3 (File No. 333-217977) (the "S-3"), to register Upland securities in an aggregate amount of up to
$75.0 million
for offerings from time to time. The S-3 was amended on May 22, 2017, and declared effective on May 26, 2017. On June 6, 2017, pursuant to the S-3, the Company entered into an underwriting agreement (the "Underwriting Agreement") with Needham & Company, LLC and William Blair & Company, L.L.C., as representatives of the several underwriters named therein, relating to the sale and issuance of 2,139,534 common shares of the Company for an offering price to the public of $21.50 per share. The net proceeds of the registered public offering were approximately
$42.6 million
, net of issuance costs, in exchange for
2,139,534
shares of common stock.
As of
March 31, 2018
, the Company may issue up to approximately
$29.0 million
of securities under the remaining capacity of its S-3 shelf registration.
As of
March 31, 2018
, we had cash and cash equivalents of
$32.5 million
,
$40.0 million
of available borrowings under our loan and security agreements, and
$163.0 million
of borrowings outstanding under our loan and security agreements. As of
December 31, 2017
, we had cash and cash equivalents of
$22.3 million
,
$30.0 million
of available borrowings under our loan and security agreements, and
$113.8 million
of borrowings outstanding under our loan and security agreements.
Sixth Amendment to Credit Facility
On March 21, 2018, the Company amended and expanded its Credit Agreement dated May 14, 2015, as amended, among,
inter alia
, the Company, certain of its subsidiaries, and each of the lenders named in the Credit Agreement (the “Credit Facility”). The Company entered into a sixth amendment to the Credit Facility with Wells Fargo Capital Finance and CIT Bank, N.A. as joint lead arrangers, and including Goldman Sachs Bank USA, Regions Bank, and Citizens Bank, N.A. (collectively, the "Lenders"), with a Consent and Sixth Amendment to Credit Agreement (the “Sixth Amendment”).
The Sixth Amendment to the Credit Facility provides for a
$258.7 million
credit facility, including (i) a fully drawn
$163.0 million
term loan, (ii) a fully available
$30.0 million
delayed draw term loan commitment (the "DDTL"), (iii) a fully available
$10.0 million
revolving loan commitment, and (iv) a
$55.0 million
uncommitted accordion.
Specifically, the Credit Facility provides for
$163.7 million
of term debt comprised of (i) a fully drawn U.S. term loan facility in an aggregate principal amount of
$158.4 million
(the “U.S. Term Loan”), (ii) a fully drawn Canadian term loan facility in an aggregate principal amount of
$5.3 million
(the “Canadian Term Loan” together with the U.S. and Canadian Term Loans, the “Term Loans”).
The Credit Facility also provides for the a delayed draw term facility from
$30.0 million
and for an uncommitted accordion amount of
$55 million
.
As of
March 31, 2018
and
December 31, 2017
, we had a working capital
deficit
of
$14.4 million
and
$23.5 million
, respectively, which included
$45.4 million
and
$43.8 million
of deferred revenue recorded as a current liability as of
March 31, 2018
and
December 31, 2017
, respectively. This deferred revenue will be recognized as revenue in accordance with our revenue recognition policy.
The following table summarizes our cash flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
|
(dollars in thousands)
|
|
Consolidated Statements of Cash Flow Data:
|
|
|
|
|
Net cash provided by operating activities
|
$
|
(475
|
)
|
|
$
|
4,927
|
|
|
Net cash used in investing activities
|
(34,746
|
)
|
|
(19,659
|
)
|
|
Net cash provided by financing activities
|
45,674
|
|
|
5,354
|
|
|
Effect of exchange rate fluctuations on cash
|
(274
|
)
|
|
37
|
|
|
Change in cash and cash equivalents
|
10,179
|
|
|
(9,341
|
)
|
|
Cash and cash equivalents, beginning of period
|
22,326
|
|
|
28,758
|
|
|
Cash and cash equivalents, end of period
|
$
|
32,505
|
|
|
$
|
19,417
|
|
Cash Flows from Operating Activities
Cash used in operating activities is significantly influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business. Our operating assets and liabilities consist primarily of cash, receivables from customers, prepaid assets, unbilled professional services, accounts payable, accrued compensation and other accrued expenses, and deferred revenues. The volume of professional services rendered and the related timing of collections on those bookings, as well as payments of our accounts payable, accrued payroll and related benefits, affect these account balances.
Our cash provided by operating activities for the
three months ended March 31, 2018
primarily reflects our net loss of
$3.2 million
plus non-cash expenses that included
$4.2 million
of depreciation and amortization,
$2.6 million
of non-cash stock compensation expense,
$0.5 million
of amortization of commissions deferred under ASC 606,
$0.2 million
of non-cash interest,
$0.1 million
of deferred income taxes, and
$0.1 million
of foreign currency re-measurement
losses
. Working capital sources of cash included a
$0.6 million
decrease
in accounts receivable and a
$0.9 million
increase
in deferred revenue. Working capital uses of cash included a
$1.8 million
increase
in prepaids and other, a
$1.1 million
decrease
in accounts payable, and a
$3.6 million
decrease
in accrued expenses.
A substantial source of cash is invoicing for subscriptions and support fees in advance, which is recorded as deferred revenue, and is included on our consolidated balance sheet as a liability. Deferred revenue consists of the unearned portion of booked fees for our software subscriptions and support, which is amortized into revenue in accordance with our revenue recognition policy. We assess our liquidity, in part, through an analysis of new subscriptions invoiced, expected cash receipts on new and existing subscriptions, and our ongoing operating expense requirements.
Cash Flows from Investing Activities
Our primary investing activities have consisted of acquisitions of complementary technologies, products and businesses. As our business grows, we expect our primary investing activities to continue to further expand our family of software applications and infrastructure and support additional personnel.
For the
three months ended March 31, 2018
, cash used in investing activities for business combinations, consisted of (i)
$34.3 million
paid during the period to sellers of Interfax Communications, Ltd., which was acquired in March 2018, and (ii) purchases of property and equipment of
$0.4 million
.
Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced applications and professional service offerings, and acquisitions of complementary technologies, products and businesses.
Cash Flows from Financing Activities
Our primary financing activities have consisted of capital raised to fund our operations, proceeds from debt obligations incurred to finance our operations, repayments of our debt obligations and share based payment activity.
During the
three months ended March 31, 2018
, we received
$0.1 million
, net of issuance costs, related to the issuance of our common stock, and borrowed
$49.4 million
, net of issuance costs, in term loans, repaid
$0.8 million
of term
loans payable, paid
$2.0 million
in additional consideration to sellers of acquired businesses, and made principal payments of
$0.3 million
on capital leases.
Loan
and Security Agreements
See
Note
6
- Debt for more information regarding our Loan and Security Agreements and outstanding debt as of
March 31, 2018
.
Off-Balance Sheet Arrangements
During the
three
months ended
March 31, 2018
and
March 31, 2017
, respectively, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special-purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and the Use of Estimates
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. 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 consolidated financial statements:
• revenue recognition and deferred revenue;
• stock-based compensation;
• income taxes; and
• business combinations and the recoverability of goodwill and long-lived assets.
Other Key Accounting Policies
Our unaudited interim financial statements and other financial information for the
three
months ended
March 31, 2018
, as presented herein and in Item 1 to this Quarterly Report on Form 10-Q, reflects 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, 2017
filed with the SEC on March 9,
2018
. Please refer to this 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.
Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We are choosing to opt out of such extended transition period, however, and we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
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 Comerica Bank, our former lender under our loan and security agreements. 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. Any draws under our loan and security agreements bear interest at a variable rate tied to the prime rate. As of
March 31, 2018
, we had a principal balance of
$157.7 million
under our U.S. Term Loan,
none
under our U.S. Revolver,
$5.3 million
under our Canadian Term Loan and
none
under our Canadian Revolver.
As of
December 31, 2017
, we had a principal balance of
$108.5 million
under our U.S. Loan Agreement and
$5.3 million
under our Canadian Loan Agreement.
Foreign Currency Exchange Risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, which expose us to foreign exchange rate risk. In addition, we incur a portion of our operating expenses in foreign currencies, including Canadian dollars, British pounds and Euros, and in the future as we expand into other foreign countries, we expect to incur operating expenses in other foreign currencies. In addition, our customers are generally invoiced in the currency of the country in which they are located. We are exposed to foreign exchange rate fluctuations as the financial results of our international operations are translated from the local functional currency into U.S. dollars upon consolidation. A decline in the U.S. dollar relative to foreign functional currencies would increase our non-U.S. revenue and improve our operating results. Conversely, if the U.S. dollar strengthens relative to foreign functional currencies, our revenue and operating results would be adversely affected. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would have resulted in a change in revenue of
$0.6 million
for the
three months ended March 31, 2018
. To date, we have not engaged in any hedging strategies. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in foreign currency exchange rates.
Inflation
We do not believe that inflation had a material effect on our business, financial condition or results of
operations in the last three fiscal years. If our costs were to become subject to significant inflationary pressures, we
may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm
our business, financial condition and results of operations.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
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, 2018
, 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.
PART II – OTHER INFORMATION
Item 1A. Risk Factors
The risk factor set forth below replaces the risk factor in our Annual Report on Form 10-K for the
year ended December 31, 2017
, entitled "Our loan facility contains operating and financial covenants that may restrict our business and financing activities." Other than the risk factor set forth below, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the
year ended December 31, 2017
.
Our Credit Facility contains operating and financial covenants that may restrict our business and financing activities.
On May 14, 2015, we entered into a credit agreement with Wells Fargo Capital Finance and other lenders named in the credit agreement, which has been amended though a series of redeterminations and expanded to include a syndicate of banks (as amended, the "Credit Facility"). In 2017, the Credit Facility was amended on April 21, 2017 with the Fourth Amendment to the Credit Agreement (the "Fourth Amendment"), further amended on August 2, 2017 with the Fifth Amendment to Credit Agreement ("the Fifth Amendment"), and again amended on March 21, 2018 with the Consent and Sixth Amendment to Credit Agreement (the "Sixth Amendment").
Effective as of the Fourth Amendment executed on April 21, 2017, the Credit Facility was comprised of a $44.4 million term loan, a $10.0 million revolving credit facility, a $10.0 million delayed draw term loan for acquisitions. Additionally, the facility provided for uncommitted increases in the maximum size of the loan facility by an aggregate principal amount of $20.0 million to further support future acquisitions and an additional $16.7 million of subordinated seller notes for acquisitions.
Effective as of the Fifth Amendment executed on August 2, 2017, the Credit Facility was comprised of (i) a fully drawn $95.0 million term loan, (ii) a $40.0 million delayed draw term loan commitment ($20.0 million of which was drawn in conjunction with the acquisition of Qvidian in November, 2017), (iii) a $10.0 million revolving loan commitment, and (iv) a $55.0 million uncommitted accordion.
Effective as of the Sixth Amendment, the Credit Facility provided for a
$258.7 million
credit facility, including (i) a fully drawn
$163.0 million
term loan, (ii) a fully available
$30.0 million
delayed draw term loan commitment (the "DDTL"), (iii) a fully available
$10.0 million
revolving loan commitment, and (iv) a
$55.0 million
uncommitted accordion.
Specifically, the Credit Facility provides for
$163.7 million
of term debt comprised of (i) a fully drawn U.S. term loan facility in an aggregate principal amount of
$158.4 million
(the “U.S. Term Loan”), (ii) a fully drawn Canadian term loan facility in an aggregate principal amount of
$5.3 million
(the “Canadian Term Loan” together with the U.S. and Canadian Term Loans, the “Term Loans”).
Under the terms of the Sixth Amendment, the Term Loans are repayable, on a quarterly basis by an amount equal to
2.5%
per annum on or before June 30, 2019, after which the existing
5.0%
per annum is due thereafter until the facility’s maturity date of August 2, 2022.
The Sixth Amendment also provides for other improvements including, among other things, (i) a favorable adjustment to decrease the overall applicable interest rate for accounts outstanding under the Credit Agreement by 50 to 150 basis points resulting in a current effective interest rate of approximately 6.15% down from the previous effective interest rate of approximately 7.1%; (ii) a favorable adjustment to the leverage ratio to increase the amount of funded indebtedness to EBITDA (as defined in the Amendment) to 4.25 to 1.00 as of March 31, 2018, along with additional leverage ratio improvements throughout the remainder of the loan term; and (iii) a favorable increase to the recurring revenue ratio future draw condition to the delayed draw term loan facility from 1.25:1.0 to 1.50:1.0.
Also, the maximum amount of purchase consideration payable in respect of an individual permitted acquisition is
$25.0 million
and in respect of all permitted acquisitions is
$175.0 million
. In addition, the amount of permitted indebtedness to sellers of businesses is
$20.0 million
.
Our obligations and the obligations of the co-borrowers and any guarantors under the Credit Facility are secured by a security interest in substantially all of our assets and assets of the co-borrowers’ and of any guarantors, including intellectual property. The terms of the Credit Facility limits, among other things, our ability to
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sell, lease, license or otherwise dispose of assets;
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undergo a change in control;
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consolidate or merge with or into other entities;
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make or own loans, investments and acquisitions;
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create, incur or assume guarantees in respect of obligations of other persons;
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create, incur or assume liens and other encumbrances; or
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pay dividends or make distributions on, or purchase or redeem, our capital stock.
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Furthermore, the Credit Facility requires us and our subsidiaries to comply with certain financial covenants. The operating and other restrictions and covenants in the Credit Facility, and in any future financing arrangements that we may enter into, may restrict our ability to finance our operations, engage in certain business activities, or expand or fully pursue our business strategies, or otherwise limit our discretion to manage our business. Our ability to comply with these restrictions and covenants may be affected by events beyond our control, and we may not be able to meet those restrictions and covenants. A breach of any of the restrictions and covenants could result in a default under the Credit Facility or any future financing arrangements, which could cause any outstanding indebtedness under the credit facility or under any future financing arrangements to become immediately due and payable, and result in the termination of commitments to extend further credit.
As of
March 31, 2018
, there was
$163.0 million
outstanding under the Credit Facility,
$163.0 million
of which was outstanding under the term loan portion, none outstanding under the
$30.0 million
delayed draw term loan, none outstanding under the
$10.0 million
revolving portion of the Credit Facility, and none outstanding under the
$55.0 million
uncommitted loan feature.
Item 6. Exhibits
See the Exhibit Index immediately following this page, which is incorporated herein by reference.
EXHIBIT INDEX
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Exhibit Number
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Exhibit Description
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101.INS***
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XBRL Instance Document
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101.SCH***
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XBRL Taxonomy Extension Schema Document
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101.CAL***
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XBRL Taxonomy Extension Calculation Linkbase Document
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101.DEF***
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XBRL Taxonomy Extension Definition Linkbase Document
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101.LAB***
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XBRL Taxonomy Extension Label Linkbase Document
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101.PRE***
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XBRL Taxonomy Extension Presentation Linkbase Document
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***
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The financial information contained in these XBRL documents is unaudited and these are not the official publicly filed financial statements of Upland Software, Inc. Investors should continue to rely on the official filed version of the furnished documents and not rely on this information in making investment decisions. In accordance with Rule 402 of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
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SIGNATURES
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.
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UPLAND SOFTWARE, INC.
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Dated: May 10, 2018
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/s/ Michael D. Hill
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Michael D. Hill
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Chief Financial Officer
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CONSENT AND SIXTH AMENDMENT TO CREDIT AGREEMENT
This CONSENT AND SIXTH AMENDMENT TO CREDIT AGREEMENT (this "
Amendment
") is entered into as of March 21, 2018, by and among WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking association, as administrative agent and collateral agent for each member of the Lender Group and the Bank Product Providers (in such capacities, together with its successors and assigns in such capacities, "
Agent
") and as United States administrative agent for each member of the Lender Group and the Bank Product Providers (in such capacity, together with its successors and assigns in such capacity, "
US Agent
"), WELLS FARGO CAPITAL FINANCE CORPORATION CANADA, an Ontario corporation, as Canadian administrative agent for each member of the Lender Group and the Bank Product Providers (in such capacity, together with its successors and assigns in such capacity, "
Canadian Agent
"), the Lenders (as defined in the Credit Agreement as defined below) party hereto, UPLAND SOFTWARE, INC., a Delaware corporation ("
Parent
"), each subsidiary of Parent identified on the signature pages hereof as a "US Borrower" (collectively, the "
US Borrowers
") and UPLAND SOFTWARE INC. / LOGICIELS UPLAND INC., a Canadian federal corporation ("
Upland CAD
"; collectively with Parent and US Borrowers each, a "
Borrower
" and collectively, the "
Borrowers
").
WHEREAS, the Borrowers, Agent, US Agent, Canadian Agent and the Lenders are parties to that certain Credit Agreement dated as of May 14, 2015 (as amended, restated, modified or supplemented from time to time, the "
Credit Agreement
");
WHEREAS, the Borrowers have advised Agent that PowerSteering Software Limited, a limited company organized and existing under the laws of England and Wales and a wholly-owned subsidiary of Parent ("
PowerSteering UK
"), desires to enter into that certain Share Purchase Agreement dated on or about the date hereof, a copy of which is attached hereto as
Exhibit A
(the "
Interfax Purchase Agreement
"), by and among PowerSteering UK ("
Buyer
"), Yehuda Alon ("
Alon
") and Tamar Marash ("
Marash
" and together with Alon, each, a "
Seller
" and collectively, the "
Sellers
"), pursuant to which Buyer will purchase the shares comprising the entire issued share capital of Interfax Communications Limited, a private company limited by shares organized and existing under the laws of Ireland (the "
Company
") (such share purchase, the "
Interfax Share Purchase
");
WHEREAS, Borrowers have informed Agent and Lenders that, other than solely with respect to clauses (i) and (k) of the definition of "Permitted Acquisition" set forth on Schedule 1.1 to the Credit Agreement, the Interfax Share Purchase would constitute a Permitted Acquisition under the Credit Agreement.
NOW THEREFORE, in consideration of the premises and mutual agreements herein contained, the parties hereto agree as follows:
1.
Defined Terms
. Unless otherwise defined herein, capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the Credit Agreement.
2.
Consent
. In reliance upon the representations and warranties of each Borrower set forth in
Section 7
below and subject to the satisfaction of the conditions to effectiveness set forth in
Section 6
below, the undersigned Lenders, constituting all Lenders pursuant to the Credit Agreement, hereby consent to:
(a)
the acquisition of the Equity Interests of the Company, which is incorporated under the laws of Ireland, and which is a jurisdiction other than the United States or Canada as set forth in clause (i) of the definition of "Permitted Acquisition" set forth in Schedule 1.1 to the Credit Agreement; and
(b)
the aggregate purchase consideration (including deferred payment obligations) payable in connection with the
Interfax Share Purchase
in a maximum amount not to exceed $40,000,000, which amount exceeds the maximum purchase consideration payable in respect of any single Acquisition as set forth in clause (k) of the definition of "Permitted Acquisition" set forth in Schedule 1.1 to the Credit Agreement,
in each case, so long as (i) the
Interfax Share Purchase
is consummated in accordance with all of the terms and conditions of the
Interfax Purchase Agreement
and (ii) the
Interfax Share Purchase
satisfies all of the applicable requirements of a Permitted Acquisition contained in the definition of "Permitted Acquisition" set forth on Schedule 1.1 to the Credit Agreement (other than clause (i) of such definition solely as a result of the Company being incorporated under the laws of a jurisdiction other than the United States or Canada and clause (k) of such definition solely as a result of the purchase consideration for the
Interfax Share Purchase
exceeding the amount permitted under such clause). For the avoidance of doubt, the purchase consideration payable in respect of the
Interfax Share Purchase
shall count against the $175,000,000 limit on the aggregate purchase consideration payable in respect of all Permitted Acquisitions under the Credit Agreement set forth in clause (k) of the definition of "Permitted Acquisition" set forth on Schedule 1.1 of the Credit Agreement. Except as expressly set forth herein, the foregoing consent is a limited consent and shall not constitute (i) a modification or alteration of the terms, conditions or covenants of the Credit Agreement or any other Loan Document or (ii) a waiver, release or limitation upon the exercise by Agent and/or Lenders of any of their respective rights, legal or equitable thereunder.
3.
Amendments to Credit Agreement
. In reliance upon the representations and warranties of each Borrower set forth in
Section 7
below and subject to the satisfaction of the conditions to effectiveness set forth in
Section 6
below, the Credit Agreement shall be amended as follows:
(a)
Section 2.2(a) of the Credit Agreement is hereby amended and restated in its entirety as follows:
(a) Subject to the terms and conditions of this Agreement, (i) on the Closing Date, the Lenders with a US Term Loan Commitment (as of the Closing Date) made a term loan to the US Borrowers in the original principal amount of $19,000,000, (ii) on April 25, 2016, the Lenders with a Delayed Draw Term Loan Commitment (as of April 25, 2016) made a Delayed Draw Term Loan to the US Borrowers in the original principal amount of $10,000,000, (iii) on the Third Amendment Closing Date, the Lenders made additional term loans to the US Borrowers (according to the amounts set forth in footnote 1 on Schedule C-1 (as in effect on the Third Amendment Closing Date) in the original principal amount of $16,687,500, (iv) on January 10, 2017, the Lenders with a Delayed Draw Term Loan Commitment (as of January 10, 2017) made a Delayed Draw Term Loan to the US Borrowers in the original principal amount of $10,000,000, (v) on April 21, 2017, the Lenders made additional term loans to the US Borrowers (according to the amounts set forth in footnote 1 on Schedule C-1 (as in effect on the Fourth Amendment Closing Date) in the original principal amount of $15,000,000, (vi) on the Fifth Amendment Closing Date, the Lenders made additional terms loans to the US Borrowers (according to the amounts set forth in footnote 1 on Schedule C-1 (as in effect on the Fifth Amendment Closing Date) in the original principal amount of $22,326,562,50, and (vii) on November 16, 2017, the Lenders with a Delayed Draw Term Loan Commitment (as of November 16, 2017) made a Delayed Draw Term Loan to the US Borrowers in the original principal amount of $20,000,000. Immediately prior to the effectiveness of the Sixth Amendment as of the Sixth Amendment Closing Date, the outstanding principal balance of the US Term Loan made under and as defined in this Agreement was $108,355,000 (the "
Original US Term Loan
"). Subject to the terms and conditions of this Agreement and the Sixth Amendment, the Lenders agree (severally, not jointly or jointly and severally) to make additional term loans in Dollars to the US Borrowers on the Sixth Amendment Closing Date in an aggregate original principal amount of $50,000,000 (together with the Original US Term Loan, the "
US Term Loan
"). Each Lender's obligation to fund the portion of the US Term Loan to be funded on the Sixth Amendment Closing Date shall be limited to the amount set forth in footnote 1 on Schedule C-1 as the amount funded by it on the Sixth Amendment Closing Date.
(b)
The table set forth in Section 2.2(b) of the Credit Agreement is hereby amended and restated in its entirety as follows:
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Date
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Installment Amount
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March 31, 2018
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$685,000
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June 30, 2018
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$997,500
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September 30, 2018
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$997,500
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December 31, 2018
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$997,500
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March 31, 2019
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$997,500
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June 30, 2019
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$997,500
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September 30, 2019
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$1,995,000
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December 31, 2019
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$1,995,000
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March 31, 2020
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$1,995,000
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June 30, 2020
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$1,995,000
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September 30, 2020
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$1,995,000
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December 31, 2020
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$1,995,000
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March 31, 2021
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$1,995,000
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June 30, 2021
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$1,995,000
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September 30, 2021
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$1,995,000
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December 31, 2021
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$1,995,000
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March 31, 2022
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$1,995,000
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June 30, 2022
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$1,995,000
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(c)
Section 2.14(d) of the Credit Agreement is hereby amended and restated in its entirety as follows:
(d) In addition to the conditions set forth in this
Section 2.14
and the conditions precedent set forth in
Section 3
, the obligation of the Lender Group (or any member thereof) to make any portion of a Delayed Draw Term Loan is subject to the Borrowers having delivered to Agent an updated pro forma certified calculation of the Recurring Revenue Ratio (after giving effect to the borrowing of the applicable Delayed Draw Term Loan) for the most recently ended fiscal quarter for which financial statements have been received pursuant to
Section 5.1
, demonstrating that such Recurring Revenue Ratio is not greater than 1.50:1.0.
(d)
Section 5 of the Credit Agreement is hereby amended by adding a new Section 5.16 at the end thereof as follows:
Section 5.16
Intercompany License Agreements
. To the extent that any Loan Party uses or intends to use any Intellectual Property (as defined in the US Guaranty and Security Agreement) of Interfax, each Borrower hereby covenants and agrees to deliver to Agent an executed license agreement between such Loan Party, as licensee, and Interfax, as licensor, in form and substance reasonably satisfactory to the Agent and the Lenders promptly, and in any event within sixty (60) days after, such Loan Party commences using such Intellectual Property (or such later date as may be determined by Agent in its sole discretion).
(e)
Section 7(b) of the Credit Agreement is hereby amended and restated in its entirety as follows:
(b)
Leverage Ratio
. Have a Leverage Ratio, measured on a quarter-end basis, of not greater than the applicable ratio set forth in the following table for the applicable date set forth opposite thereto:
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Applicable Date
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Applicable Ratio
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March 31, 2018
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4.25 to 1.00
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June 30, 2018
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4.25 to 1.00
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September 30, 2018
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4.25 to 1.00
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December 31, 2018
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4.25 to 1.00
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March 31, 2019
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4.00 to 1.00
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June 30, 2019
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4.00 to 1.00
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September 30, 2019
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4.00 to 1.00
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December 31, 2019
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4.00 to 1.00
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March 31, 2020
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3.75 to 1.00
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June 30, 2020
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3.75 to 1.00
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September 30, 2020
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3.75 to 1.00
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December 31, 2020
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3.50 to 1.00
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March 31, 2021
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3.50 to 1.00
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June 30, 2021
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3.25 to 1.00
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September 30, 2021
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3.25 to 1.00
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December 31, 2021
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3.25 to 1.00
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March 31, 2022 and each June 30, September 30 and December 31 thereafter
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3.00 to 1.00
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(f)
Clause (c)(vi) of the definition of "EBITDA" set forth on Schedule 1.1 to the Credit Agreement is hereby amended and restated in its entirety as follows:
(vi) with respect to any Permitted Acquisition, costs, fees, charges and expenses in respect of restructuring items for any Permitted Acquisition incurred within one year after the consummation of such Permitted Acquisition, up to an aggregate amount for such Permitted Acquisition not to exceed, in any 12 month period, 15% of the aggregate Purchase Price paid in connection with any Permitted Acquisition(s) consummated during such period,
(g)
Clause (c)(viii) of the definition of "EBITDA" set forth on Schedule 1.1 to the Credit Agreement is hereby amended and restated in its entirety as follows:
(viii) with respect to any Permitted Acquisition, (A) costs, fees, charges and expenses consisting of out-of-pocket expenses owed by Parent or any of its Subsidiaries to any Person who is not an Affiliate of any Loan Party or any of its Subsidiaries for services performed by such Person in connection with such Permitted Acquisition incurred within 180 days of the consummation of such Permitted Acquisition and (B) cash compensation expenses related to banker or success fees, up to an aggregate amount (for all such items in these clauses (A) and (B)) for such Permitted Acquisition not to exceed, in any 12 month period, 15% of the aggregate Purchase Price paid in connection with any Permitted Acquisition(s) consummated during such period,
(h)
The definitions of "Applicable Margin", "Delayed Draw Term Loan Amount", "Delayed Draw Term Loan Commitment Termination Date", "Leverage Ratio", "Recurring Revenue Ratio" and "Permitted Intercompany Advances" set forth on Schedule 1.1 to the Credit Agreement are hereby amended and restated in their entirety as follows:
"
Applicable Margin
" means, as of any date of determination and with respect to Base Rate Loans or Non-Base Rate Loans, as applicable, the applicable margin set forth in the following table that corresponds to the most recent Leverage Ratio calculation delivered to Agent pursuant to
Section 5.1
of the Agreement (the "
Leverage Ratio Calculation
");
provided
, that any time an Event of Default has occurred and is continuing, the Applicable Margin shall be set at the margin in the row styled "Level III":
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Level
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Leverage
Ratio Calculation
|
Applicable Margin Relative to Base
Rate Loans
(the "
Base Rate Margin
")
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Applicable Margin
Relative to Non-Base
Rate Loans (the "
Non-Base Rate Margin
")
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I
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If the Leverage Ratio is less than or equal to 3.00:1.0
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3.00 percentage points
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4.00 percentage points
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II
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If the Leverage Ratio is less than or equal to 3.50:1.00 but greater than 3.00:1.00
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3.50 percentage points
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4.50 percentage points
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III
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If the Leverage Ratio is greater than 3.50:1.00
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4.00 percentage points
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5.00 percentage points
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Except as set forth in the foregoing proviso, the Applicable Margin shall be based upon the most recent Leverage Ratio Calculation, which will be calculated as of the end of each fiscal
quarter. Except as set forth in the foregoing proviso, the Applicable Margin shall be re-determined quarterly on the first day of the month following the date of delivery to Agent of the certified calculation of the Leverage Ratio pursuant to
Section 5.1
of the Agreement;
provided
, that if Borrowers fail to provide such certification when such certification is due, the Applicable Margin shall be set at the margin in the row styled "Level III" as of the first day of the month following the date on which the certification was required to be delivered until the date on which such certification is delivered, on which date (but not retroactively), without constituting a waiver of any Default or Event of Default occasioned by the failure to timely deliver such certification, the Applicable Margin shall be set at the margin based upon the calculations disclosed by such certification. In the event that the information regarding the Leverage Ratio contained in any certificate delivered pursuant to
Section 5.1
of the Agreement is shown to be inaccurate, and such inaccuracy, if corrected, would have led to the application of a higher Applicable Margin for any period (an "
Applicable Period
") than the Applicable Margin actually applied for such Applicable Period, then (i) Borrowers shall promptly deliver to Agent a correct certificate for such Applicable Period, (ii) the Applicable Margin shall be determined as if the correct Applicable Margin (as set forth in the table above) were applicable for such Applicable Period, and (iii) Borrowers shall promptly deliver to Agent full payment in respect of the accrued additional interest as a result of such increased Applicable Margin for such Applicable Period, which payment shall be promptly applied by Agent to the affected Obligations.
"
Delayed Draw Term Loan Amount
" means $30,000,000.
"
Delayed Draw Term Loan Commitment Termination Date
" means the date that is the second anniversary of the Sixth Amendment Closing Date.
"
Leverage Ratio
" means, as of any date of determination the ratio of (a) Funded Indebtedness as of such date,
less
Qualified Cash in amount in excess of $2,500,000, but not to exceed $17,500,000, to (b) EBITDA for the 12 month period ended as of such date.
"
Permitted Intercompany Advances
" means (x) loans made by (a) a Loan Party to another Loan Party (other than loans by a US Loan Party to a Canadian Loan Party that is not organized in the United States), (b) a Subsidiary of Parent that is not a Loan Party to another Subsidiary of Parent that is not a Loan Party, (c) a Subsidiary of Parent that is not a Loan Party to a Loan Party, so long as the parties thereto are party to the Intercompany Subordination Agreement, (d) a Loan Party to a Subsidiary of Parent that is not a Loan Party or a US Loan Party to a Canadian Loan Party that is not organized in the United States so long as (i) the aggregate amount of all such loans (by type, not by the borrower) does not exceed $250,000 outstanding at any one time and (ii) at the time of the making of such loan, no Event of Default has occurred and is continuing or would result therefrom and (y) in connection with the Purchase Price paid by PowerSteering UK (as defined in the Sixth Amendment) with respect to the Interfax Share Purchase (as defined in the Sixth Amendment), the capital contribution by Parent to PowerSteering UK (as defined in the Sixth Amendment) on the Sixth Amendment Closing Date in an aggregate amount not to exceed $40,000,000.
"
Recurring Revenue Ratio
" means, as of any date of determination, the ratio of (a) Senior Indebtedness as of such date to (b) TTM Recurring Revenue.
(i)
Schedule 1.1 to the Credit Agreement is hereby amended by adding the following defined terms in alphabetical order:
"
Interfax
" means, collectively, Interfax Communications Limited, a private company limited by shares organized and existing under the laws of Ireland, and each of its direct and indirect Subsidiaries.
"
Senior Indebtedness
" means, as of any date of determination, the sum of (i) the outstanding principal balance of the Term Loans plus (ii) the Revolver Usage, in each case, as of such date.
"
Sixth Amendment
" means that certain Consent and Sixth Amendment to Credit Agreement, dated as of the Sixth Amendment Closing Date, by and among the Borrowers, Agent and the Lenders party thereto.
"
Sixth Amendment Closing Date
" means March 21, 2018.
(j)
Schedule C-1 to the Credit Agreement is hereby amended and restated in its entirety as set forth on
Exhibit B
attached hereto.
4.
Continuing Effect
. Except as expressly set forth in
Section 2
and
3
of this Amendment, nothing in this Amendment shall constitute a waiver or other modification of any other terms or provisions of the Credit Agreement or any other Loan Document, and the Credit Agreement and the other Loan Documents shall remain unchanged and shall continue in full force and effect, in each case as amended hereby. This Amendment is a Loan Document.
5.
Reaffirmation and Confirmation
. Each Borrower hereby ratifies, affirms, acknowledges and agrees that the Credit Agreement and the other Loan Documents to which it is a party represent the valid, enforceable and collectible obligations of such Borrower, and further acknowledges that there are no existing claims, defenses, personal or otherwise, or rights of setoff whatsoever with respect to the Credit Agreement or any other Loan Document as of the date hereof. Each Borrower hereby agrees that this Amendment in no way acts as a release or relinquishment of the Liens and rights securing payments of the Obligations. The Liens and rights securing payment of the Obligations are hereby ratified and confirmed by each Borrower in all respects.
6.
Conditions to Effectiveness
. This Amendment shall become effective upon the satisfaction of each of the following conditions precedent, in each case satisfactory to Agent in all respects:
(a)
Agent shall have received a copy of (i) this Amendment, executed and delivered by each Lender, and each Borrower and (ii) Amendment No. 1 to the Second Amended and Restated Fee Letter, executed and delivered by each Borrower, and (iii) each other document, instrument and agreement listed on the closing checklist attached hereto as
Exhibit C
hereto;
(b)
no Default or Event of Default shall have occurred and be continuing on the date hereof or as of the date of the effectiveness of this Amendment;
(c)
Agent shall have received a fully-executed copy of the
Interfax
Purchase Agreement, together with all attachments thereto.
7.
Representations and Warranties
. In order to induce Agent and each Lender to enter into this Amendment, each Borrower hereby represents and warrants to Agent and Lenders that:
(a)
after giving effect to this Amendment, all representations and warranties contained in the Loan Documents to which such Borrower is a party are true and correct in all material respects (except that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof) on and as of the date of this Amendment, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date, in which case such representations and warranties shall be true and correct in all material respects (except that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof) on and as of such earlier date);
(b)
no Default or Event of Default has occurred and is continuing; and
(c)
this Amendment and the Loan Documents, as modified hereby, constitute legal, valid and binding obligations of such Borrower and are enforceable against such Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally.
8.
Post-Closing Covenant
.
(a)
In the event that the Interfax Share Purchase is not consummated within three days of the date hereof, (a) Borrowers shall cause to be promptly delivered to Agent, the proceeds of the funds deposited with Pillsbury Winthrop Shaw Pittman LLP, pursuant to a Solicitor’s Undertaking delivered by Pillsbury Winthrop Shaw Pittman LLP in favor of Wells Fargo Bank, National Association, dated as of the date hereof, in connection with the Interfax Share Purchase to be applied against the remaining installments of principal of the Term Loan on a pro rata basis (for the avoidance of doubt, any amount that is due and payable on the Maturity Date shall constitute an installment), and (b) the amendments contained in Sections 3(b) (after giving effect to any application of funds pursuant to the foregoing clause (a)), 3(h) (solely with respect to the definition of "Permitted Intercompany Advances") and 3(i) (solely with respect to the definition of "Interfax") of this Amendment shall be ineffective.
(b)
Failure to comply with any of the provisions of this Section 8 shall result in an automatic Event of Default under the Credit Agreement.
9.
Miscellaneous
.
(a)
Choice of Law and Venue; Jury Trial Waiver; Reference Provision
. Without limiting the applicability of any other provision of the Credit Agreement or any other Loan Document, the terms and provisions set forth in
Section 12
of the Credit Agreement are expressly incorporated herein by reference.
(b)
Counterparts
. This Amendment may be executed in any number of counterparts, and by the parties hereto on the same or separate counterparts, and each such counterpart, when executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Amendment.
10.
Release
.
(a)
In consideration of the agreements of Agent and Lenders contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, each Borrower, on behalf of itself and its successors, assigns, and other legal representatives (each Borrower and all such other Persons being hereinafter referred to collectively as the "
Releasors
" and individually as a "
Releasor
"), hereby absolutely, unconditionally and irrevocably releases, remises and forever discharges Agent and Lenders, and their successors and assigns, and their present and former shareholders, affiliates, subsidiaries, divisions, predecessors, directors, officers, attorneys, employees, agents and other representatives (Agent, each Lender and all such other Persons being hereinafter referred to collectively as the "
Releasees
" and individually as a "
Releasee
"), of and from all demands, actions, causes of action, suits, covenants, contracts, controversies, agreements, promises, sums of money, accounts, bills, reckonings, damages and any and all other claims, counterclaims, defenses, rights of set‑off, demands and liabilities whatsoever (individually, a "
Claim
" and collectively, "
Claims
") of every name and nature, known or unknown, suspected or unsuspected, both at law and in equity, which any Releasor may now own, hold, have or claim to have against the Releasees or any of them for, upon, or by reason of any circumstance, action, cause or thing whatsoever which arises at any time on or prior to the day and date of this Amendment, in any way related to or in connection with the Credit Agreement, or any of the other Loan Documents or transactions thereunder or related thereto.
(b)
Each Borrower understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release.
(c)
Each Borrower agrees that no fact, event, circumstance, evidence or transaction which could now be asserted or which may hereafter be discovered shall affect in any manner the final, absolute and unconditional nature of the release set forth above.
[Signature Page Follows]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized and delivered as of the date first above written.
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PARENT AND A US BORROWER
:
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UPLAND SOFTWARE, INC.
,
a Delaware corporation
By:
/s/ Michael D. Hill
Name:
Michael D. Hill
Title:
Secretary
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US BORROWERS
:
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UPLAND SOFTWARE I, INC.
,
a Delaware corporation
By:
/s/ Michael D. Hill
Name:
Michael D. Hill
Title:
Secretary
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UPLAND SOFTWARE II, LLC
,
a Delaware limited liability company
By:
/s/ Michael D. Hill
Name:
Michael D. Hill
Title:
Secretary
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UPLAND SOFTWARE IV, LLC
,
a Nebraska limited liability company
By:
/s/ Michael D. Hill
Name:
Michael D. Hill
Title:
Secretary
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UPLAND SOFTWARE V, INC.
,
a Delaware corporation
By:
/s/ Michael D. Hill
Name:
Michael D. Hill
Title:
Secretary
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UPLAND SOFTWARE VI, LLC
,
a New Jersey limited liability company
By:
/s/ Michael D. Hill
Name:
Michael D. Hill
Title:
Secretary
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Signature Page to Consent and Sixth Amendment to Credit Agreement
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UPLAND SOFTWARE VII, LLC
,
a Delaware limited liability company
By:
/s/ Michael D. Hill
Name:
Michael D. Hill
Title:
Secretary
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UPLAND IX, LLC
,
a Delaware limited liability company
By:
/s/ Michael D. Hill
Name:
Michael D. Hill
Title:
Secretary
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ULTRIVA, LLC
,
a California limited liability company
By:
/s/ Michael D. Hill
Name:
Michael D. Hill
Title:
Secretary
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ADVANCED PROCESSING & IMAGING, INC.
,
a Florida corporation
By:
/s/ Michael D. Hill
Name:
Michael D. Hill
Title:
Secretary
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OMTOOL, LTD.
,
a Delaware corporation
By:
/s/ Michael D. Hill
Name:
Michael D. Hill
Title:
Secretary
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RIGHTANSWERS, INC.
,
a Delaware corporation
By:
/s/ Michael D. Hill
Name:
Michael D. Hill
Title:
Secretary
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WATERFALL INTERNATIONAL INC.
,
a Delaware corporation
By:
/s/ Michael D. Hill
Name:
Michael D. Hill
Title:
Secretary
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Signature Page to Consent and Sixth Amendment to Credit Agreement
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QVIDIAN CORPORATION
,
a Delaware corporation
By:
/s/ Michael D. Hill
Name:
Michael D. Hill
Title:
Secretary
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Signature Page to Consent and Sixth Amendment to Credit Agreement
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CANADIAN BORROWER
:
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UPLAND SOFTWARE INC. / LOGICIELS UPLAND INC.
,
a Canadian federal corporation
By:
/s/ Michael D. Hill
Name:
Michael D. Hill
Title:
Secretary
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Signature Page to Consent and Sixth Amendment to Credit Agreement
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WELLS FARGO BANK, NATIONAL ASSOCIATION
, a national banking association, as Agent, US Agent and as a Lender
By:
/s/ Tiffany Ormon
Name:
Tiffany Ormon
Title:
Director
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Signature Page to Consent and Sixth Amendment to Credit Agreement
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WELLS FARGO CAPITAL FINANCE CORPORATION CANADA
, an Ontario corporation, as Canadian Agent and as a Lender
By:
/s/ David G. Phillips
Name:
David G. Phillips
Title:
Senior Vice President
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Signature Page to Consent and Sixth Amendment to Credit Agreement
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CIT BANK, N.A.
, a national banking association, as a Lender
By:
/s/ Christopher O’Keefe
Name:
Christopher O’Keefe
Title:
Authorized Signatory
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Signature Page to Consent and Sixth Amendment to Credit Agreement
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STRATEGIC CREDIT PARTNERS II, LLC
, as a Lender
By:
/s/ Craig Transue
Name:
Craig Transue
Title:
Authorized Signatory
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Signature Page to Consent and Sixth Amendment to Credit Agreement
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GOLDMAN SACHS BANK USA
, as a Lender
By:
/s/ Justin Betzen
Name:
Justin Betzen
Title:
Authorized Signatory
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Signature Page to Consent and Sixth Amendment to Credit Agreement
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REGIONS BANK
, as a Lender
By:
/s/ Steven Dixon
Name:
Steven Dixon
Title:
Director
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Signature Page to Consent and Sixth Amendment to Credit Agreement
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CITIZENS BANK, N.A.
, as a Lender
By:
/s/ Ryan McGeary
Name:
Ryan McGeary
Title:
Vice President
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Signature Page to Consent and Sixth Amendment to Credit Agreement
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AC LOAN SOURCING LTD
, as a Lender
By:
/s/ Thomas E. Bancroft
Name:
Thomas E. Bancroft
Title:
Portfolio Manager
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Signature Page to Consent and Sixth Amendment to Credit Agreement
EXHIBIT A
Interfax Purchase Agreement
[see attached]
DATE MARCH 21, 2018
(1)
POWERSTEERING SOFTWARE LIMITED
(2)
YEHUDA ALON
(3)
TAMAR MARASH
SHARE PURCHASE AGREEMENT
relating to the acquisition of the entire
issued share capital of
INTERFAX COMMUNICATIONS LIMITED
Pillsbury Winthrop Shaw Pittman LLP
Tower 42, Level 21
25 Old Broad Street
London EC2N 1HQ
TABLE OF CONTENTS
Page
1.
Definitions and interpretation
1
3.
Consideration and Buyer’s Obligations
8
7.
Specific Indemnities
14
8.
Restrictions on the Sellers
16
10.
Matters following Completion
18
11.
Transitionary services
18
13.
Announcements and confidentiality
19
18.
Governing law and jurisdiction
23
Schedule
1. The Sellers
2. The Company
3. The Subsidiaries
4. Completion obligations of the Sellers
5. Warranties
6. Limitations on Liability
7. Intellectual Property
8. Tax Covenant
9. Completion Accounts
10. Completion Accounts Worked Example
11. Transitionary Services
12. Employee Bonus Pool Allocation
13. Sellers’ Loan Amounts
Agreed Form Documents
A1 to A16 Proprietary Information Agreements
B1 to B8 Letters of resignation
C1 to C2 Board resolutions
D License to Occupy
E HSBC Corporate Card Line Termination Letter
F [deliberately left blank]
G1 to G6 Employment termination agreements or letters
H1 to H3 Consultancy termination agreements or letters
H1 to H42 Letters to Specified Employees regarding individual Employee Bonus Allocation.
SHARE PURCHASE AGREEMENT
DATE:
March 21, 2018
BETWEEN:
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(1)
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THE PERSONS
whose names and addresses are set out in Schedule 1 (the “
Sellers
”)
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(2)
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POWERSTEERING SOFTWARE LIMITED
(registered in England and Wales under number 5887016) whose registered office is at 16 Great Queen Street, Covent Garden, London WC2B 5AH (the “
Buyer
”)
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INTRODUCTION:
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(A)
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The Company (as defined below) is a private company limited by shares. Certain details of the Company are set out in Schedule 2.
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(B)
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The Sellers have agreed to sell and the Buyer has agreed to buy the Shares (as defined below) on the terms and subject to the conditions of this Agreement.
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AGREEMENT:
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•
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DEFINITIONS AND INTERPRETATION
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The Introduction and Schedules form part of this Agreement and have the same force and effect as if set out in the body of this Agreement. Any reference to this Agreement includes the Introduction and Schedules.
In this Agreement, the following words and expressions shall have the following meanings unless the context requires otherwise:
Accounting Reference Date:
31 December;
Accounts:
the audited accounts of the Company and of each of the Subsidiaries and the consolidated accounts of the Company and of the Subsidiaries for the accounting reference period which ended on the Accounts Date (comprising in each case a balance sheet and profit and loss account or, as the case may be, a consolidated balance sheet and consolidated profit and loss account, notes and directors’ and auditors’ reports);
Accounts Date:
31 December 2016;
Actual Cash and Cash Equivalents
: the amount of any cash and cash equivalents included in the balance sheet of any Group Company at the Completion Date as confirmed by the Completion Accounts;
Adjustment Date:
the fifth Business Day following the date on which the Completion Accounts and the Net Working Capital Statement are agreed or determined in accordance with Schedule 9;
Agreed Form:
the form agreed between and signed or initialled by or on behalf of the Sellers and the Buyer;
Anti-Corruption Laws
: any laws, regulations or conventions in any part of the world related to combating bribery and corruption, including the OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions; in the United Kingdom, the Bribery Act 2010; and in the United States, the Foreign Corrupt Practices Act;
Anti-Terrorism and Anti-Money Laundering Laws
: any laws, regulations or conventions in any part of the world related to terrorism or money laundering, including, the European Union Money Laundering Directives; in Ireland, the Criminal Justice (Money Laundering and Terrorists Financing) Act 2010; in the United Kingdom, the Money Laundering Regulations 2003, the Proceeds of Crime Act 2002, the Serious Organised Crime and Police Act 2005, the Anti-Terrorism, Crime and Security Act 2001; in the United States, the Executive Order and statutes authorizing the establishment of trade and economic sanctions programs enforced by the Office of Foreign Assets Control of the U.S. Treasury Department, the Bank Secrecy Act of 1970 and the PATRIOT Act of 2001;
Bespoke Software:
all software written or customised specifically for the Company, including any amendments to Off-the-Shelf Software and any interfaces;
Business Day:
any day (other than a Saturday or Sunday) on which banks generally are open in Ireland for the transaction of normal business;
Buyer’s Group:
the Buyer and any Group Company of the Buyer;
Cash and Cash Equivalents:
as defined in Section 7 of FRS 102;
CCPC:
the Competition and Consumer Protection Commission of Ireland, being the body referred to in Section 9 of the Competition and Consumer Protection Act 2014;
Claim:
has the meaning given to it in Schedule 6;
Company:
Interfax Communications Limited incorporated under the laws of Ireland (registered number 520413);
Company IP Rights:
all rights in the Registered IP and the Unregistered IP;
Companies Legislation:
the Companies Act 2014 and every statutory modification, consolidation or re-enactment thereof for the time being in force;
Competition Legislation
: shall mean the Competition Acts 2002 to 2012 and the Competition and Consumer Protection Act 2014, Articles 101 and 102 of the Treaty on the Functioning of the European Union and regulations thereunder or under EC Council Regulation 139/2004 as amended and regulations made thereunder or any other competition or similar legislation anywhere in the world;
Completion:
completion of the sale and purchase of the Shares in accordance with this Agreement;
Completion Accounts:
has the meaning set out in paragraph 1.1 of Schedule 9;
Completion Date:
the date of this Agreement;
Completion Working Capital:
shall mean Current Assets less Current Liabilities and shown in the Net Working Capital Statement, calculated in accordance with Schedule 9;
Confidential Information:
all information not in the public domain, which a Seller shall have received or obtained at any time by reason of or in connection with his relationship with the Company or any of the Subsidiaries including: trade secrets; customer/client lists, contact details of clients, customers and suppliers and individuals within those organisations; technical information, know-how, research and development; financial projections, target details and accounts; fee levels, pricing policies, commissions and commission charges; budgets, forecasts, reports, interpretations, records and corporate and business plans; planned products and services; marketing and advertising plans, requirements and materials, marketing surveys and research reports and market share and pricing statistics; and computer software and passwords;
Consideration:
has the meaning given to it in Clause 3.1;
CRO:
the Companies Registration Office (Ireland);
Current Assets
: the aggregate of accounts receivable and other current assets which will include un-deposited funds, credit card holdbacks, deposits, inventory, VAT and prepayments but excluding Actual Cash and Cash Equivalents;
Current Liabilities
: shall mean the sum of accounts payable, obligations to employees, corporation tax, PAYE and social insurance, VAT, accruals, sundry creditors and other creditors but excluding shareholders loans or any debt related current liability;
Data Room
: the contents of the data room operated by Sterling and called ‘Project Bain’, the index to which is attached to the Disclosure Letter;
Deed of Amendment
: the deed between the Company and Return Fax 2000 Limited amending the terms of the cost-plus development and operations agreement dated 1 January 2013 in the agreed form marked “F”;
Directors:
those persons who are directors or shadow directors of the Company or of any Subsidiary and who are identified as such in Schedules 2 and 3;
Disclosure Letter:
the letter dated the date of this Agreement from the Sellers to the Buyer making certain disclosures against the Warranties;
Disclosed:
fairly disclosed to the Buyer with sufficient detail to allow the Buyer to identify the nature and scope of the matters, facts and circumstances disclosed and the extent of their consequences;
Employee:
any person employed by the Company or any of the Subsidiaries;
Employee Bonus
: the bonuses to be paid by the Company to the Specified Employees out of the Employee Bonus Pool on or immediately following Completion in accordance with the Employee Bonus Pool Allocation;
Employee Bonus Pool
: the gross sum of $1,862,717 to be paid by the Buyer to the Company on or prior to Completion;
Employee Bonus Pool Allocation
: the allocation sheet attached at Schedule 12 which sets out the Employee Bonus that shall be paid to each Specified Employee by the Company;
Encumbrance:
any interest or equity of any person (including any right to acquire, option or right of pre-emption) or any mortgage, charge, pledge, lien, assignment, hypothecation, security interest, title retention or any other security agreement or arrangement or other third party right, or any agreement, arrangement or obligation to create any of the same;
Expert:
an arbitrator appointed pursuant to Clause 5 or an accountant appointed pursuant to Schedule 9 (as the case may be);
Former Employees
: those former employees of the Company identified on the Employee Bonus Pool Allocation, who shall be paid an Employee Bonus by the Company under Clause 4.5;
Fundamental Warranties:
the warranties in paragraphs 1.1, 3.2, 3.3, 16 and 18 of Schedule 5 (and each a “
Fundamental Warranty
”);
Group Company:
in relation to any company, any body corporate that is a holding company of that company, a subsidiary of that company or a subsidiary of a holding company of that company;
Hardware:
any and all computer, telecommunications and network equipment used in the business of the Company (including PCs, mainframes, servers, screens, terminals, keyboards, disks, printers, cabling, associated and peripheral electronic equipment);
Holdback Amount:
US$5,000,000;
HSBC Corporate Card Line Termination Letter:
the letter from Interfax, Inc. to HSBC Bank USA, National Association terminating the USD Corporate Credit Card Agreement in the agreed form marked “E”;
Indemnities:
the indemnities given by the Sellers in favour of the Buyer set out in Clause 7.1;
Intellectual Property:
patents, registered designs, rights in design, copyright, database right, rights in databases, trade marks, service marks, trade or business names, domain names, logos, get-up or trade dress, inventions or secret processes, formulae, know-how and all rights or forms of protection of a similar nature or effect subsisting anywhere in the world, including applications or registrations for any such right;
IT Contracts:
(1) all licences granted to the Company in respect of the Software, (2) all maintenance agreements, (3) all consultancy or professional services agreements relating to information technology, (4) all support agreements relating to information technology, (5) all lease agreements relating to the Hardware, (6) all contracts relating to the provision of connectivity for IT, including hosting agreements and agreements with internet service providers, and (7) any other contracts relating to the IT Systems or the IT Services;
IT Services:
any and all services relating to the IT Systems or to any other aspect of the Company’s data processing or data transfer requirements (including facilities management, bureau services, hardware maintenance, software development or support, consultancy, back-up and disaster recovery, source code deposit, recovery and network services);
IT Systems:
the Hardware and the Software;
Licence to Occupy
: the licence permitting the employees of the Company to occupy part of the property of Unit 7 Coolport, Coolmine Business Park, Blanchardstown, Dublin, IR, DIS MC91 in the agreed form marked “D”;
Management Accounts:
the unaudited accounts of the Company and of each of the Subsidiaries and the unaudited consolidated accounts of the Company and of the Subsidiaries for the period from the Accounts Date to 31 January 2018 (comprising in each case a balance sheet and profit and loss account and a consolidated balance sheet and consolidated profit and loss account) and the notes thereon;
Net Working Capital Adjustment:
has the meaning given in Clause 4.7.2;
Net Working Capital Statement:
has the meaning set out in paragraph 1.1 of Schedule 9;
Off-the-Shelf Software:
all standard office application software used by the Company, including word processing, email, calendar, customer relationship management, spreadsheet and database functions;
Parties:
the parties to this Agreement, and each a “
Party
”;
Permitted Business
: means the business of Data Guard Limited and RestNetwork Limited as carried out on the date of the Reorganisation;
Proprietary Information Agreements:
the agreements in the Agreed Form “A1” between the employees of the Company and the Subsidiaries and the Company in respect of confidentiality and intellectual property rights given in favour of the Company;
Registered IP:
all patents, trade marks, domain names, and registered designs and applications for the same owned by the Company, true and complete details of which are set out in Schedule 7;
Reorganisation
: has the meaning given in Clause 7.1.1;
Sellers’ Loans
: the loans owed to each Seller from the Company as at the Completion Date which amounts are set out in Schedule 13 and ‘Seller’s Loan’ means any one of them;
Sellers’ Solicitors:
Lavelle Solicitors of Dublin, Ireland;
Sellers’ Solicitor’s Account:
the client account of Lavelle Solicitors with Bank of Ireland, at 7-12, Dame Street, Dublin 2, Ireland IBAN: IE50 BOFI 9013 9475 181002 account number 75181002, account name Michael Lavelle T/A Lavelle Solicitors Client Account;
Settled or Determined
: means liability for a Relevant Claim which has:
been agreed between the Sellers and the Buyer; or
been determined by an Expert in accordance with Clause 5 and from which there is no right of appeal save in the case of manifest error,
and the words “
Settlement
”
and “
Determination
”
shall be construed accordingly;
Shares:
the shares comprising the entire issued share capital of the Company, certain details of which are given in paragraph 7 of Schedule 2;
Software:
together, the Off-the-Shelf Software and the Bespoke Software, including all source and other preparatory materials relating to such programs;
Specified Employees
: those Employees and Former Employees which are listed on the Employee Bonus Pool Allocation;
Subsidiaries:
the subsidiaries of the Company, certain details of which are given in Schedule 3;
Taxation
and
tax:
have the meaning given to them in the Tax Covenant;
Tax Covenant:
the covenant contained in the Tax Covenant;
a third party:
any person other than the Parties;
Transitionary Services
: means the services listed in Schedule 11 to be provided by the Company from the Completion Date in accordance with Clause 11;
Unregistered IP:
Intellectual Property used or currently planned to be used by the Company excluding any Registered IP;
UK Director:
a Director or former Director who provides or provided his or her services from the United Kingdom;
UK Employee:
an Employee or former Employee employed to work in the United Kingdom;
UK Worker:
a Worker or former Worker engaged to work in the United Kingdom;
Warranties:
the warranties set out in Schedule 5; and
Workers:
any person who personally performs work for the Company or any of the Subsidiaries who is not an Employee, and who is not on business on their own account or in a client/customer relationship.
In this Agreement, unless otherwise specified:
any reference to any statute or statutory provision includes any subordinate legislation made under that statute or statutory provision, whether before or after the date of this Agreement;
any reference to any legislation (whether of Ireland or elsewhere), including to any statute, statutory provision or subordinate legislation (“
Legislation
”):
includes a reference to that Legislation as from time to time amended or re-enacted, whether before or after the date of this Agreement;
in the Warranties and Tax Covenant only, includes a reference to any past Legislation (as from time to time amended or re-enacted) which that Legislation re-enacted,
except, in the case of each of Clauses 1.3.1 and 1.3.2, to the extent that any amendment or re-enactment coming into force, or Legislation made, on or after the date of this Agreement would create or increase the liability of any Party;
any reference to re-enactment includes consolidation and rewriting, in each case whether with or without modification;
words and expressions which are defined in the Companies Legislation and which are not otherwise defined in this Agreement shall have the same meanings as are given to them in the Companies Legislation where used in this Agreement;
references to an “associate” or a “connected person” in relation to another person are references to a person who is an associate of or connected with another within the meaning of Section 10 of the Taxes Consolidation Act 1997;
any reference to an FRS is to a Financial Reporting Standard issued by the Financial Reporting Council (FRC) in the UK and to any related interpretation issued by the FRC;
words suggesting a gender shall include the other gender and the neuter;
words in the singular shall include the plural and vice versa;
any reference to a “company” shall be construed so as to include any company, corporation or other body corporate, wherever and however incorporated or established;
any reference to a “person” includes a natural person, partnership, company, body corporate, association, organisation, government, state, foundation and trust (in each case whether or not having separate legal personality);
any reference to the Introduction, a Clause or Schedule is to the Introduction, a Clause or Schedule (as the case may be) of or to this Agreement;
any reference to this Agreement or to any other document is a reference to this Agreement or that other document as amended, varied, supplemented, or novated (in each case, other than in breach of the provisions of this Agreement) at any time;
“directly or indirectly” means either alone or jointly with any other person and whether on his own account or in partnership with another or others or as the holder of any interest in or as officer, employee or agent of or consultant to any other person;
the Warranties, indemnities, agreements and obligations contained in this Agreement on the part of the Sellers shall be construed and take effect as several Warranties, indemnities, agreements and obligations;
any phrase introduced by the terms “including”, “include”, “in particular” or a similar expression shall be construed as illustrative and shall not limit the sense of the words preceding those terms; and
any reference to something being “in writing” or “written” shall include a reference to that thing being produced by any legible and non-transitory substitute for writing (including in electronic form) or partly in one manner and partly in another.
The index and Clause headings in this Agreement are included for ease of reference only and do not affect the interpretation of this Agreement.
Any payments made under this Agreement shall be made without withholding or deduction of, or in respect of, any tax unless required by applicable law. If any such withholding or deduction is required, the payor shall, when making the payment to which the withholding or deduction relates, pay to the payee such additional amount as will ensure that the payee receives the same total amount that it would have received if no such withholding or deduction had been required.
The Sellers shall sell the entire legal and beneficial interest in the Shares free from all Encumbrances and the Buyer shall purchase the entire legal and beneficial interest in the Shares, with effect from and including the Completion Date to the intent that as from that date all rights and advantages accruing to the Shares, including any dividends or distributions declared or paid on the Shares after that date, shall belong to the Buyer.
The Sellers undertake to procure the waiver of all pre-emption and similar rights over the Shares or any of them to which any person may be entitled under the constitution of the Company or otherwise in relation to the sale and purchase of the same under this Agreement.
The Buyer shall not be obliged to complete the purchase of any of the Shares unless the sale of all of the Shares is completed simultaneously.
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CONSIDERATION AND BUYER’S OBLIGATIONS
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The consideration (the “
Consideration
”) for the Shares shall be the sum of US$31,898,410 as adjusted by the Net Working Capital Adjustment plus the Actual Cash and Cash Equivalents.
The Consideration shall be divided between the Sellers in proportion to their respective holdings of the Shares but the Buyer shall not be concerned with such division.
The Consideration shall be deemed to be reduced by an amount equal to the aggregate amounts paid by the Sellers in respect of a breach of any of the Warranties or under the Tax Covenant or the Indemnities.
Completion shall take place on the Completion Date when:
the Sellers shall deliver to the Buyer, or procure the delivery to the Buyer of, the documents and other items referred to in Schedule 4;
the Sellers shall procure that there shall be held a meeting of the board of directors of the Company and of each of the Subsidiaries at which there shall be duly passed the resolutions set out and contained in the board resolutions of the Company and of the Subsidiaries in the Agreed Form marked “C1” to “C2” respectively;
the Buyer shall pay:
the Consideration less the Holdback Amount to the Sellers, or as the Sellers may direct in writing, by way of transfer of funds to the Sellers’ Solicitor’s Account (the charges of such transfer being payable by the Sellers), receipt of which shall be an effective discharge of the Buyer’s obligation to pay the Consideration; and
an amount equal to the Employee Bonus Pool and the Seller’s Loans to the Company.
The performance by the Sellers of their respective obligations under Clause 4.1 shall be a condition precedent to the performance by the Buyer of its obligations under Clause 4.1 to the intent that, if the Sellers or any of them shall fail or shall be unable to perform any of their obligations under Clause 4.1, the Buyer shall at its option (and without prejudice to any other remedies or rights which it may have against the Sellers or any of them in respect of such non‑performance) cease to be liable to perform its obligations under Clause 4.1.
Sellers’ Loans
On Completion the Sellers and the Buyer acknowledge and agree that the Company shall immediately repay (following receipt by the Company of the amounts set out in Clause 4.1.4(b)), the Sellers’ Loans to each Seller (by bank transfer to each Seller’s bank account).
Condition Subsequent to Completion
Immediately following Completion, the Buyer shall procure that the Company and Return Fax 2000 Ltd take all necessary actions to initiate the payment to the Specified Employees from the Company and Return Fax 2000 Ltd. of the Employee Bonus in accordance with the Employee Bonus Pool Allocation through each such companies’ payroll and provide written evidence to the Sellers within seven days of Completion that the aforesaid payments have been made. The Employee Bonus Pool Allocation is inclusive of employer related costs.
The Buyer and the Sellers shall co-operate fully in all actions necessary to procure the satisfaction and discharge of the Sellers Loans on Completion and the payment to the Employees of the Employee Bonus by the Company and Return Fax 2000 Ltd as soon as is practicable following Completion including the passing of any board or shareholder resolutions necessary to give effect to this clause.
Completion Accounts
The Parties shall procure that the Completion Accounts and the Net Working Capital Statement are prepared and agreed or determined (as the case may be) in accordance with Schedule 9.
Following agreement or determination of the Completion Accounts and the Net Working Capital Statement, if the amount of the Completion Working Capital:
exceeds the sum of €471,000, the Buyer shall pay to the Sellers on or before the Adjustment Date an amount equal to the excess; or
is less than the sum of €371,000, the Sellers shall pay to the Buyer on or before the Adjustment Date an amount equal to the shortfall,
together the “
Net Working Capital Adjustment
”.
An example of the calculation of the Completion Net Assets, for illustrative purposes only, is attached at Schedule 10.
Following agreement or determination of the Completion Accounts, the Actual Cash and Cash Equivalents as contained in the Completion Accounts shall be added to the Net Working Capital Adjustment and paid to the Sellers in accordance with Clause 4.5.5 on or before the Adjustment Date.
Any payment due to the Sellers under Clause 4.5.2(a) and 4.7.4, shall be made by electronic funds transfer to the Sellers’ Solicitor Account and any payment due to the Buyer under Clause 4.5.2(b) shall be made to a bank account notified by the Buyer to the Sellers.
The Buyer shall withhold the Holdback Amount from the payment of Consideration in Clause 4.1.3. The pro rata share of the Holdback Amount of each Seller is set out in Schedule 1, and the amount of Consideration received by each Seller on Completion shall be reduced by such amount.
The Buyer shall be entitled to the extent set out in this Clause 5 to have recourse to the Holdback Amount to obtain payment of any amounts due to it under any Claims and claims under the Indemnities (“
Relevant Claims
”) provided that such Relevant Claims have been Settled or Determined in accordance with Clause 5.6.
On the date that is nine months after Completion (or if such date is not a Business Day, the first Business Day immediately following such date) (the “
Initial Holdback Release Date
”) (such period referred to herein as the “
Initial Holdback Period
”), the Buyer shall pay, by way of a transfer of funds to the Sellers’ Solicitor’s Account, an amount equal to half of the Holdback Amount, after deducting:
the amount of all Relevant Claims Settled or Determined pursuant to Clause 5.6; and
the amount of any unresolved Relevant Claims, (the “
Pending Claims
”) delivered in accordance with Clause 5.6.1 prior to termination of the Initial Holdback Period (the “
Initial Unresolved Claims Amount
”), which Initial Unresolved Claims Amount shall remain with the Buyer until such Pending Claims have been Settled or Determined in accordance with Clause 5.6.
On the date that is nine months after the Initial Holdback Release Date (the “
Subsequent Holdback Release Date
”), (such period referred to herein as the “
Subsequent Holdback Period
”), the Buyer shall pay, by way of a transfer of funds to the Sellers’ Solicitor’s Account, an amount equal to the remainder of the Holdback Amount, after deducting the amount of any Pending Claims delivered in accordance with Clause 5.6.1 prior to termination of the Subsequent Holdback Period (the “
Subsequent Unresolved Claims Amount
”), which Subsequent Unresolved Claims Amount shall remain within the Buyer until such Pending Claims have been Settled or Determined in accordance with Clause 5.6.
As each Pending Claim is Settled or Determined, an amount equal to the difference, if any, between the amount retained by the Buyer in respect of such Pending Claim (being either the Initial Unresolved Claims Amount or the Subsequent Unresolved Claims Amount) less the final amount of the Settled or Determined Pending Claim, shall be paid by way of a transfer of funds to the Sellers’ Solicitor’s Account. Relevant Claims including Pending Claims shall be Settled or Determined in accordance with Clause 5.6.
Settlement or Determination of a Relevant Claim
In the event that the Buyer has incurred or sustained damages or reasonably, anticipates that it will incur or sustain damages in respect of a Relevant Claim, it shall promptly deliver to the Sellers a certificate signed by any officer of the Buyer (a “
Relevant Claim Estimate
”) stating that:
the Buyer has incurred or sustained damages or reasonably anticipates that it could incur or sustain damages;
specifying in reasonable detail the basis of such claim or the basis for such anticipated liability; and
providing a reasonable estimate of the total amount sought in connection with the Relevant Claim.
Objection to the Relevant Claim Estimate
The Sellers shall have 20 days following receipt of a Relevant Claim Estimate (the “
Objection Period
”) to object to any Relevant Claim made in a Relevant Claim Estimate. In the event that the Sellers have not objected within the Objection Period then the Buyer shall retain an amount of the Holdback Amount that is equal to the amount set forth in such Relevant Claim Estimate and the Holdback Amount shall be reduced by such amount. In the event that the Sellers do object within the Objection Period, such objection must be in the form of a certificate signed by the Sellers and delivered to the Buyer (an “
Objection Certificate
”), which certificate shall set out the item or items in the Relevant Claim Estimate to which the Sellers are objecting and a basis for each such objection. If the Sellers do not provide an Objection Statement within the Objection Period then it will be deemed that the Sellers do not have any objections to the Relevant Claim Estimate. Any elements of the Relevant Claim Estimate are not specifically objected in an Objection Statement to will be deemed to be agreed and not subject to an objection.
For a period of 15 days after the delivery of an Objection Certificate, the Buyer and the Sellers shall attempt in good faith to reach agreement as to all or any portion of the claims that are subject to the Objection Certificate. If they reach agreement then a memorandum shall be prepared and signed by both Parties. The memorandum shall contain the amount that has been agreed in respect of the Relevant Claim Estimate and the amount payable to the Sellers under Clauses 5.3 and 5.4 shall reduce accordingly. If no such agreement can be reached after good faith negotiation, either the Sellers or the Buyer may demand arbitration of the matter to be settled by arbitration conducted by an Expert mutually agreeable to the Sellers and the Buyer (acting reasonably).
If within 30 days after agreeing to submission of a dispute to the Expert under Clause 5.7.2, the Sellers and the Buyer cannot mutually agree on an Expert then the matter giving rise to the dispute as set out in the Objection Certificate shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by a sole arbitrator appointed in accordance with the said Rules. The place of arbitration shall be Dublin, Ireland and the language of the arbitration shall be English. Judgement upon any award rendered by the Expert may be entered in any court having jurisdiction. The payment of fees and expenses of the Parties to such arbitration shall be determined by the arbitrator.
All losses, costs, and liabilities indemnified in Clause 7.1 incurred by or on behalf of the Company in respect of the Indemnity in Clause 7.1.2, incurred in accordance with the conduct of such claim being carried out in accordance with Clause 7.2, shall not, (save in the case of manifest error or fraud) be subject to Settlement or Determination under Clause 5.6 and in respect of such costs, the Buyer shall retain an amount of the Holdback Amount that is equal to such losses, costs and liabilities and the Holdback Amount shall be reduced by such amount, subject however to the Sellers’ right to refer a Pending Claim under Clause 7.2.1(c).
For the avoidance of any doubt the expiry of the Holdback Period shall have no effect on the limitations of liability on each Seller set out in this Agreement in respect of any Pending Claim.
The Sellers warrant to the Buyer that each of the Warranties is true and accurate in all respects and is not misleading at the date of this Agreement.
The liability of the Sellers for breach of any Warranty shall be several.
The Sellers undertake to the Buyer that, in the event of any claim being made against them arising out of or relating to this Agreement, they will not make any claim against the Company or any of the Subsidiaries or against any director, officer, employee or adviser of the Company or of any of the Subsidiaries on which or on whom they may have relied before agreeing to any terms of this Agreement or authorising any statement in the Disclosure Letter.
The Sellers shall not be liable for any Claim for breach of Warranties, save for those set out under paragraph 1.1 (the Sellers), 3.1 (shares), 3.3 (share ownership), or 3.4 (share and loan capital) of Schedule 5, to the extent that the events or circumstances giving rise thereto have been Disclosed in the Disclosure Letter.
The Warranties:
are given separately and independently and, unless expressly provided to the contrary, are not limited or restricted by reference to, or inference from, the terms of any other Warranty or item of this Agreement;
where qualified by the knowledge, information, belief or awareness of the Sellers, unless expressly provided to the contrary, are deemed to refer to the actual (as opposed to constructive or imputed) knowledge, information, belief or awareness of the Sellers after due and careful enquiries by the Sellers in respect of the relevant subject matter of such Warranties; and
apply to each of the Subsidiaries as well as to the Company as if references to “the Company” included a corresponding reference to the Subsidiaries (and each of them severally).
None of the Warranties nor any provision in the Tax Covenant shall be, or shall be deemed to be, qualified, modified or discharged by reason of any investigation or inquiry made by or on behalf of the Buyer and no information relating to the Company or to any of the Subsidiaries of which the Buyer, its agents or advisers have knowledge (whether actual, imputed or constructive), other than (in the case of the Warranties) by reason of its being Disclosed in the Disclosure Letter in accordance with this Agreement, shall prejudice any claim which the Buyer shall be entitled to bring or shall operate to reduce any amount recoverable by the Buyer under this Agreement. No Claim may be made by the Buyer under the Warranties to the extent that the Buyer had actual knowledge prior to Completion that any of the Warranties was untrue or misleading or had not been complied with.
The provisions of Schedule 6 shall (where relevant) apply to limit the liability of the Sellers under the Warranties and the Tax Covenant provided that the provisions of Schedule 6 shall not apply in respect of any claim arising out (or to the extent it is increased) of any fraud or fraudulent misrepresentation or wilful non-disclosure on the part of the Sellers.
Buyer Warranties
The Buyer warrants to each of the Sellers, that each of the warranties set out in this Clause 6.8 is true and accurate in all respects and is not misleading at the date of this Agreement:
The Buyer is a company duly incorporated and validly existing under the laws of the United Kingdom.
No order has been made, petition presented or meeting convened for the purpose of considering a resolution for the winding-up of the Buyer or for the appointment of any provisional liquidator of the Buyer. No receiver or administrator has been appointed in respect of the whole or any part of any of the property, assets and/or undertaking of the Buyer.
The Buyer’s entry into and performance of the Agreement does not constitute any breach of or default under any contractual, governmental or public obligation binding upon it.
The Buyer is not engaged in any litigation or arbitration proceedings which might have an effect upon the Buyer’s capacity or ability to perform its obligations under this Agreement and so far as the Buyer is aware, no such legal or arbitration proceedings have been threatened against it.
The Buyer has full power and authority and has taken all necessary corporate action to enable it effectively to enter into and perform this Agreement and all agreements entered into, or to be entered into, pursuant to the terms of this Agreement, and such agreements when executed, will constitute valid, binding and enforceable obligations on the Buyer in accordance with their respective terms.
The Sellers irrevocably and unconditionally indemnify the Buyer immediately on demand against all losses, costs, liabilities and adverse tax consequences (including but not limited to any direct, indirect or consequential losses, loss of profit, loss of reputation and all interest, penalties and legal costs (calculated on a full indemnity basis) and all other reasonable professional costs and expenses) suffered or incurred by the Buyer, the Company or any of the Subsidiaries arising out of or in connection with any of the following matters:
the divestment by the Company to PCI Booking Limited of:
the premises at Unit 7 Coolport, Coolmine Industrial Estate Blanchardstown, Dublin;
the business and assets of Data Guard Limited in consideration for the issue of shares by PCI Booking Limited to the Sellers, including the immediately preceding transfer of the business and assets of Data Guard Limited to the Company in consideration for €7,800,000, to be left outstanding as an intercompany loan);
the issued share capital of RestNetwork Limited;
the sale of the PCI business by Data Guard Limited; and
the writing off of the intercompany debt in the amount of €1,000,324;
(the “
Reorganisation
”),
any action brought against the Company (and/or any of its Subsidiaries) in relation to a class action brought against Marketech Corp (and others) by JT Frames Inc. in the United States;
the cost of maintaining Data Guard Limited in existence for two years from the Completion Date (up to a maximum amount of €1,500 per year plus VAT) and of a members’ voluntary liquidation of Data Guard Limited (up to a maximum amount of €5,000 plus VAT); and
any claims relating to alleged non-payment by the Company, in whole or in part, of any pay, benefits or compensation to any of its employees transferring employment to Data Guard Limited and PCI Booking Ltd including without limitation Eugene Groeger and to Rooska Management & Financial Services Ltd.
Conduct
In respect of the Indemnity in Clause 7.1.2 (the “
Specified Claim
”), the following provisions shall apply:
The Sellers, (using professional advisers nominated by them), shall take such action, and institute and conduct such proceedings, on behalf of the Buyer and/or Interfax US Inc. and/or the Company and/or any of the other Subsidiaries, in order to:
dispute, resist, appeal, compromise, defend, remedy or mitigate any matter giving rise to the Specified Claim; and/or
enforce against any third party the rights of the Buyer, Interfax US Inc. or the Company in relation to the matter giving rise to the Specified Claim.
The Buyer shall give the Sellers and their professional advisers reasonable access at any reasonable times to any relevant documents and records within the power or control of the Buyer and/or the Company and/or any of the Subsidiaries so as to enable the Sellers and their professional advisers to examine such documents and records and to take copies to allow the Sellers to conduct the proceedings in relation to the Specified Claim in the manner set out in this Clause 7.2.1.
If the Specified Claim is a Pending Claim on the expiry of the Holdback Period, the provisions of this Clause 7.2 shall continue to apply to any such proceedings unless, at the discretion of the Sellers, the Sellers wish to submit the Pending Claim to arbitration in accordance with Clause 5.7.3.
The liability of the Sellers under this Clause 7 shall be several. The Sellers’ aggregate liability in respect of any and all claims under the Indemnities shall be limited to and in no event exceed the Holdback Amount, and the liability of a Seller shall be the pro rata share of Holdback Amount set against his or her name in column 5 of Schedule 1. For the avoidance of doubt, where any claim under the indemnities in Clauses 7.1.1 and 7.1.4 only, would also constitute a claim under the Fundamental Warranties, the Warranties relating to tax and under Tax Covenant the Buyer shall be entitled to bring such a claim notwithstanding any claim under Clause 7.1.1 or 7.1.4, and any such claim under the Fundamental Warranties, the Warranties relating to tax and under the Tax Covenant shall be subject to the limitations in Schedule 6.
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RESTRICTIONS ON THE SELLERS
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The provisions of this Clause 8 are made with the intention of assuring to the Buyer and each of its Group Companies following Completion the full benefit and value of the goodwill, confidential information and connections of the Company and the Subsidiaries and as a constituent part of the agreement for the sale of the Shares. Accordingly each of the Sellers agrees that the restrictions contained in this Clause 8 are reasonable and necessary for the protection of the legitimate interests of the Buyer and that the restrictions do not work harshly on him or her.
Each of the Sellers covenants with the Buyer and each of its Group Companies following the Completion Date that for the period of three years following the Completion Date, save with the prior written consent of the Buyer, he or she will not directly or indirectly on his own behalf or on behalf of any other person:
in competition with the Company or any of the Subsidiaries deal with, seek employment or engagement with, or be employed or engaged by or be a director or consultant to, work on any account of, or be in any way interested in or connected with any business which competes with any business carried on by the Company or any of the Subsidiaries at Completion in which that Seller has at any time during the period of 12 months ending on the Completion Date been involved for the purpose of providing services the same as or similar to those he provided to the Company or any of the Subsidiaries, provided always that this Clause shall not prevent a Seller from carrying on the Permitted Business or being interested as a holder or beneficial owner solely for investment purposes of less than three per cent of any securities of any company whose securities are listed or quoted on any recognised investment exchange in Ireland, Israel, the United Kingdom or the United States;
deal with, seek employment or engagement with, be employed or engaged by, engage in business with or work on any account or business of any customer
of the Company or any of the Subsidiaries for the purpose of providing that customer with services which are the same as or similar to any services which he was involved in providing to that customer at any time in the 12 months preceding the Completion Date, provided always that this Clause shall not prevent a Seller from carrying on the Permitted Business;
solicit business from any customer of the Company or any of the Subsidiaries for the purpose of providing to that customer services which are the same as or similar to those which he has been involved in providing to that customer at any time in the 12 months preceding the Completion Date, provided always that this Clause shall not prevent a Seller from carrying on the Permitted Business;
interfere with or seek to interfere with contractual or other trade relations between the Company or any of the Subsidiaries and any of its or their respective customers;
interfere or seek to interfere with contractual or other trade relations between the Company or any of the Subsidiaries and any of its or their respective suppliers;
solicit the services of, endeavour to entice away from the Company or any of the Subsidiaries or knowingly assist in, or procure, the employment by any other person of any director or senior or managerial employee or consultant of the Company or any of the Subsidiaries known personally to him (whether or not such person would commit any breach of his contract of employment or engagement by reason of leaving the service of such company);
save as required by applicable law or regulation, communicate or divulge to any person or make use of and shall use his best endeavours to prevent the publication, disclosure or unauthorised use of any Confidential Information concerning the business, finances or affairs of the Company or of any of the Subsidiaries or of any of their respective customers or suppliers;
for so long as it is used or registered in the name of the Company or any of its Group Companies, use or apply to register on any public register any trade, business or domain name or e-mail address used by the Company or any of the Subsidiaries during the period of two years preceding the Completion Date (including the names ‘Interfax’, ‘ShieldQ’ and ‘Returnfax’ (whether alone or in conjunction with other names)) or any name similar to those names or addresses or likely to be confused with them.
If any of the restrictions in Clause 8 is held to be void or ineffective for any reason but would be held to be valid and effective if part of its wording were deleted or modified, that restriction shall apply with such deletions or modifications as may be necessary to make it valid and effective.
The restrictions contained in each sub-clause of Clause 8 shall be construed as separate and individual restrictions and shall each be capable of being severed without prejudice to the other restrictions or to the remaining provisions.
Each of the Sellers confirms that he has no claim (whether in respect of any breach of contract, compensation for loss of office or monies due to him or on any account whatsoever) outstanding against the Company or any Subsidiary or against any of the shareholders, directors, officers, employees or professional advisers of the Company or any Subsidiary as at the Completion Date and that no agreement or arrangement (including any contract of employment) is outstanding under which the Company or any Subsidiary or any of such persons has or could have any obligation of any kind to him.
To the extent that any such claim or obligation exists or may exist, each of the Sellers irrevocably and unconditionally waives such claim or obligation and releases the Company and each Subsidiary and any such other persons from any liability whatsoever in respect of such claim or obligation.
Nothing in this Clause 9 shall be deemed or shall constitute a waiver by the Sellers or any one of them of any rights that exist under this Agreement which may be enforced by the Sellers after Completion.
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MATTERS FOLLOWING COMPLETION
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If and to the extent that legal title to or beneficial interests in any assets (including any Intellectual Property) which are required for or used in the business of the Company or any of the Subsidiaries are vested in any Group Company of any of the Sellers after Completion or any Group Company of any of the Sellers after Completion has any interest in such assets, such Seller(s) if required by the Buyer shall (or shall procure that the relevant Group Company of the Seller concerned shall):
execute or procure the execution of all such deeds or documents as may be necessary for the purposes of transferring such assets or the relevant interests in them to the Buyer;
do or procure to be done all such further acts or things and procure the execution of all such other documents as the Buyer may reasonably direct in order to vest such assets or the relevant interests in them in the Buyer; and
procure that the transferor shall hold the asset, or relevant interest in the asset, on trust for the Buyer (to the extent permitted by any relevant law) until such time as the transfer is validly effected to vest the asset or relevant interest in the asset in the Buyer.
The Sellers shall, and shall procure that their respective Group Companies shall, following Completion forthwith send to the Buyer all papers, books, accounts and other records relating wholly to the Company or to the Subsidiaries, which are not required to be delivered under Schedule 4.
The Sellers shall, and shall procure that Eugene Groeger shall, use their reasonable endeavours to support reasonable requests from the Buyer in the successful transition of the Company, the Subsidiaries and their respective businesses to the new ownership and management team for one week after Completion. Any further assistance to be given by Eugene Groeger shall be subject to the Company (and/or any of its Subsidiaries) and Eugene Groeger agreeing the terms of a consultancy arrangement.
The Parties shall, and shall procure that their respective directors, officers, employees, workers and contractors shall, provide the Transitionary Services to each other, as relevant, in good faith and acting reasonably.
The provisions of Schedule 8 shall have effect.
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ANNOUNCEMENTS AND CONFIDENTIALITY
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Subject to the provisions of Clause 13.2, no Party shall issue any press release or publish any circular to shareholders or any other public document or make any statement or disclosure to any person who is not a Party (including any document, statement or disclosure published, issued or made by the Sellers or any of them to any supplier to or customer of the Company or any of the Subsidiaries) in each case relating to this Agreement, its terms or the matters contained in it, without obtaining the prior written approval of the other Parties to its contents and the manner and extent of its presentation and publication or disclosure (such approval not to be unreasonably withheld or delayed or made subject to unreasonable conditions).
The provisions of Clause 13.1 do not apply to:
any announcement relating to or connected with or arising out of this Agreement required to be made by the Buyer:
by virtue of the regulations of the US Securities and Exchange Commission; or
by any court or governmental or administrative authority competent to require the same; or
by any applicable law or regulation; or
any statement or disclosure made in good faith by the Buyer, the Company or any of the Subsidiaries after Completion for its legitimate corporate purposes, including in connection with any civil, criminal, regulatory or arbitration proceedings in any jurisdiction brought or threatened by or against it in relation to the Agreement, the documents in the Agreed Form and any other documents referred to in it or them;
any document, statement or disclosure published, issued or made by the Buyer, or the Company or any of the Subsidiaries after Completion to any supplier to or customer of the Company or of any of the Subsidiaries;
any disclosure made by a Party to its professional advisers, provided that such disclosure is made under obligations of confidentiality; or
any document, statement or disclosure made by the Buyer after Completion to any person to whom it proposes to assign its rights under this Agreement or who is otherwise contemplated by Clause 14.3 or 14.4.
Subject to this Clause 14, this Agreement shall be binding upon and enure for the benefit of the successors and assignees of the Parties including, in the case of individuals, their respective estates after their deaths and, subject to any succession or assignment permitted by this Agreement, any such successor or assignee of the Parties shall in its own right be able to enforce any term of this Agreement.
The Sellers, their successors and assignees shall not be entitled to assign their respective rights or obligations under this Agreement without the prior written consent of the Buyer (such consent not to be unreasonably withheld).
The Buyer and its assignees may at any time (i) assign, (ii) transfer, (iii) charge (iv) declare or create a trust or other interest over or (v) deal in any other manner with this Agreement or any of its rights or obligations under it.
The Buyer shall be entitled to:
grant security over, assign by way of security, assign or transfer their respective rights under or in connection with this Agreement; or
sell or transfer any of the Shares to a third party on terms the same as, or similar to (in whole or in part) those set out in this Agreement (including the terms of Clause 6 (Warranties) and this Clause 14 (Assignment)).
Any person to whom security has been granted or assigned, to whom rights have been assigned or transferred or to whom Shares have been sold or transferred in accordance with Clause 14.4 shall in its own right be able to enforce any of the warranties, covenants, indemnities, agreements and undertakings set out in this Agreement, provided always that any such third party:
which is a provider of finance to the Buyer or any Group Company of the Buyer (or a nominee of such a provider) in connection with the matters contemplated by this Agreement (or any subsequent refinancing thereof), may at any time assign its rights under this Agreement to any person who has purchased, directly or indirectly, the Shares or substantially all the assets of the Company and its Subsidiaries pursuant to its enforcement of that security;
which is not a person within Clause 14.5.1, shall (i) obtain the prior written consent of the Buyer, (ii) serve written notice on the Parties agreeing to be bound by the terms of Clause 17 (Governing law and jurisdiction) and (iii) not be entitled to assign its rights under Clause 14.4.
Each Party undertakes, for no further consideration or payment but at the cost and expense of the requesting Party, to sign all documents and to do all other acts as the requesting Party reasonably requires which may be necessary to give full effect to this Agreement.
Each Party shall pay the costs and expenses incurred by it in connection with the negotiation, preparation, execution and carrying into effect of this Agreement and each document referred to in it.
This Agreement shall, as to any of its provisions remaining to be performed or capable of having or taking effect following Completion, remain in full force and effect notwithstanding Completion.
Unless expressly provided otherwise, all representations, warranties, undertakings, covenants, agreements and obligations made, given or entered into in this Agreement by more than one person are made, given or entered into severally.
The rights of each Party under this Agreement:
may be exercised as often as necessary;
are cumulative and not exclusive of rights or remedies provided by law; and
may be delayed, released or waived only in writing and specifically.
Delay in the exercise or non-exercise of any right or remedy provided by this Agreement or by law is not a waiver of that right or remedy.
A waiver of a breach of any of the terms of this Agreement or a default under this Agreement does not constitute a waiver of any other breach or default and shall not affect the other terms of this Agreement.
Any amendment of this Agreement shall not be binding on the Parties unless set out in writing, expressed to amend this Agreement and signed by authorised representatives of each of the Parties.
The provisions contained in each Clause and paragraph of this Agreement shall be enforceable independently of each of the others and their validity or enforceability shall not be affected if any of the others is invalid or unenforceable by reason of any provision of applicable law.
If any provision is invalid or unenforceable but would be valid or enforceable if some part of the provision were deleted or modified, the provision in question shall apply with such modification as may be necessary to make it valid and enforceable.
This Agreement may be executed in any number of counterparts, and by the Parties on separate counterparts, each of which, when executed and delivered, shall constitute one and the same instrument. Delivery of an executed signature page of a counterpart facsimile transmission or in AdobeTM Portable Document Format (PDF) sent by electronic mail shall take effect on delivery of an executed counterpart of this Agreement.
The Parties agree that, subject always to and save as expressly provided in the provisions of this Clause 15.12, Clause 8 (restrictive covenants for the benefit of Group Companies of the Buyer), Clause 9 (release by Sellers for the benefit of third parties), Clause 14.1 (successors to, and assignees of, the Parties) and Clauses 14.3, 14.4 and 14.5 (security holders, third party and Group Company transferees of the Shares post Completion):
no term of this Agreement shall be enforceable by a third party; and
notwithstanding that any term of this Agreement may be or become enforceable by a third party, the terms of this Agreement or any of them may be varied in any way or waived or this Agreement may be rescinded (in each case) without the consent of any such third party.
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1.1
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Any notice or other communication to be given under this Agreement to a Party shall be in writing and shall be delivered personally or sent by post or email to the Party to be served at its address set out below:
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Email Address: legal@uplandsoftware.com
With a copy to:
Pillsbury Winthrop Shaw Pittman LLP
401 Congress Avenue, Suite 1700
Austin, TX 78701
Facsimile Number: 001 512-270-7830
Email Address: steve.tyndall@pillsburylaw.com
Marked for the attention of: Steven M. Tyndall, P.C.
Email address: yyyy.alon@gmail.com
With a copy to:
Lavelle Solicitors, St James House, Adelaide Road, Dublin 2
Facsimile Number: 00353 1 6614581
Email address: gokelly@lavellesolicitors.ie
Marked for the attention of: Griana O'Kelly
or at any other address or facsimile number or email address or to any other addressee as it may have notified to the other Party in accordance with this Clause 16.1. Any notice or other document sent by post shall be sent by prepaid registered post (if within Ireland) or be prepaid/signed for airmail (if elsewhere).
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1.2
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Any such notice shall be deemed to have been received:
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1.2.1
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if delivered personally, at the time of delivery;
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1.2.2
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in the case of registered post, 24 hours from the date of posting;
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1.2.3
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in the case of airmail, five days from the date of posting; and
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1.2.4
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in the case of email, at the time of delivery,
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provided that if deemed receipt occurs before 9 am on a Business Day the notice shall be deemed to have been received at 9 am on that day, and if deemed receipt occurs after 5 pm on a Business Day, or on a day which is not a Business Day, the notice shall be deemed to have been received at 9 am on the next Business Day. For the purpose of this Clause, “Business Day” means any day which is not a Saturday, a Sunday or a public holiday in the place at or to which the notice is left or sent.
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1.3
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In proving service of a notice or document it shall be sufficient to prove that delivery was made and recorded or that the facsimile message was properly addressed and despatched or that an email address was properly addressed and despatched and the sender did not receive notification of a failure to deliver, as the case may be.
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For the purposes of this Clause, “Pre-Contractual Statement” means any undertaking, promise, assurance, statement, representation, warranty or understanding (whether in writing or not) of any person (whether party to this Agreement or not) relating to the subject matter of this Agreement other than as expressly set out in this Agreement and “this Agreement” includes the documents referred to in it or entered into pursuant to it.
The Parties confirm that this Agreement together with the other Transaction Documents, represents the entire understanding, and constitutes the entire agreement of the Parties in relation to its subject matter and its terms and supersedes any previous agreement between the Parties relating to the subject matter or the terms of this Agreement.
Each of the Parties acknowledges and agrees that in entering into this Agreement it does not rely on any Pre-Contractual Statement.
Each of the Parties acknowledges and agrees that the only remedy available to it for breach of this Agreement shall be for breach of contract and it shall have no right of action against any other Party in respect of any Pre-Contractual Statement.
This Clause 17 shall exclude liability for misrepresentation save that it shall not exclude any liability for (or remedy in respect of) fraudulent misrepresentation.
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•
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GOVERNING LAW AND JURISDICTION
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This Agreement and any non-contractual obligations arising out of or in connection with this Agreement (including its formation) is governed by and shall be construed in accordance with the law of Ireland.
Each Party irrevocably agrees to submit to the exclusive jurisdiction of the courts of Ireland over any claim, dispute or controversy (whether contractual or non-contractual) arising under or in connection with this Agreement or the legal relationships established by this Agreement (including its formation).
The Sellers irrevocably appoint Michael Lavelle of Lavelle Solicitors, St James House, Adelaide Road, Dublin 2, Ireland, facsimile number 00353 1 6614581, email address
mlavelle@lavellesolicitors.ie
with a copy to
law@lavellesolicitors.ie
as its agent to receive on its behalf in Ireland service of any proceedings arising out of or in connection with this Agreement. Such service shall be deemed completed on delivery to such agent (whether or not it is forwarded to and received by the Sellers). If for any reason such agent ceases to be able to act as agent or no longer has an address in Ireland, the Sellers shall deliver to the Buyer the new agent’s name, address, and facsimile number and email address in accordance with Clause 15.
Each Party irrevocably consents to any process in any legal action or proceedings arising out of or in connection with this Agreement being served on it in accordance with the provisions of this Agreement relating to service of notices. Nothing contained in this Agreement shall affect the right to serve process in any other manner permitted by law.
Signed
on the date set out at the head of this Agreement.
SIGNED
by John T. McDonald )
for and on behalf of
POWERSTEERING
) /s/ John T. McDonald
SOFTWARE LIMITED
)
SIGNED
by
YEHUDA ALON
) /s/ Yehuda Alon
SIGNED
by
TAMAR
MARASH
) /s/ Tamar Marash
EXHIBIT B
Schedule C-1
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Lender
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Canadian Revolver Commitment
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US Revolver Commitment
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Canadian Term Loan Commitment
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US Term Loan Commitment
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Delayed Draw Term Loan Commitment
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Wells Fargo Bank, National Association
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$0
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$2,181,818.18
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$0
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$42,844,583.38
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$8,163,825.77
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Wells Fargo Capital Finance Corporation Canada
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$1,000,000
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$0
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$5,332,500
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$0
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$0
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CIT Bank, N.A.
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$0
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$2,110,389.61
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$0
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$22,168,335.12
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$5,523,088.01
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Strategic Credit Partners II, LLC
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$0
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$0
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$0
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$7,406,249.97
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$0
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Goldman Sachs Bank USA
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$0
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$2,110,389.61
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$0
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$40,234,532.83
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$7,655,077.56
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Regions Bank
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$0
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$1,558,441.56
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$0
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$27,420,779.22
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$5,194,805.19
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Citizens Bank, N.A.
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$0
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$1,038,961.04
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$0
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$9,280,519.49
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$3,463,203.46
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AC Loan Sourcing Ltd
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$0
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$0
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$0
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$9,000,000
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$0
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TOTAL
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$1,000,000
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$9,000,000
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$5,332,500
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$158,355,000.00
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$30,000,000
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EXHIBIT C
Closing Checklist
[see attached]
5.
CLOSING CHECKLIST
Wells Fargo Bank, National Association, as Agent and US Agent
Wells Fargo Capital Finance Corporation Canada, as Canadian Agent
Upland Software, Inc., Upland Software I, Inc., Upland Software II, LLC, Upland Software IV, LLC, Upland Software V, Inc., Upland Software VI, LLC, Upland Software VII, LLC, Upland IX, LLC,
Upland Software Inc., Ultriva, LLC, and
Advanced Processing & Imaging, Inc.
Omtool, Ltd., RightAnswers, Inc.,
Waterfall International Inc., and Qvidian Corporation
Consent and Sixth Amendment to Credit Agreement & Acquisition of (i) the Equity Interests of Interfax Communications Limited and its subsidiaries (the "Interfax Acquisition") and (ii) the Assets of Marketech Corporation (the "Marketech Acquisition")
CONSENT AND SIXTH AMENDMENT CLOSING DATE: March 21, 2018 INTERFAX ACQUISITION CLOSING DATE: March 21, 2018 MARKETECH ACQUISITION CLOSING DATE: March 21, 2018
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A.
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Wells Fargo Bank, National Association, as Agent, US Agent, and as a Lender One Boston Place, 20th Floor
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Boston, Massachusetts 02108
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B.
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Wells Fargo Capital Finance Corporation Canada, as Canadian Agent and as a Lender
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40 King Street West
Toronto, Ontario M5H 3Y2, Canada
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C.
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Upland Software, Inc. ("Parent") Upland Software I, Inc. ("Upland I") Upland Software II, LLC ("Upland II")
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Upland Software IV, LLC ("Upland IV") Upland Software V, Inc. ("Upland V") Upland Software VI, LLC ("Upland VI") Upland Software VII, LLC ("Upland VII") Upland IX, LLC ("Upland IX")
PowerSteering Software Limited ("PowerSteering") Omtool, Ltd. ("Omtool")
Qvidian Corporation ("Qvidian") Frost Tower
401 Congress Avenue, Suite 1850
Austin, Texas 78701
Ultriva, LLC ("Ultriva")
1601 S. De Anza Blvd. Suite 165 Cupertino, CA 95014
Advanced Processing & Imaging, Inc. ("API") 2101 W. Commercial Blvd.
Suite 1200
Fort Lauderdale, FL 33309
RightAnswers, Inc. ("RightAnswers") UK RightAnswers Limited
333 Thornall Street, 7th Floor Edison, NJ 08837
Waterfall International Inc. ("Waterfall") 655 Fourth Street
San Francisco, CA 94107
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D.
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Upland Software Inc. / Logiciels Upland Inc. ("Upland Canada") 275 Armand-Frappier Boulevard
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Laval, Quebec, Ontario H7V 4A7, Canada
Parent, Upland I, Upland II, Upland IV, Upland V, Upland VI, Upland VII, Upland IX, Ultriva, API, Omtool, RightAnswers, Waterfall and Qvidian are collectively referred to as "US Borrowers". Upland Canada is referred to as "Canadian Borrower". The US Borrowers and Canadian Borrower are collectively referred to as "Borrowers".
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E.
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Interfax Communications Limited ("Interfax Target")
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Interfax US Inc. ("Interfax US Subsidiary") Return Fax 2000 Ltd.
Data Guard Limited Unit 7 Coolport
Coolmine Industrial Estate Blanchardstown, Dublin 15, D15HC91
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F.
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Marketech Corporation ("Marketech Target")
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A.
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US Counsel to Agent: Goldberg Kohn Ltd.
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55 East Monroe Street, Suite 3300
Chicago, Illinois 60603
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B.
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Canadian Counsel to Agent:
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Norton Rose Fulbright Canada LLP
Royal Bank Plaza,
South Tower, Suite 3800 200 Bay Street, P.O. Box 84
Toronto, Ontario M5J 2Z4, Canada
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C.
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US Counsel to Borrowers:
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Pillsbury Winthrop Shaw Pittman LLP 1540 Broadway
New York, New York 10036
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D.
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Canadian Counsel to Borrowers: Borden Ladner Gervais LLP
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40 King Street West, Suite 4400
Toronto, Ontario M5H 3Y4, Canada
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1.
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Consent and Sixth Amendment to Credit Agreement
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2.
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Amendment No. 1 to Second Amended and Restated Fee Letter
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3.
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Disbursement Letter, together with wire disbursement details
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4.
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Promissory Note (Citizens)
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B.
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InterFax Acquisition Documents
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6.
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Solicitor's Undertaking in favor of Wells Fargo Bank, National Association
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7.
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Solicitor's Underaking in favor of Lavelle Solicitors
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a)
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Share Purchase Agreement, with exhibits and schedules
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d)
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Compromise and Settlement Agreement (Adam Marash)
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e)
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Compromise and Settlement Agreement (Yehuda Alon)
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f)
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Letters of Termination for Israeli Employees (4)
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g)
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Termination of Non-Executive Consultancy Services (Rooska Management and Financial Services Limited)
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h)
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Termination of Non-Executive Consultancy Services (Rest Cloud Limited)
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i)
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Proprietary Information Agreements (15)
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C.
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Marketech Acquisition Documents
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9.
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Asset Purchase Agreement, with exhibits and schedules
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10.
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Bill of Sale (Seller)
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11.
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Assignment and Assumption Agreement
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12.
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Consulting Agreement with Seller and Avi Tessler
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D.
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Payoff/Release Documentation
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13.
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UCC-3 Terminations with respect to the filings set forth on
Exhibit A
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14.
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Summary of UCC searches conducted with respect to Marketech Target and Interfax Target and their respective Subsidiaries
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1
NTD: The disclosure bundle attached to the Disclosure Letter is to be provided via access to a data room.
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15.
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Summary of US IP searches conducted against Marketech Target and Interfax Target and their respective Subsidiaries
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IV.
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Post-Acquisition Documents
:
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16.
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Supplement to Perfection Certificate (Omtool re Marketech Target)
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B.
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Post-Closing Documents
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17.
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Post-Closing UCC Searches
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18.
EXHIBIT A
UCC-1 FINANCING STATEMENTS TO BE TERMINATED
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Secured Party
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Debtor
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Jurisdiction
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Date of
Filing
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Filing Number
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HSBC Bank USA, N.A.
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Interfax US Inc.
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DE SOS
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10/02/2017
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2017 6573247
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