Upland Software Q3 10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-36720  
 
 
UPLAND SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
State of Delaware
27-2992077
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
401 Congress Avenue, Suite 1850
Austin, Texas
78701
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (512) 960-1010
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)  
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨   No  x
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  ¨    No  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
x
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The number of shares of the registrant’s common stock outstanding as of December 19, 2014 was 15,208,862.

Table of Contents

Upland Software, Inc.
Table of Contents
 
 
 
Page
 
 
 
 
 
 
 
 



Table of Contents

Item 1. Financial Statements
Upland Software, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
 
September 30,
2014
 
December 31, 2013
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
3,190

 
$
4,703

Accounts receivable, net of allowance of $605 and $454 for September 30, 2014 and December 31, 2013, respectively
14,493

 
11,026

Prepaid and other
5,875

 
2,562

Total current assets
23,558

 
18,291

Canadian tax credits receivable
3,193

 
3,583

Property and equipment, net
3,874

 
3,942

Intangible assets, net
30,631

 
34,747

Goodwill
33,137

 
33,630

Other assets
592

 
654

Total assets
$
94,985

 
$
94,847

Liabilities, redeemable convertible preferred stock and stockholders’ deficit
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
4,814

 
$
1,280

Accrued expenses and other
7,694

 
5,379

Deferred revenue
20,169

 
16,620

Due to seller
834

 
1,033

Current maturities of notes payable
27,116

 
5,245

Total current liabilities
60,627

 
29,557

Commitments and contingencies (Note 9)

 

Canadian tax credit liability to sellers
1,957

 
2,595

Notes payable, less current maturities
500

 
23,438

Deferred revenue
129

 
416

Noncurrent deferred tax liability, net
2,578

 
3,084

Other long-term liabilities
1,907

 
1,101

Total liabilities
67,698

 
60,191

Redeemable convertible preferred stock, $0.0001 par value; 9,300,342 shares authorized:
 
 
 
Series A: 2,990,703 shares designated; 2,821,181 shares issued and outstanding at September 30, 2014 (unaudited) and December 31, 2013; aggregate liquidation preference of $17.2 million at December 31, 2013
17,147

 
17,118

Series B: 1,767,912 shares designated; 1,701,909 shares issued and outstanding at September 30, 2014 (unaudited) and December 31, 2013; aggregate liquidation preference of $10.4 million at December 31, 2013
10,370

 
10,367

Series B-1: 983,767 shares designated; 237,740 shares issued and outstanding at September 30, 2014 (unaudited) and December 31, 2013; aggregate liquidation preference of $1.5 million at December 31, 2013
1,376

 
1,076

Series B-2: 1,639,613 shares designated; 155,598 shares issued and outstanding at September 30, 2014 (unaudited) and December 31, 2013; aggregate liquidation preference of $0.9 million at December 31, 2013
949

 
949

Series C: 1,918,347 shares designated; 1,918,048 shares issued and outstanding at September 30, 2014 (unaudited) and December 31, 2013; aggregate liquidation preference of $21.1 million at December 31, 2013
22,217

 
21,028

Total redeemable convertible preferred stock
52,059

 
50,538

Stockholders’ deficit:
 
 
 
Common stock, $0.0001 par value; 13,989,998 shares authorized: 3,949,216 and 1,851,319 shares issued and outstanding at September 30, 2014 (unaudited) and December 31, 2013, respectively
2

 
—

Additional paid-in capital
8,980

 
—

Accumulated other comprehensive loss
(1,201
)
 
(773
)
Accumulated deficit
(32,553
)
 
(15,109
)
Total stockholders’ deficit
(24,772
)
 
(15,882
)
Total liabilities, redeemable convertible preferred stock and stockholders’ deficit
$
94,985

 
$
94,847

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

1
Table of Contents

Upland Software, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
 
Subscription and support
 
$
12,368

 
$
7,731

 
$
35,910

 
$
21,913

Perpetual license
 
850

 
647

 
1,947

 
1,135

Total product revenue
 
13,218

 
8,378

 
37,857

 
23,048

Professional services
 
3,057

 
2,014

 
10,242

 
6,011

Total revenue
 
16,275

 
10,392

 
48,099

 
29,059

Cost of revenue:
 
 
 
 
 
 
 
 
Subscription and support
 
3,488

 
2,087

 
10,092

 
5,358

Professional services
 
2,305

 
1,400

 
7,042

 
4,255

Total cost of revenue
 
5,793

 
3,487

 
17,134

 
9,613

Gross profit
 
10,482

 
6,905

 
30,965

 
19,446

Operating expenses:
 
 
 
 
 
 
 
 
Sales and marketing
 
3,767

 
2,726

 
10,918

 
7,129

Research and development
 
3,793

 
2,730

 
22,186

 
7,136

Refundable Canadian tax credits
 
(138
)
 
(144
)
 
(412
)
 
(440
)
General and administrative
 
3,555

 
1,662

 
9,231

 
4,582

Depreciation and amortization
 
1,067

 
688

 
3,188

 
2,935

Acquisition-related expenses
 
108

 
22

 
629

 
550

Total operating expenses
 
12,152

 
7,684

 
45,740

 
21,892

Loss from operations
 
(1,670
)
 
(779
)
 
(14,775
)
 
(2,446
)
Other expense:
 
 
 
 
 
 
 
 
Interest expense, net
 
(397
)
 
(434
)
 
(1,231
)
 
(981
)
Other income (expense), net
 
60

 
49

 
(308
)
 
122

Total other expense
 
(337
)
 
(385
)
 
(1,539
)
 
(859
)
Loss before provision for income taxes
 
(2,007
)
 
(1,164
)
 
(16,314
)
 
(3,305
)
Provision for income taxes
 
(438
)
 
(69
)
 
(1,128
)
 
(202
)
Loss from continuing operations
 
(2,445
)
 
(1,233
)
 
(17,442
)
 
(3,507
)
Loss from discontinued operations
 
—

 
(195
)
 
—

 
(511
)
Net loss
 
$
(2,445
)
 
$
(1,428
)
 
$
(17,442
)
 
$
(4,018
)
Preferred stock dividends and accretion
 
(445
)
 
(11
)
 
(1,320
)
 
(33
)
Net loss attributable to common shareholders
 
$
(2,890
)
 
$
(1,439
)
 
$
(18,762
)
 
$
(4,051
)
Net loss per common share:
 
 
 
 
 
 
 
 
Loss from continuing operations per common share, basic and diluted
 
$
(0.80
)
 
$
(1.01
)
 
$
(5.60
)
 
$
(3.16
)
Income (loss) from discontinued operations per common share, basic and diluted
 
$
—

 
$
(0.16
)
 
$
—

 
$
(0.46
)
Net loss per common share, basic and diluted
 
$
(0.80
)
 
$
(1.17
)
 
$
(5.60
)
 
$
(3.62
)
Weighted-average common shares outstanding, basic and diluted
 
3,610,459

 
1,232,626

 
3,350,786

 
1,118,813


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

2
Table of Contents

Upland Software, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Net loss
 
$
(2,445
)
 
$
(1,428
)
 
$
(17,442
)
 
$
(4,018
)
Foreign currency translation adjustment
 
(502
)
 
222

 
(426
)
 
(306
)
Comprehensive loss
 
$
(2,947
)
 
$
(1,206
)
 
$
(17,868
)
 
$
(4,324
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3
Table of Contents

Upland Software, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
 
Nine Months Ended September 30,
 
2014
 
2013
Operating activities
 
 
 
Net loss
$
(17,442
)
 
$
(4,018
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
5,463

 
4,351

Deferred income taxes
52

 
(747
)
Non-cash interest and other expense
519

 
138

Non-cash stock compensation expense
617

 
374

Stock-based compensation—related party vendor
11,220

 
—

Changes in operating assets and liabilities, net of purchase business combinations:
 
 
 
Accounts receivable
(3,487
)
 
3,090

Prepaids and other
(3,643
)
 
(1,280
)
Accounts payable
3,545

 
(490
)
Accrued expenses and other liabilities
250

 
482

Deferred revenue
3,574

 
(2,065
)
Net cash provided by (used in) operating activities
668

 
(165
)
Investing activities
 
 
 
Purchase of property and equipment
(544
)
 
(117
)
Purchase business combinations, net of cash acquired
—

 
(10,344
)
Net cash used in investing activities
(544
)
 
(10,461
)
Financing activities
 
 
 
Payments on capital leases
(384
)
 
(247
)
Proceeds from notes payable
2,700

 
26,338

Payments on notes payable
(3,753
)
 
(16,546
)
Series C redeemable preferred stock issuance costs
(97
)
 
—

Net cash provided by (used in) financing activities
(1,534
)
 
9,545

Effect of exchange rate fluctuations on cash
(103
)
 
(174
)
Change in cash and cash equivalents
(1,513
)
 
(1,255
)
Cash and cash equivalents, beginning of period
4,703

 
3,892

Cash and cash equivalents, end of period
$
3,190

 
$
2,637

Supplemental disclosures of cash flow information
 
 
 
Cash paid for interest
$
1,035

 
$
838

Cash paid for taxes
$
34

 
$
2

Noncash investing and financing activities
 
 
 
Notes payable issued to sellers in business combination
$
—

 
$
3,500


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

4
Table of Contents

Upland Software, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization and Nature of Operations
Upland Software, Inc. (“Upland” or the “Company”) is a leading provider of cloud-based enterprise work management software. Upland’s software applications help organizations better optimize the allocation and utilization of their people, time and money. Upland provides a family of cloud-based enterprise work management software applications for the information technology, marketing, finance, professional services and process excellence functions within organizations. Upland’s software applications address a broad range of enterprise work management needs, from strategic planning to task execution.
2. 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, or 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.
Unaudited Interim Financial Information
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") for interim financial reporting. In the opinion of management of the Company, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for a fair presentation. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014 or for any other period.
There have been no significant changes in our critical accounting policies during the three and nine months ended September 30, 2014, as compared to the critical accounting policies as set forth in the prospectus filed pursuant to Rule 424(b) under the Securities Act with the SEC on November 6, 2014.
Use of Estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses. Significant items subject to such estimates include allowance for doubtful accounts, stock-based compensation, warrant liabilities, acquired intangible assets, the useful lives of intangible assets and property and equipment, and income taxes. In accordance with GAAP, management bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Management regularly evaluates its estimates and assumptions using historical experience and other factors; however, actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash deposits and liquid investments with original maturities of three months or less when purchased. Cash equivalents are stated at cost, which approximates market value, because of the short maturity of these instruments.

5

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

Accounts Receivable and Allowance for Doubtful Accounts
The Company extends credit to the majority of its customers. Issuance of credit is based on ongoing credit evaluations by the Company of customers’ financial condition and generally requires no collateral. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Invoices generally require payment within 30 days from the invoice date. The Company generally does not charge interest on past due payments, although the Company's contracts with its customers usually allow it to do so.
The Company maintains an allowance for doubtful accounts to reserve for potential uncollectible receivables. The allowance is based upon the creditworthiness of the Company’s customers, the customers’ historical payment experience, the age of the receivables and current market conditions. Provisions for potentially uncollectible accounts are recorded in sales and marketing expenses. The Company writes off accounts receivable balances to the allowance for doubtful accounts when it becomes likely that they will not be collected.
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 nine months ended September 30, 2014 or 2013, or more than 10% of accounts receivable as of September 30, 2014 or December 31, 2013.
Property and Equipment
Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over each asset’s useful life. Leasehold improvements are amortized over the shorter of the lease term of the estimated useful lives of the related assets. Upon retirement or disposal, the cost of each asset and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income. Repairs, maintenance, and minor replacements are expensed as incurred. The estimated useful lives of property and equipment are as follows:
Computer hardware and equipment
3 - 5 years
Purchased software and licenses
3 - 5 years
Furniture and fixtures
7 years
Leasehold improvements
Lesser of estimated useful life or lease term
Goodwill and Other Intangibles
Goodwill arises from business combinations and is measured as the excess of the cost of the business acquired over the sum of the acquisition-date fair value of tangible and identifiable intangible assets acquired, less any liabilities assumed.
Goodwill is evaluated for impairment annually or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. The events and circumstances considered by the Company include the business climate, legal factors, operating performance indicators and competition.
The Company evaluates the recoverability of goodwill using a two-step impairment process tested at the reporting unit level. The Company has one reporting unit for goodwill impairment purposes. In the first step, the fair value of the reporting unit is compared to the book value, including goodwill. In the case that the fair value is less than the

6

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

book value, a second step is performed that compares the implied fair value of goodwill to the book value of goodwill. The fair value for the implied goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities, excluding goodwill. If the implied fair value of the goodwill is less than the book value, the difference is recognized as an impairment charge in the consolidated statement of operations. No goodwill impairment charges were recorded during the nine months ended September 30, 2014 and 2013.
Identifiable intangible assets consist of customer relationships, marketing-related intangible assets and developed technology. Intangible assets with definite lives are amortized over their estimated useful lives on a straight-line basis. The straight-line method of amortization represents the Company’s best estimate of the distribution of the economic value of the identifiable intangible assets.
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of intangible assets may not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable. The Company evaluates the recoverability of intangible assets by comparing their carrying amounts to the future net undiscounted cash flows expected to be generated by the intangible assets. If such intangible assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the intangible assets exceeds the fair value of the assets.
The Company determines fair value based on discounted cash flows using a discount rate commensurate with the risk inherent in the Company’s current business model for the specific intangible asset being valued. The Company determined there was an impairment of the PowerSteering trade name of $1.1 million during 2013. There were no such impairments during 2014.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or circumstances indicate their carrying value may not be recoverable. When such events or circumstances arise, an estimate of future undiscounted cash flows produced by the asset, or the appropriate grouping of assets, is compared to the asset's carrying value to determine whether impairment exists. If the asset is determined to be impaired, the impairment loss is measured based on the excess of its carrying value over its fair value. Assets to be disposed of are reported at the lower of the carrying value or net realizable value. No indicators of impairment were identified during the nine months ended September 30, 2014 or 2013.    
Software Development Costs
Software development costs are expensed as incurred until the point the Company establishes technological feasibility. Technology feasibility is established upon the completion of a working model. Costs incurred by the Company between establishment of technological feasability and the point at which the product is ready for general release are capitalized, subject to their recoverability, and amortized over the economic life of the related products. Because the Company believes its current process for developing its software products essentially results in the completion of a working product concurrent with the establishment of technological feasibility, no software development costs have been capitalized to date.    
Canadian Tax Credits
Canadian tax credits related to current expenses are accounted for as a reduction of the research and development costs. Such credits relate to the Company's operations in Canada are not dependent upon taxable income. Credits are accrued in the year in which the research and development costs or the capital expenditures are incurred, provided the Company is reasonably certain that the credits will be received. The government credit must be examined and approved by the tax authorities, and it is possible that the amounts granted will differ from the amounts recorded.

7

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

Deferred Financing Costs
The Company capitalizes underwriting, legal, and other direct costs incurred related to the issuance of debt, which are recorded as deferred charges and amortized to interest expense over the term of the related debt using the effective interest rate method. Upon the extinguishment of the related debt, any unamortized capitalized deferred financing costs are recorded to interest expense. In 2013, the Company wrote off approximately $164,000 of deferred financing costs in connection with the refinancing of its debt facility.
Deferred Costs Related to IPO
As of September 30, 2014, we had incurred approximately $3.0 million in offering expenses related to our initial public offering (IPO) as discussed in Note 18. We capitalized such costs in other current assets and netted these costs against the proceeds received from the IPO, which were received on November 12, 2014.
Fair Value of Financial Instruments
The Company accounts for financial instruments in accordance with the authoritative guidance on fair value measurements and disclosures for financial assets and liabilities. This guidance defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. The guidance also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.
These tiers include Level 1, defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.
The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, and accounts payable, long–term debt and warrant liabilities. 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. The carrying values of warrant liabilities are marked to the market at each reporting period.
Revenue Recognition
The Company derives revenue from product revenue, consisting of subscription, support and perpetual licenses, and professional services revenues. The Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery of the product or services has occurred, no Company obligations with regard to implementation considered essential to the functionality remain, the fee is fixed or determinable and collectability is probable.
Subscription and Support Revenue
The Company derives subscription revenues by providing its software-as-a-service solution to customers in which the customer does not have the right to take possession of the software, but can use the software for the contracted term. The Company accounts for these arrangements as service contracts. Subscription and support revenues are recognized on a straight-line basis over the term of the contractual arrangement, typically one to three years. Amounts that have been invoiced and that are due are recorded in deferred revenue or revenue, depending on when the criteria for revenue recognition are met.
The Company may provide hosting services to customers who purchased a perpetual license. Such hosting services are recognized ratably over the applicable term of the arrangement. These hosting arrangements are typically for a period of one to three years.

8

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

Software maintenance agreements provide technical support and the right to unspecified upgrades on an if-and-when-available basis. Revenue from maintenance agreements is recognized ratably over the life of the related agreement, which is typically one year.
Perpetual License Revenue
The Company also records revenue from the sales of proprietary software products under perpetual licenses. For license agreements in which customer acceptance is a condition to earning the license fees, revenue is not recognized until acceptance occurs. The Company’s products do not require significant customization. Revenue on arrangements with customers who are not the ultimate users (primarily resellers) is not recognized until the product is delivered to the end user. Perpetual licenses are sold along with software maintenance and, sometimes, hosting agreements. When vendor specific objective evidence (VSOE) of fair value exists for the software maintenance and hosting agreement, the perpetual license is recognized under the residual method whereby the fair value of the undelivered software maintenance and hosting agreement is deferred and the remaining contract value is recognized immediately for the delivered perpetual license. When VSOE of fair value does not exist for the either the software maintenance or hosting agreement, the entire contract value is recognized ratably over the underlying software maintenance and/or hosting period.
Professional Services Revenue
Professional services provided with 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 as such services are provided when VSOE of fair value exists for such services and all undelivered elements such as software maintenance and/or hosting agreements. VSOE of fair value for services is based upon the price charged when these services are sold separately, and is typically an hourly rate. When VSOE of fair value does not exist for software maintenance and/or hosting agreements, revenues from professional services are recognized ratably over the underlying software maintenance and/or hosting period.
Professional services, when sold with the subscription arrangements, are accounted for separately when these services have value to the customer on a standalone basis and there is objective and reliable evidence of fair value for each deliverable. When accounted for separately, revenues are recognized as the services are rendered for time and material contracts. For those arrangements where the elements do not qualify as a separate unit of accounting, the Company recognizes professional services ratably over the contractual life of the related application subscription arrangement. Currently, all professional services are accounted for separately as all have value to the customer on a standalone basis.
Multiple Element Arrangements
The Company enters into arrangements with multiple-element that generally include subscriptions and implementation and other professional services.
For multiple-element arrangements, arrangement consideration is allocated to deliverables based on their relative selling price. In order to treat deliverables in a multiple-element arrangement as separate units of accounting, the elements must have standalone value upon delivery. If the elements have standalone value upon delivery, each element must be accounted for separately. The Company’s subscription services have standalone value as such services are often sold separately. In determining whether implementation and other professional services have standalone value apart from the subscription services, the Company considers various factors including the availability of the services from other vendors. The Company has concluded that the implementation services included in multiple-element arrangements have standalone value. As a result, when implementation and other professional services are sold in a multiple-element arrangement, the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. The selling price for a element is based on its VSOE of selling price, if available, third-party evidence of selling price, or TPE, if VSOE is not available or best estimate of selling price, or BESP, if neither VSOE nor TPE is available. The Company has not established VSOE

9

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

for its subscription services due to lack of pricing consistency, the introduction of new services and other factors. The Company has determined that TPE is not a practical alternative due to differences in its service offerings compared to other parties and the availability of relevant third-party pricing information. Accordingly, the Company uses BESP to determine the relative selling price.
The Company determined BESP by considering its overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the Company’s discounting practices, the size and volume of its transactions, customer characteristics, price lists, go-to-market strategy, historical standalone sales and agreement prices. As the Company’s go-to-market strategies evolve, it may modify its pricing practices in the future, which could result in changes in relative selling prices, and include both VSOE and BESP.
Deferred Revenue
Deferred revenue represents either customer advance payments or billings for which the aforementioned revenue recognition criteria have not yet been met.
Cost of Revenue
Cost of revenue primarily consists of salaries and related expenses (e.g. bonuses, employee benefits, and payroll taxes) for personnel directly involved in the delivery of services and products directly to customers. Cost of revenue also includes the amortization of acquired technology.
Redeemable Preferred Stock Warrant Liability
Warrants to purchase the Company's redeemable preferred stock are classified as liabilities in the accompanying balance sheet and are recorded at fair value. The warrants are marked to market each reporting period, with the change in fair value recorded as a gain (loss) in the accompanying consolidated statement of operations.
Advertising Costs
Advertising costs are expensed in the period incurred. Advertising costs were not significant for the nine months ended September 30, 2014 and 2013. Advertising costs are recorded in sales and marketing expenses in the accompanying consolidated statement of operations.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities will be recognized in the period that includes the enactment date. A valuation allowance is established against the deferred tax assets to reduce their carrying value to an amount that is more likely than not to be realized.
The Company accounts for uncertainty of income taxes based on a “more likely than not” threshold for the recognition and derecognition of tax positions, which includes the accounting for interest and penalties.
Stock-Based Compensation
Stock options awarded to employees and directors are measured at fair value at each grant date. The Company accounts for stock-based compensation in accordance with authoritative accounting principles which require all share-based compensation to employees, including grants of employee stock options, to be recognized in the financial statements based on their estimated fair value. Compensation expense is determined under the fair value method using the Black--Scholes option pricing model and recognized ratably over the period the awards vest. The

10

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

Black-Scholes option pricing model used to compute share-based compensation expense requires extensive use of accounting judgment and financial estimates. Items requiring estimation include the expected term option holders will retain their vested stock options before exercising them, the estimated volatility of the Company’s common stock price over the expected term of each stock option, and the number of stock options that will be forfeited prior to the completion of their vesting requirements. Application of alternative assumptions could result in significantly different share-based compensation amounts being recorded in the financial statements. The following table summarizes the weighted-average grant-date fair value of options granted in 2014 and the assumptions used to develop their fair values. There were no options granted during the nine months ended September 30, 2013.
 
Nine Months Ended September 30, 2014
Weighted average grant-date fair value of options
$3.76
Expected volatility
54.1% - 55.2%
Risk-free interest rate
1.6% - 1.9%
Expected life in years
6.29
Dividend yield
—
The Company estimates the fair value of options granted using the Black-Scholes options pricing model. As there was no public market for its common stock, the Company estimates the volatility of its common stock based on the volatility of publicly traded shares of comparable companies' common stock. The Company's decision to use the volatility of comparable stock was based upon the Company's assessment that this information is more representative of future stock price trends than the Company's historical volatility. the Company estimates the expected term using the simplified method, which calculates the expected term as the midpoint between the vesting date and the contractual termination date of each award. The dividend yield assumption is based on historical and expected future dividend payouts. The risk-free interest rate is based on observed market interest rates appropriate for the term of each options.
Comprehensive Loss
The Company utilizes the guidance in Accounting Standards Codification (ASC) Topic 220, Comprehensive Income, for the reporting and display of comprehensive loss and its components in the consolidated financial statements. Comprehensive loss comprises net loss and cumulative foreign currency translation adjustments. The accumulated comprehensive loss as of September 30, 2014 and December 31, 2013 was due to foreign currency translation adjustments.
Foreign Currency Transactions
Certain transactions are denominated in a currency other than the Company's functional currency, and the Company generates certain assets and liabilities that are fixed in terms of the amount of foreign currency that will be received or paid. At each balance sheet date, the Company adjusts the assets and liabilities to reflect the current exchange rate, resulting in a translation gain or loss. Transaction gains and losses are also realized upon a settlement of a foreign currency transaction in determining net loss for the period in which the transaction is settled. Foreign currency transaction gains and losses were not material for the nine months ended September 30, 2014 and 2013.
Basic and Diluted Net Loss per Common Share
The Company uses the two-class method to compute net loss per common share because the Company has issued securities, other than common stock, that contractually entitle the holders to participate in dividends and earnings of the Company. The two-class method requires earnings for the period to be allocated between common stock and participating securities based upon their respective rights to receive distributed and undistributed earnings. Holders of the Company’s Series A, B, B-1, B-2 and C preferred stock are entitled, on a pari passu basis, to receive dividends

11

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

when, as, and if declared by the board of directors, prior and in preference to any declaration or payment of any dividend on the common stock until such time as the total dividends paid on each share of Series A, B, B-1, B-2 and C preferred stock is equal to the original issue price of the shares. As a result, all series of the Company’s preferred stock are considered participating securities.
Under the two-class method, for periods with net income, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted-average number shares of common stock outstanding during the period. Net income attributable to common stockholders is computed by subtracting from net income the portion of current year earnings that the participating securities would have been entitled to receive pursuant to their dividend rights had all of the year’s earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the participating securities have no obligation to fund losses. Diluted net loss per common share is computed under the two-class method by using the weighted-average number of shares of common stock outstanding plus, for periods with net income attributable to common stockholders, the potential dilutive effects of stock options and warrants. In addition, the Company analyzes the potential dilutive effect of the outstanding participating securities under the if-converted method when calculating diluted earnings per share, in which it is assumed that the outstanding participating securities convert into common stock at the beginning of the period. The Company reports the more dilutive of the approaches as its diluted net income per share during the period. Due to net losses for the nine months ended September 30, 2014 and 2013, basic and diluted net loss per share were the same, as the effect of all potentially dilutive securities would have been anti-dilutive.
Recent Accounting Pronouncements
In May 2014, the FASB issued FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle. ASU 2014-09 requires disclosures enabling users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, using one of two retrospective application methods. Early application is not permitted. The Company has not selected a transition method and is currently evaluating the impact of the provisions of ASC 606.
In August 2014, the FASB issued FASB ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. The new standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The adoption of this standard is not expected to have a material impact on our financial statements.
3. Acquisitions
On May 16, 2013, the Company acquired 100% of the outstanding capital of FileBound Solutions, Inc. and Marex Group, Inc. (together FileBound) for total purchase consideration of $14,650,000, which includes cash at closing of $182,000, notes payable to the seller of $3,500,000 (at present rate) and 106,572 shares of the Company’s series B-1 preferred stock with a fair value of $624,000. FileBound provides cloud-based enterprise content management software products that enable customers to automate document-based workflows and control access and distribution of their content to boost productivity, encourage collaboration and improve compliance. Revenues recorded since the acquisition date for the year ended December 31, 2013 were approximately $4,959,000.

12

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

On November 7, 2013, the Company acquired 100% of the outstanding interest of ComSci, LLC. (ComSci) for total purchase consideration of $7,568,000, which includes cash at closing of $104,000, 155,599 shares of the Company’s common stock, 155,598 shares of the company’s B-2 preferred stock with a fair value of $949,000, and $750,000 to be paid in November 2014. ComSci provides cloud-based financial management software products that enable organizations to have visibility into the cost, quality, and value of internal services delivered within their organizations. Revenues recorded since the acquisition date for the year ended December 31, 2013 were approximately $937,000.
On December 23, 2013, the Company acquired 100% of the outstanding capital of Clickability, Inc. (Clickability) for total purchase consideration of $12,281,000. Clickability provides cloud-based enterprise content management software products that are used by enterprise marketers and media companies to create, maintain and deliver web sites that shape visitor experiences and empower nontechnical staff to create, manage, publish, analyze and refine content and social media assets without IT intervention. For accounting purposes, the acquisition of Clickability was recorded on December 31, 2013 and, accordingly, the operations of Clickability had no impact on the Company’s statement of operations. The operations of Clickability from December 23, 2013 to December 31, 2013 were not material.
The Company recorded the purchase of the acquisitions described above using the acquisition method of accounting and, accordingly, recognized the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The results of operations of the acquisitions are included in the Company’s consolidated results of operations beginning with the date of the acquisition.
The following condensed table presents the acquisition-date fair value of the assets acquired and liabilities assumed for the acquisitions (in thousands):
 
FileBound
 
ComSci
 
Clickability
Cash
$
182

 
$
104

 
$
—

Accounts receivable
1,940

 
951

 
1,773

Other current assets
153

 
47

 
297

Property and equipment
927

 
61

 
1,519

Customer relationships
3,600

 
2,000

 
4,400

Trade name
320

 
180

 
250

Technology
2,040

 
810

 
2,500

Goodwill
7,188

 
3,851

 
3,401

Other assets
21

 
8

 
—

Total assets acquired
16,371

 
8,012

 
14,140

Accounts payable
113

 
260

 
154

Accrued expense and other
266

 
106

 
100

Deferred revenue
1,342

 
78

 
1,605

Total liabilities assumed
1,721

 
444

 
1,859

Total consideration
$
14,650

 
$
7,568

 
$
12,281

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.

13

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

Goodwill for FileBound and ComSci is deductible for tax purposes.
4. Fair Value Measurements
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. GAAP sets forth a three–tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three tiers are Level 1, defined as observable inputs, such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions. At September 30, 2014 and December 31, 2013, assets and liabilities measured at fair value on a recurring basis were not significant.
Changes to the fair value of assets and liabilities are recorded to other income (expense), net. Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
 
Fair Value Measurements at December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
$
—

 
$
—

 
$
—

 
$
—

Liabilities:
 
 
 
 
 
 
 
Warrant liabilities
$
—

 
$
—

 
$
525

 
$
525

 
Fair Value Measurements at September 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
$
—

 
$
—

 
$
—

 
$
—

Liabilities:
 
 
 
 
 
 
 
Warrant liabilities
$
—

 
$
—

 
$
831

 
$
831

The following table presents additional information about fixed maturity securities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value:
Ending balance at December 31, 2012
$
—

Issuance of preferred stock warrants
158

Change in fair value of preferred stock warrants
367

Ending balance at December 31, 2013
$
525

Change in fair value of preferred stock warrants
306

Ending balance at September 30, 2014
$
831

The fair value of warrants to purchase convertible preferred stock was determined using Black-Scholes option pricing model. The valuation of the warrant liability is discussed in Note 13 Preferred Stock Warrants.

14

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

5. Goodwill and Other Intangible Assets
Changes in the Company’s goodwill balance for the nine months ended September 30, 2014 are summarized in the table below (in thousands):
Balance at December 31, 2013
$
33,630

Finalization of 2013 business combination
(82
)
Foreign currency translation adjustment
(411
)
Balance at September 30, 2014
$
33,137

Intangible assets, net, include the estimated acquisition-date fair values of customer relationships, marketing-related assets, and developed technology that the Company recorded as part of its business acquisitions. The following is a summary of the Company’s intangible assets, net (in thousands):
 
Estimated Useful
Life (Years)
 
Gross
Carrying Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
December 31, 2013:
 
 
 
 
 
 
 
Customer relationships
10
 
$
26,799

 
$
3,244

 
$
23,555

Trade name
3
 
2,598

 
1,422

 
1,176

Developed technology
4-7
 
11,825

 
1,809

 
10,016

Total intangible assets
 
 
$
41,222

 
$
6,475

 
$
34,747

 
Estimated Useful
Life (Years)
 
Gross
Carrying Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
September 30, 2014:
 
 
 
 
 
 
 
Customer relationships
10
 
$
26,513

 
$
5,181

 
$
21,332

Trade name
1-3
 
2,591

 
1,875

 
716

Developed technology
4-7
 
11,722

 
3,139

 
8,583

Total intangible assets
 
 
$
40,826

 
$
10,195

 
$
30,631

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. In 2013, management changed its intention to use the PowerSteering trade name on a Company-wide basis and, accordingly, changed the useful life of such trade name from indefinite to a definite life of three years. As a result, the Company recorded an amortization charge of $1,060,000 in 2013 related to the PowerSteering trade name. Management has determined there have been no other indicators of impairment or change in the useful life during the three and nine months ended September 30, 2014 and 2013. Total amortization expense was $3.8 million and $3.5 million during the nine months ended September 30, 2014 and 2013, respectively.
Estimated annual amortization expense for the next five years and thereafter is as follows (in thousands):

15

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

 
Amortization
Expense
Year ending December 31:
 
Remainder of 2014
$
1,279

2015
4,895

2016
4,678

2017
4,471

2018 and thereafter
15,308

Total
$
30,631

6. Income Taxes
The Company’s income tax provision for the three and nine months ended September 30, 2014 and 2013 reflects our estimate of the effective tax rates expected to be applicable for the full years, adjusted for any discrete events that are recorded in the period in which they occur. The estimates are reevaluated each quarter based on our estimated tax expense for the full year. The effective income tax rate for the three and nine months ended September 30, 2014 was (21.9)% and (6.9)%, respectively. The effective income tax rate for the three and nine months ended September 30, 2013 was (5.9)% and (6.1)%, respectively. The tax provision for the three and nine months ended September 30, 2014 and 2013 is primarily related to foreign income taxes associated with our Canadian operations, changes in deferred tax liabilities associated with amortization of United States tax deductible goodwill and state taxes in certain states in which the Company does not file on a consolidated basis.The Company has historically incurred operating losses in the United States and, given our cumulative losses and limited history of profits, has recorded a valuation allowance against its United States net deferred tax assets, exclusive of tax deductible goodwill, at September 30, 2014 and 2013.
The Company has not taken any uncertain tax positions impacting current or deferred taxes. Federal, state, and foreign income tax returns have been filed in jurisdictions with varying statutes of limitations. Varying among the separate companies, tax years 1998 through 2013 remain subject to examination by federal and most state tax authorities due to our net operating loss carryforwards. In the foreign jurisdictions, tax years 2008 through 2013 remain subject to examination.



16

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

7. Debt
Long-term debt consisted of the following at September 30, 2014 and December 31, 2013 (in thousands):
 
September 30, 2014
 
December 31, 2013
Senior secured notes (less discount of $87 at September 30, 2014 and $123 at December 31, 2013)
$
17,858

 
$
20,678

Revolving credit facility
4,767

 
3,067

Seller notes due 2014 (less discount of $9 at September 30, 2014 and $62 at December 31, 2013, respectively)
1,491

 
1,438

Seller notes due 2015
3,000

 
3,000

Seller notes due 2016
500

 
500

 
27,616

 
28,683

Less current maturities
(27,116
)
 
(5,245
)
Total long-term debt
$
500

 
$
23,438

Loan and Security Agreements
U.S. Loan Agreement
On March 5, 2012, the Company entered into a loan and security agreement with Comerica Bank (as amended, the U.S. Loan Agreement). The U.S. Loan Agreement provides the Company and certain of its subsidiaries, as co-borrowers, a secured accounts receivable revolving loan facility of up to $5.0 million and a secured term loan facility of up to $19.5 million, for a total loan facility of up to $24.5 million. As of December 31, 2013, the Company had $2.1 million outstanding as revolving loans and $19.1 million as term loans under the U.S. Loan Agreement. As of September 30, 2014, the Company had $4.8 million outstanding as revolving loans and $17.1 million as term loans under the U.S. Loan Agreement.
Revolving loans and term loans bear interest at a floating rate equal to Comerica Bank’s prime rate plus 1.75% (5% at December 31, 2013). Interest on the revolving loans and the term loans is due and payable monthly. Revolving loans may be borrowed, repaid and reborrowed until April 11, 2015, when all outstanding revolving loan amounts must be repaid. Term loan advances may be requested until April 11, 2014. From November 1, 2013 to March 1, 2014, an amount equal to 5% of the principal outstanding on all term loan advances on October 2, 2013 is payable in monthly installments during such period. Between April 1, 2014 and March 1, 2015 an amount equal to 15% of the principal outstanding on all term loan advances on April 11, 2014 is payable in monthly installments during such period. From April 1, 2015 to March 1, 2016 an amount equal to 25% of the principal outstanding on all term loan advances on April 11, 2014 is payable in monthly installments during such period. From April 1, 2016 to March 1, 2017, an amount equal to 25% of the principal outstanding on all term loan advances on April 11, 2014 is payable in monthly installments on the first day of each month during such period. From April 1, 2017 to March 1, 2018, an amount equal to 30% of principal outstanding on all term loan advances on April 11, 2014 is payable in monthly installments during such period. All outstanding principal and interest under the term loan facility must be repaid on April 11, 2018. The revolving loan facility and the term loan facility may be prepaid prior to their respective termination dates without penalty or premium. Starting June 1, 2015, the Company and the other borrowers may be required to begin prepaying certain term loan advances with a percentage of our excess cash flow, if any.
The Company’s obligations and the obligations of the other borrowers under the loan facility are secured by a security interest on substantially all of the Company’s assets and the other borrowers’ assets, including intellectual property. The Company’s other and future subsidiaries may also be required to become co-borrowers or guarantors under the loan facility and grant a security interest on their assets in connection therewith.
The U.S. Loan Agreement contains customary affirmative covenants and customary negative covenants limiting the Company’s ability and the ability of the Company’s subsidiaries to, among other things, dispose of assets, undergo a

17

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

change in control, merge or consolidate, make acquisitions, incur debt, incur liens, pay dividends, repurchase stock and make investments, in each case subject to certain exceptions. The Company and the other borrowers must also comply with a minimum cash financial covenant, minimum fixed charge ratio financial covenant, maximum indebtedness to adjusted EBITDA financial covenant, and minimum EBITDA financial covenant. The Company was in compliance with all financial covenants as of December 31, 2013.
The U.S. Loan Agreement also contains customary events of default including, among others, payment defaults, breaches of covenants defaults, material adverse change defaults, bankruptcy and insolvency event defaults, cross defaults with certain material indebtedness, judgment defaults, and breaches of representations and warranties defaults. Upon an event of default, Comerica Bank may declare all or a portion of the outstanding obligations payable to be immediately due and payable and exercise other rights and remedies provided for under the loan facility and any related guaranty, including a requirement that any guarantor pay all of the outstanding obligations under its guaranty and a right by Comerica Bank to exercise remedies under any security agreement related to such guaranty. During the existence of an event of default, interest on the obligations could be increased by 5%.
At September 30, 2014, the Company would have been in violation of certain financial covenants under the U.S. Loan Agreement and Canadian Loan Agreement (defined below). However, the Company obtained a waiver of compliance with such financial covenants from Comerica Bank through March 31, 2015. Since the waiver does not extend more than one year beyond September 30, 2014, the Company has classified all of the balances outstanding under the U.S. Loan Agreement and Canadian Loan Agreement as a current liability on its balance sheet as of September 30, 2014. The Company is in current discussions and negotiations with Comerica Bank to amend the terms of its existing debt agreements, including the financial covenants, to more appropriately align with the Company’s current financial requirements. If the Company is unable to amend its existing debt agreements, management intends to repay a portion of the outstanding indebtedness that will allow the Company to remain in compliance with its current financial covenants.
In connection with the entry into the U.S. Loan Agreement in March 2012, the Company granted a warrant to purchase 19,675 shares of the Company’s Series B preferred stock at $1.00 per share. The warrant is exercisable for 10 years. The fair value of the warrant was not significant as of the date of issuance. In connection with the amendment of U.S. Loan Agreement in December 2012, the Company granted a warrant to purchase 6,558 shares of the Company’s Series B preferred stock at $1.00 per share. The warrant is exercisable for 10 years. The fair value of the warrant was not significant as of the date of issuance. In connection with the amendment of the U.S. Loan Agreement in April 2013, the Company granted a warrant to purchase 37,164 shares of the Company’s Series B preferred stock at $1.00 per share which replaced the aforementioned warrant to purchase 6,558 shares of the Company’s Series B Preferred Stock. The warrant is exercisable for 10 years. The fair value of the warrant at the time of issuance was determined to be $158,000. The Company recorded a debt discount in the amount of $158,000 which is being accreted as interest expense over the term of the underlying note using the interest method.
Canadian Loan Agreement
On February 10, 2012, Tenrox Inc., a Canadian corporation and the Company’s wholly-owned subsidiary (the Canadian Subsidiary), entered into a loan and security agreement with Comerica Bank (as amended, the Canadian Loan Agreement). The Canadian Loan Agreement provides a secured accounts receivable revolving loan facility of up to $3.0 million and a secured term loan facility of up to $2.5 million, for a total loan facility of up to $5.5 million. As of December 31, 2013, the Canadian Subsidiary had $1.0 million outstanding as revolving loans and $1.7 million as term loans under the Canadian Loan Agreement. As of September 30, 2014, the Company had no outstanding revolving loans and $0.7 million as term loans the Canadian Loan Agreement.
Revolving loans and term loans bear interest at a floating rate equal to Comerica Bank’s prime rate plus 1.75%. Interest on the revolving loans and the term loans is due and payable monthly. Revolving loans may be borrowed, repaid and reborrowed until April 11, 2015, when all outstanding revolving loan amounts must be repaid. Principal on the term loan advance is payable in 24 equal monthly installments beginning on May 1, 2013 and continuing each month until paid in full. All outstanding principal and interest under the term loan facility must be repaid on

18

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

April 11, 2015. The revolving loan facility and the term loan facility may be prepaid prior to their respective termination dates without penalty or premium.
The Canadian Subsidiary’s obligations under the loan facility are secured by a security interest on substantially all of its assets, including its intellectual property. Additionally, we and certain of our domestic subsidiaries provided guarantees of the loan facility secured by substantially all of our and such subsidiaries’ assets, including intellectual property. Furthermore, our other and future subsidiaries may be required to become co-borrowers or guarantors under the loan facility and grant a security interest on its assets in connection therewith.
The Canadian Loan Agreement and the security agreements contain customary affirmative covenants and customary negative covenants limiting our ability, the Canadian Subsidiary’s ability and the ability of our subsidiaries to, among other things, dispose of assets, undergo a change in control, merge or consolidate, make acquisitions, incur debt, incur liens, pay dividends, repurchase stock and make investments, in each case subject to certain exceptions. The Canadian Subsidiary must also comply with a minimum cash financial covenant, minimum fixed charge ratio financial covenant, maximum indebtedness to adjusted EBITDA financial covenant and minimum EBITDA financial covenant.
The Canadian Loan Agreement and the security agreements also contain customary events of default including, among others, payment defaults, breaches of covenants defaults, material adverse change defaults, bankruptcy and insolvency event defaults, cross defaults with certain material indebtedness, judgment defaults, and breaches of representations and warranties defaults. Upon an event of default, Comerica Bank may declare all or a portion of the Canadian Subsidiary’s outstanding obligations payable to be immediately due and payable and exercise other rights and remedies provided for under the loan facility, including a requirement that any guarantor pay all of the outstanding obligations under their respective guaranty and a right by Comerica Bank to exercise remedies under any security agreement related to such guaranty. During the existence of an event of default, interest on the obligations could be increased by 5.0%.
At September 30, 2014, the Company would have been in violation of certain financial covenants under the U.S. Loan Agreement and Canadian Loan Agreement. However, the Company obtained a waiver of compliance with such financial covenants from Comerica Bank through March 31, 2015. Since the waiver does not extend more than one year beyond September 30, 2014, the Company has classified all of the balances outstanding under the U.S. Loan Agreement and Canadian Loan Agreement as a current liability on its balance sheet as of September 30, 2014. The Company is in current discussions and negotiations with Comerica Bank to amend the terms of its existing debt agreements, including the financial covenants, to more appropriately align with the Company’s current financial requirements. If the Company is unable to amend its existing debt agreements, management intends to repay a portion of the outstanding indebtedness that will allow the Company to remain in compliance with its current financial covenants.
In connection with the entry into the Canadian Loan Agreement in February 2012, the Company granted Comerica Bank a warrant to purchase 19,675 shares of the Company’s Series A preferred stock at $6.10 per share. The warrant is exercisable for 10 years. The fair value of the warrant was not significant as of the date of issuance.
Seller Notes
In May 2013, the Company issued seller notes payable in connection with the acquisition of FileBound. The notes have an aggregate principal amount of $3.5 million with 5% stated interest. $3.0 million of the notes are due in May 2015 and $500,000 of the notes are due in May 2016.
Debt Maturities
The Company believes the carrying value of its long-term debt at December 31, 2013 approximates its fair value based on the variable interest rate feature or based upon interest rates currently available to the Company.
Future debt maturities of long-term debt at September 30, 2014 are as follows (in thousands):

19

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

Year ending December 31:
 
Remaining 2014
$
2,498

2015
12,298

2016
5,071

2017
5,256

2018
2,589

Thereafter
—

Total
$
27,712

Convertible Promissory Notes
In October 2013, the Company issued $4.9 million of promissory notes to investors bearing interest at 5% per annum with a maturity date of October 2014. Such promissory notes are automatically converted into shares of preferred stock upon the occurrence of a qualified financing. The conversion price for the shares of preferred stock is 80% of the price paid by other investors in the qualified financing. Such conversion price represents a beneficial conversion feature in the amount of $1.2 million which was recorded as interest expense. In December 2013, all of the promissory notes were converted into shares of Series C preferred stock.
8. Net Loss Per Common Share
The following table sets for the computations of loss per share (in thousands, except share and per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Numerators:
 
 
 
 
 
 
 
Loss from continuing operations attributable to common stockholders
$
(2,445
)
 
$
(1,233
)
 
$
(17,442
)
 
$
(3,507
)
Income (loss) from discontinued operations attributable to common stockholders
—

 
(195
)
 
—

 
(511
)
Preferred stock dividends and accretion
(445
)
 
(11
)
 
(1,320
)
 
(33
)
Net loss attributable to common stockholders
$
(2,890
)
 
$
(1,439
)
 
$
(18,762
)
 
$
(4,051
)
Denominator:
 
 
 
 
 
 
 
Weighted–average common shares outstanding, basic and diluted
3,610,459

 
1,232,626

 
3,350,786

 
1,118,813

Loss from continuing operations per share, basic and diluted
$
(0.80
)
 
$
(1.01
)
 
$
(5.60
)
 
$
(3.16
)
Loss from discontinued operations per share, basic and diluted
$
—

 
$
(0.16
)
 
$
—

 
$
(0.46
)
Net loss per common share, basic and diluted
$
(0.80
)
 
$
(1.17
)
 
$
(5.60
)
 
$
(3.62
)

20

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

Due to the net losses for the three and nine months ended September 30, 2014 and 2013, 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:
 
Nine Months Ended September 30,
 
2014
 
2013
Redeemable Convertible preferred stock:
 
 
 
Series A preferred stock
2,821,181

 
2,821,181

Series B preferred stock
1,701,909

 
1,701,909

Series B–1 preferred stock
237,740

 
237,740

Series B–2 preferred stock
155,598

 
—

Series C preferred stock
1,918,048

 
—

Stock options
702,849

 
170,248

Restricted stock
338,773

 
402,753

Total anti–dilutive common share equivalents
7,876,098

 
5,333,831

9. Commitments and Contingencies
Operating Leases
The Company leases office space under operating leases that expire between 2014 and 2016. The Company’s corporate office in Austin, Texas, leases additional office space under an operating lease. In addition to the office space we currently occupy, the amended office lease increases rentable square feet from 6,255 to 9,896 to be added to the existing premises. With respect to the expansion space, the Company anticipates making approximately $619 thousand in base rent payments during the term of the amended office lease. The initial term of the amended office lease is five years and will commence upon the occupancy date of the new space, currently expected to be on or about January 2015, and extend through December 2020, subject to change based on the construction schedule. The lease term for the current office space has been extended to end contemporaneously with the end of the initial term for the amended office lease. In connection with the lease term extension in this amendment, the Company anticipates making approximately $1.1 million in additional base rent payments on the existing space.
On September 18, 2014, the Company entered into a sublease which provides for 7,740 square feet of office space. The term of the sublease is 29 months ending May 31, 2017 and the Company anticipates making approximately $861,000 in base rent payments during the term of the sublease.
Capital Leases
In conjunction with the sublease described above, the Company entered into an agreement to purchase certain furniture and fixtures for total consideration of $120,000, payable in twelve consecutive monthly installments of $10,000 commencing in November 2014.
During the third quarter of 2014, the Company entered into nine capital lease agreements for computer equipment. The term of each lease is 48 months and the Company anticipates making approximately $731,000 in payments throughout the lease term. In addition, the Company entered into another capital lease agreement for computer equipment. The term of the lease is 36 months and the Company anticipates making approximately $380,000 in payments throughout the lease term.

21

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

Purchase Commitments
The Company has an outstanding purchase commitment for software development services pursuant to a technology services agreement in the amount of $2.1 million in 2014. For years after 2014, 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 2014 total revenues increase by 10% as compared to 2013 total revenues, then the 2015 purchase commitment would increase by approximately 213,000 from the 2014 purchase commitment amount to $2.3 million. A similar 10% increase in 2015 total revenues as compared to 2014 total revenues would increase the 2016 purchase commitment amount from the 2015 purchase commitment amount of $2.3 million by approximately $234,000 to $2.6 million.
Total rent expense for the nine months ended September 30, 2014 and 2013 was approximately $1.1 million and $751,000, respectively. The current and long-term portion of capital lease obligations are recorded in the accrued expenses and other long-term liabilities line items on the balance sheet, respectively. The Company has a letter of credit for an office lease with a bank in the amount of $150,000.
Litigation
In the normal course of business, the Company may become involved in various lawsuits and legal proceedings. While the ultimate results of these matters cannot be predicted with certainty, management does not expect them to have a material adverse effect on the consolidated financial position or results of operations of the Company.
10. Property and Equipment, Net
Property and equipment consisted of the following (in thousands) at:
 
September 30, 2014
 
December 31, 2013
Equipment (included equipment under capital lease of $2,666 and $1,640 at September 30, 2014 and December 31, 2013, respectively)
$
7,309

 
$
3,498

Furniture and fixtures
350

 
607

Leasehold improvements
470

 
2,297

Accumulated depreciation
(4,255
)
 
(2,460
)
Property and equipment, net
$
3,874

 
$
3,942

Amortization of assets recorded under capital leases is included with depreciation expense. Depreciation and amortization expense on property and equipment was $1.6 million and $575,000 for the nine months ended September 30, 2014 and 2013, respectively. The Company recorded no impairment of property and equipment and recorded no gains or losses on the disposal of property and equipment during the nine months ended September 30, 2014 and 2013.
11. Stockholders' Deficit
Common Stock
In July and October 2010, the Company issued 1,582,635 shares of restricted stock to three stockholders of the Company at $0.0001 per share for aggregate proceeds of $965. In October 2012, the Company issued 113,085 shares of restricted stock to an employee of the Company at $1.22 per share for aggregate proceeds of $138,000. These shares are subject to a repurchase option. If the holder’s status as an employee or service provider to the Company terminates, then the Company shall have the option to repurchase any shares that have not yet been released from the repurchase option at a price per share equal to the original purchase price. Based on the

22

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

contractual vesting schedules, 626,460 and 240,280 shares remain unvested as of December 31, 2012 and 2013, respectively.
In November 2013, the Company issued 155,599 shares of common stock valued at $275,000 in connection with the acquisition of ComSci.
On September 2, 2014, the Company granted 294,010 shares of restricted stock with a grant-date fair value of $8.73. The restricted stock has restrictions which vest over three years from date of grant for 40,990 shares and over four years from the date of grant for 253,020 shares. The grant-date fair value of the shares is recognized over the requisite vesting period. If vesting periods are not achieved, the shares will be forfeited by the employee.
Stock Options
During 2010, the Company adopted the Upland Software, Inc. 2010 Stock Plan (the Plan). The Plan provides, in part, that incentive and nonstatutory stock options, as defined by the Internal Revenue Code of 1986, to purchase shares of the Company’s common stock and restricted stock may be granted to employees, directors, and consultants.As of December 31, 2013, the Company has 947,367 shares of common stock reserved for issuance under the Plan. Accordingly, the Company has reserved 357,991 shares of common stock to permit exercise of options outstanding in accordance with the terms of the Plan.
Under the Plan, stock options will be issued at an exercise price equal to at least 100% of the fair market value of the Company’s common stock at the option grant date as determined by the Company’s Board of Directors or appointed administrator. The maximum term of these options is ten years, measured from the date of grant. Options under the Plan generally vest over four years. Under certain conditions, vesting is accelerated upon a change in control (as defined in the Plan).
Stock Option Activity
Stock option activity during the nine months ended September 30, 2014 was as follows:
 
Number of Options Outstanding
 
Weighted-Average Exercise Price
Outstanding at December 31, 2013
357,991

 
$1.40
Options granted
386,797

 
$7.02
Options exercised
(313
)
 
$1.77
Options forfeited
(41,626
)
 
$3.05
Outstanding at September 30, 2014
702,849

 
$4.40

Restricted Stock Awards
On September 2, 2014, the Company granted service-based restricted stock for the purchase of 294,010 ordinary shares with a grant-date fair value of $8.73. The restricted stock has restrictions which vest over three years from date of grant for 40,990 shares and over four years from the date of grant for 253,020 shares. The grant date fair value of the shares is recognized over the requisite vesting period. If vesting periods are not achieved, the shares will be forfeited by the employee.
Share-based Compensation
The Company recognized share-based compensation expense from all awards in the following expense categories:

23

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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Cost of subscription and support revenue
$
8,346

 
$
2,179

 
$
21,322

 
$
6,538

Cost of professional services revenue
4,969

 
1,893

 
15,747

 
5,678

Sales and marketing
9,811

 
3,740

 
24,123

 
11,219

Research and development
16,054

 
3,115

 
44,736

 
9,345

General and administrative
210,562

 
113,672

 
510,830

 
341,017

Total
$
249,742

 
$
124,599

 
$
616,758

 
$
373,797

12. Redeemable Convertible Preferred Stock
In 2011, the Company issued 2,652,110 shares of Series A redeemable convertible preferred stock for aggregate proceeds of $16.0 million, net of issuance costs of $199,000.
In January 2012, the Company issued 169,054 shares of Series A redeemable convertible preferred stock for aggregate proceeds of $1.0 million, net of issuance costs of $24,000.
In January 2012, the Company issued 1,701,909 shares of Series B redeemable convertible preferred stock for aggregate proceeds of $10.4 million, net of issuance costs of $22,000.
In November 2012, the Company issued 131,168 shares of Series B-1 redeemable convertible preferred stock valued at $800,000 in connection with the acquisition of EPM Live. Such shares are subject to forfeiture obligations based upon continued employment over a 24-month period. The Company is accounting for such shares as compensation as the shares vest. At September 30, 2014, 131,168 shares remain subject to forfeiture and $48,000 of stock compensation remains unamortized and is expected to be recognized over the next year
In May 2013, the Company issued 106,572 shares of B-1 redeemable convertible preferred stock valued at $624,000 in connection with the acquisition of FileBound.
In November 2013, the Company issued 155,598 shares of Series B-2 redeemable convertible preferred stock valued at $949,000 in connection with the acquisition of ComSci.
In December 2013, the Company issued 1,918,048 shares of Series C redeemable convertible preferred stock for aggregate proceeds of $19.7 million, net of issuance costs of $82,000. The proceeds from the issuance of Series C preferred stock included the conversion of $4.9 million of convertible promissory bridge notes and accrued interest payable.
All of the shares of preferred stock were converted to shares of common stock on a one-to-one basis in connection with the Company's IPO in November 2014.
13. Preferred Stock Warrants
The Company had 19,675 Series A preferred stock warrants and 56,839 Series B redeemable convertible preferred stock warrants outstanding as of December 31, 2013 and September 30, 2014 with an exercise price of $6.10 per share. All of these warrants were issued in connection with the loan agreements described in Note 7.
The fair value of warrants to purchase convertible preferred stock was determined using the Black-Scholes option pricing model. The warrants were converted to warrants to purchase common stock in November 2014.

24

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

14. Employee Benefit Plans
The Company has established two voluntary defined contribution retirement plans qualifying under Section 401(k) of the Internal Revenue Code. The Company made no contributions to the 401(k) plans for the nine months ended September 30, 2014 and 2013.
15. Discontinued Operations
On November 6, 2013, the Company distributed all of the shares of its Visionael subsidiary to the Company’s stockholders in a spin-off. Since all shares of the subsidiary were distributed in 2013, the Company’s consolidated statements of operations have been presented to show the discontinued operations of the subsidiary separately from continuing operations for all periods presented. Since the transaction was between entities under common control, the distribution of the shares of the subsidiary did not result in a gain or loss on distribution as it was recorded at historical carrying values.
16. 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):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
U.S.
$
12,856

 
$
8,199

 
$
37,870

 
$
21,931

Canada
929

 
673

 
2,811

 
2,563

Other International
2,490

 
1,520

 
7,418

 
4,565

Total Revenues
$
16,275

 
$
10,392

 
$
48,099

 
$
29,059

17. Related Party Transactions
In 2013, the Company borrowed and repaid monies from and to an investor in the Company pursuant to promissory notes (see Note 7). During the nine months ended September 30, 2014 and 2013, the Company purchased software development services pursuant to a technology services agreement with a company controlled by a non-management investor in the Company in the amount of $1.3 million and $1.6 million, respectively. In January 2014, the Company issued 1,803,574 shares of common stock to this company in connection with the amendment of such technology services agreement and took a noncash charge of $11.2 million recorded in research and development expenses. The Company has an outstanding purchase commitment for additional software development services from this company in 2014 in the amount of $2.1 million. For years after 2014, 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 2014 total revenues increase by 10% as compared to 2013 total revenues, then the 2015 purchase commitment would increase by approximately 213,000 from the 2014 purchase commitment amount to $2.3 million. A similar 10% increase in 2015 total revenues as compared to 2014 total revenues would increase the 2016 purchase commitment amount from the 2015 purchase commitment amount of $2.3 million by approximately $234,000 to $2.6 million.
When the Company receives requested services as detailed by statements of work pursuant to the software development agreement, it determines whether such software development costs should be capitalized as either internally-used software or software to be sold or otherwise marketed. If such costs are not capitalizable, the

25

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

Company expenses such costs as the services are received. If the Company anticipates that it will not utilize the full amount of the annual minimum fee, the estimated unused portion of the annual minimum fee is expensed at that time.
18. Subsequent Events
The Company has evaluated subsequent events through the date the consolidated financial statements were available for issuance.
On October 9, 2014, the Board approved, and, on October 24, 2014 the Company effected, a 6.099-for-1 reverse stock split of its common and preferred stock. All share and per share information for all periods presented has been adjusted to reflect the effect of such reverse stock split.
On November 12, 2014, the Company completed its IPO of 3,846,154 shares of common stock, at a price of $12.00 per share, before underwriting discounts and commissions. The Company sold all of such shares. The IPO generated net proceeds of approximately $42.9 million, after deducting underwriting discounts and commissions. Expenses incurred by us for the IPO were approximately $3.8 million and will be recorded against the proceeds received from the IPO. With the proceeds, the Company plans to finance growth by investing in or acquiring complementary companies, products, or technologies, expanding its sales team, growing sales of its applications globally, and improving and enhancing its applications.
On November 20, 2014, the Company acquired all outstanding shares of Solution Q, Inc. and its SaaS project and portfolio management application, “Eclipse.” The purchase price consideration paid in the transaction was approximately $5.8 million, and consisted of approximately $3.2 million in cash payable at closing (net of $400,000 of cash acquired), a $900,000 cash holdback payable eighteen (18) months following the closing (subject to indemnification claims), and 150,977 shares of the Company’s common stock.
On December 10, 2014, the Company completed its acquisition of Mobile Commons, Inc. (“Mobile Commons”), a cloud-based mobile messaging software provider, pursuant to an Agreement and Plan of Merger by and among the Company, Mobile Commons and certain other parties thereto, dated December 8, 2014 (the “Merger Agreement”). The purchase price consideration expected to be paid in the transaction is approximately $5.1 million in cash payable at closing (net of $200,000 of cash acquired), $700,000 cash payable to escrow at closing to be held for eighteen (18) months (subject to indemnification claims by the Company), and approximately 386,253 shares of the Company’s common stock (of which approximately 44,192 shares are expected to be held in escrow for eighteen (18) months and subject to indemnification claims by the Company).  The foregoing excludes any potential future earn-out payments tied to performance-based goals, including up to $500,000 worth of unregistered shares of Company common stock, pursuant to the terms of the Merger Agreement. 
As discussed in Note 7, the Company is currently in discussions with Comerica Bank to restructure the U.S. Loan Agreement and Canadian Loan Agreements.

26
Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements may be identified by the use of forward-looking words such as “anticipate,” “believe,” “may,” “will,” “continue,” “seek,” “estimate,” “intend,” “hope,” “predict,” “could,” “should,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions, although not all forward-looking statements contain these words. These forward-looking statements include, but are not limited to, statements concerning the following:
•
our financial performance and our ability to achieve or sustain profitability or predict future results;
•
our ability to attract and retain customers;our ability to deliver high-quality customer service;
•
the growth of demand for enterprise work management applications;
•
our ability to effectively manage our growth;
•
our ability to consummate and integrate acquisitions;
•
maintaining our senior management team and key personnel;
•
our ability to maintain and expand our direct sales organization;
•
our ability to obtain financing in the future on acceptable terms or at all;
•
our ability to adapt to changing market conditions and competition;
•
our ability to successfully enter new markets and manage our international expansion;
•
the operation and reliability of our third-party data centers;
•
our ability to adapt to technological change and continue to innovate;
•
economic and financial conditions;
•
our ability to integrate our applications with other software applications;
•
maintaining and expanding our relationships with third parties;
•
costs associated with defending intellectual property infringement and other claims;
•
our ability to maintain, protect and enhance our brand and intellectual property;
•
our ability to comply with privacy laws and regulations; and
•
other risk factors included under “Risk Factors” in this Quarterly Report on Form 10-Q.
The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from our forward-looking statements, including those factors discussed in Part II, Item 1A: “Risk Factors” of this Quarterly Report on Form

27
Table of Contents

10-Q and other risks and uncertainties detailed in this and our other reports and filings with the SEC. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
Overview
The continued growth of an information-based economy driven by technological innovation and globalization is causing a fundamental shift in the way work is done. These changes have 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. McKinsey estimates that, as of May 2013, there were more than 200 million knowledge workers globally. 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 at any time, from anywhere and on any device. 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 helping transform how work gets done by providing organizations and their knowledge workers with software applications that better align resources with business objectives and increase visibility, governance, collaboration, quality of customer experience and responsiveness to changes in the business environment. This results in increased work capacity, higher productivity, better execution and greater levels of customer engagement. Our applications are easy-to-use, highly scalable and offer real-time collaboration for knowledge workers distributed on a local or global scale. Our applications address enterprise work challenges in the following categories:
•
Program and Portfolio Management: Enables customers to gain high-level visibility across their organizations and improve top-down governance and management of programs, initiatives, investments and projects.
•
Project Management and Collaboration: Enables customers to improve collaboration and the execution of both projects and unstructured work.
•
Workflow Automation and Enterprise Content Management: Enables customers to automate document-based workflows and control access and distribution of their content to boost productivity, encourage collaboration, improve compliance and enhance and influence customer engagement.
•
Digital Engagement Management: Enables customers to automate the digital provision of personalized content to target audiences via website and mobile devices, providing a timely and highly relevant customer experience.
•
Professional Services Automation: Enables customers to more effectively manage their knowledge workers to better track work, expenses and client billing while improving scheduling, utilization and alignment of human capital.
•
Financial Management. Enables customers to have visibility into the cost, quality and value of internal services delivered within their organizations, which helps improve alignment during planning and budgeting processes, and better assess and validate proposed investments and initiatives of a particular line of business.

28
Table of Contents

We sell our software applications primarily through a direct sales organization comprised of inside sales and field sales personnel. In addition to our direct sales organization, we have an indirect sales organization, which sells to distributors and value-added resellers. We employ a land-and-expand go-to-market strategy. After we demonstrate the value of an initial application to an organization, our sales and account management teams work to expand the adoption of that initial application across the organization, as well as cross-sell additional applications to address other enterprise work management needs of the organization. Our customer success organization supports our direct sales efforts by managing the post-sale customer lifecycle.
Our subscription agreements are typically sold either on a per-seat basis or on a minimum contracted volume basis with overage fees billed in arrears, depending on the application being sold. We service customers ranging from large global corporations and government agencies to small- and medium-sized businesses. As of September 30, 2014, we had more than 1,200 customers with over 200,000 users, excluding users under volume-based contracts, across a broad range of industries, including financial services, retail, technology, manufacturing, education, consumer goods, media, telecommunications, government, food and beverage, healthcare and life sciences.
We have achieved significant growth since our inception, substantially all of which has been as a result of our acquisition strategy. For the three months ended September 30, 2013 compared to the three months ended September 30, 2014, our subscription and support revenue grew from $7.7 million to $12.4 million, representing a 60% period-over-period growth rate, and our total revenue grew from $10.4 million to $16.3 million, representing a 57% period-over-period growth rate. For the nine months ended September 30, 2013 compared to the nine months ended September 30, 2014, our subscription and support revenue grew from $21.9 million to $35.9 million, representing a 64% period-over-period growth rate, and our total revenue grew from $29.1 million to $48.1 million, representing a 66% period-over-period growth rate.
For the three months ended September 30, 2014 and 2013, we recorded Adjusted EBITDA of $0.5 million and $0.5 million, respectively. For the nine months ended September 30, 2014 and 2013, we recorded Adjusted EBITDA of $3.2 million and $2.6 million, respectively. See “Selected Consolidated Financial Data” for additional discussion of Adjusted EBITDA and the reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP measure.
For the three months ended September 30, 2014 and 2013, we recorded net losses of $2.4 million and $1.4 million, respectively. For the nine months ended September 30, 2014 and 2013, we recorded net losses of $17.4 million and $4.0 million, respectively. We expect to have significant operating expenses in the future to support and grow our business, including expanding the range of integrations between our software and third-party applications and platforms, expanding our direct and indirect sales capabilities, pursuing acquisitions of complementary businesses, investing in our data center infrastructure, research and development and increasing our global presence. Furthermore, we will incur significant expenses as a public company and may encounter unforeseen expenses, complications and other difficulties in growing our business. As a result, we may not be able to achieve or sustain profitability.
Our operating results in a given period can fluctuate based on the mix of subscription and support, perpetual license and professional services revenue. For the three months ended September 30, 2014 and 2013, our subscription and support revenue accounted for 76% and 74% of our total revenue, respectively. For the nine months ended September 30, 2014 and 2013, our subscription and support revenue accounted for 75% of our total revenue in both periods. Our customer agreements for program and portfolio management, project management and collaboration, and professional services automation typically are sold on a per-seat basis with terms varying from one to three years, paid in advance. Our customer agreements for workflow automation and enterprise content management and financial management historically have been sold on a volume basis with a one-year term, paid in advance. We generally seek to enter into multi-year contracts with our customers when possible. In each case, our customer agreements provide us with revenue visibility over a number of quarters. We typically negotiate the total number of seats or total minimum contracted volume a customer is entitled to use as part of its subscription, but these seats or minimum contracted volume may not be fully utilized over the term of the agreement. In addition, where customers exceed the minimum contracted volume, additional overage fees are billed in arrears.

29
Table of Contents

Historically, we have sold certain of our applications under perpetual licenses, which also are paid in advance. For the three months ended September 30, 2014 and 2013, our perpetual license revenue accounted for 5% and 6% of our total revenue, respectively. For the nine months ended September 30, 2014 and 2013, our perpetual license revenue accounted for 4% of our total revenue for both periods. We expect perpetual license revenue to decrease as a percentage of revenue in the future. The support agreements related to our perpetual licenses are one-year in duration and entitle the customer to support and unspecified upgrades. The revenue related to such support agreements is included as part of our subscription and support revenue.
Professional services revenue consists of fees related to implementation, data extraction, integration and configuration and training on our applications. For the three months ended September 30, 2014 and 2013, our professional services revenue accounted for 19% of our total revenue in both periods. For the nine months ended September 30, 2014 and 2013, our professional services revenue accounted for 21% of our total revenue in both periods. We expect the proportional revenue contribution of product and professional services revenue to remain relatively constant in future periods.
We sell our software applications primarily through a direct sales organization comprised of inside sales and field sales personnel. In addition to our direct sales organization, we have an indirect sales organization, which sells to distributors and value-added resellers. We employ a land-and-expand go-to-market strategy. After we demonstrate the value of an initial application to an organization, our sales and account management teams work to expand the adoption of that initial application across the organization, as well as cross-sell additional applications to address other enterprise work management needs of the organization. Our customer success organization supports our direct sales efforts and our professional services organization by managing the post-sale customer life cycle. To support continued growth, we intend to pursue acquisitions of complementary technologies, products and businesses to enhance the features and functionalities of our applications, expand our customer base and provide access to new markets and increased benefits of scale. We will prioritize acquisitions within the enterprise functions we currently serve, including information technology, marketing, finance, professional services and process excellence, as well as pursue acquisitions that serve other enterprise functions. Consistent with our growth strategy, we made six acquisitions in 2012 and 2013.
2012 Acquisitions
PowerSteering. In February 2012, we acquired the business of PowerSteering Software, Inc., or PowerSteering, a provider of cloud-based program and portfolio management software, for $13.0 million. The acquisition of PowerSteering enabled our customers to gain high-level visibility across their organizations and improve top-down governance in management of programs, initiatives, investments and projects.
Tenrox. In February 2012, we acquired the business of Tenrox Inc., or Tenrox, a provider of cloud-based professional services automation software, for $15.3 million. The acquisition of Tenrox provided us with additional access to the professional services market and provided our customers with the ability to more effectively manage their knowledge workers to better track work, expenses and client billing while improving scheduling, utilization and alignment of human capital. In addition, following the Tenrox acquisition, we began selling Timesheet.com, a Tenrox product for professional services automation, as a separate application.
EPM Live. In November 2012, we acquired the business of LMR Solutions, LLC, dba EPM Live, or EPM Live, a provider of cloud-based and perpetual license-based project management and collaboration software, with a combination of cash, seller notes and equity, for total consideration of $7.7 million. The acquisition of EPM Live added a software application focused on improving collaboration and the execution of both projects and unstructured work.
2013 Acquisitions
FileBound. In May 2013, we acquired the businesses of FileBound Solutions, Inc. and Marex Group, Inc., together FileBound, a provider of cloud-based and perpetual license-based workflow automation and enterprise content management software, with a combination of cash, seller notes and equity, for total consideration of $14.7 million. The acquisition of FileBound provided our customers the ability to automate document-based workflows and control access and distribution of their content to boost productivity, encourage collaboration and improve compliance.

30
Table of Contents

ComSci. In November 2013, we acquired the business of ComSci LLC, or ComSci, a provider of cloud-based financial management software, with a combination of cash and equity, for total consideration of $7.6 million, with additional contingent consideration payable if certain performance targets are achieved. The acquisition of ComSci enabled our customers to have visibility into the cost, quality and value of internal services delivered within their organizations.
Clickability. In December 2013, we acquired the business of Clickability, Inc., or Clickability, a cloud-based platform for web content management, for $12.3 million. The acquisition of Clickability provided an enterprise content management software application that is used by enterprise marketers and media companies to create, maintain and deliver websites that shape visitor experiences and empower non-technical staff to create, management, publish, analyze and refine content and social media assets without information technology intervention. For accounting purposes, the acquisition of Clickability was recorded as of December 31, 2013 and, accordingly, the operations of Clickability had no impact on our statement of operations.
Our acquisitions may have a material adverse impact on our results of operations, including a potential material adverse impact on our cost of revenue in the short term, as we seek to integrate our acquired businesses over the following six to 12 months in order to achieve additional operating efficiencies. In addition, as we grow our business, we continue to face many challenges and risks. We might encounter difficulties identifying, acquiring and integrating complementary products, technologies and businesses. Over time, as competition increases we may experience pricing pressure. We also may experience seat downgrades or a reduction in minimum contracted volume that could negatively impact our business. Seat downgrades or reductions in minimum contracted volume could occur for several reasons, including dissatisfaction with our prices or features relative to competitive offerings, reductions in our customers’ spending levels, unused seats or minimum contracted volume or limited adoption by our customers of our applications. Our strategic initiatives will require expenditure of capital and the attention of management, and we may not succeed in executing on our growth plan.
Additionally, while cloud computing and SaaS have begun to transform enterprise work management for many organizations, other organizations, particularly those with legacy on-premise systems, have been slower to adopt cloud-based enterprise work management software applications such as ours. Until such organizations are ready to transition to cloud-based systems, we may face challenges in convincing such organizations to adopt our cloud-based enterprise work management applications or be required to make on-premise systems available instead of our cloud-based systems.
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:
 
Three Months Ended September 30,

Nine Months Ended September 30,

2014

2013

2014

2013

(dollars in thousands)
Adjusted EBITDA
$
546


$
491


$
3,154


$
2,565

Adjusted EBITDA. We monitor our Adjusted EBITDA to help us evaluate the effectiveness and efficiency of our operations. Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as net loss, calculated in accordance with GAAP, plus discontinued operations, depreciation and amortization expense, interest expense, net, other expense (income), net, provision for income taxes, stock-based compensation expense, and acquisition-related expenses.
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.


31
Table of Contents


 Three Months Ended September 30,

 Nine Months Ended September 30,

2014

2013

2014

2013








Reconciliation of Net loss to Adjusted EBITDA:







Net Loss
$
(2,445
)

$
(1,428
)

$
(17,442
)

$
(4,018
)
Net loss from discontinued operations
—


195


—


511

Depreciation and amortization expense
1,858


1,123


5,463


4,087

Interest expense, net
397


434


1,231


981

Other expense (income), net
(60
)

(49
)

308


(122
)
Provision for income taxes
438


69


1,128


202

Stock-based compensation expense
250


125


617


374

Acquisition-related expenses
108


22


629


550

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


—


11,220


—

Adjusted EBITDA
$
546


$
491


$
3,154


$
2,565









Total Revenue
$
16,275


$
10,392


$
48,099


$
29,059









Adjusted EBITDA margin
3
%

5
%

7
%

9
%
We believe that Adjusted EBITDA provides useful information to management, investors and others in understanding and evaluating our operating results for the following reasons:
•
Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired;
•
our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, in the preparation of our annual operating budget, as a measure of our operating performance, to assess the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance because Adjusted EBITDA eliminates the impact of items that we do not consider indicative of our core operating performance;
•
Adjusted EBITDA provides more consistency and comparability with our past financial performance, facilitates period-to-period comparisons of our operations and also facilitates comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and
•
we anticipate that, after consummating this offering, our investor and analyst presentations will include Adjusted EBITDA as a supplemental measure of our overall operating performance. Adjusted EBITDA should not be considered as an alternative to net loss or any other measure of financial performance calculated and presented in accordance with GAAP. The use of Adjusted EBITDA as an analytical tool has limitations such as:
•
depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect cash requirements for such replacements; however, much of the depreciation and amortization currently reflected relates to amortization of acquired intangible assets as a result of business combination purchase accounting adjustments, which will not need to be replaced in the future;

32
Table of Contents

•
Adjusted EBITDA may not reflect changes in, or cash requirements for, our working capital needs or contractual commitments;
•
Adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation;
•
Adjusted EBITDA does not reflect interest or tax payments that could reduce cash available for use; and
•
other companies, including companies in our industry, might calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as comparative measures.
Because of these limitations, you should consider Adjusted EBITDA together with other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.
Components of Operating Results
Revenue
Subscription and support revenue. We derive our subscription revenue from fees paid to us by our customers for use of our cloud-based applications. We recognize the revenue associated with subscription agreements ratably over the term of the agreement, provided all criteria required for revenue recognition have been met. Our subscription agreements are typically one to three years.
Our support revenue consists of maintenance fees associated with our perpetual licenses and hosting fees paid to us by our customers. Typically, when purchasing a perpetual license, a customer also purchases maintenance for which we charge a fee, priced as a percentage of the perpetual license fee. Maintenance agreements include the right to support and unspecified upgrades. We recognize the revenue associated with maintenance ratably over the term of the contract. In limited instances, at the customer’s option, we may host the software purchased by a customer under a perpetual license on systems at our third-party data centers. For hosting, we charge a fee, priced as a percentage of the perpetual license fee, and we recognize the revenue associated with hosting ratably over the associated hosting period. These hosting arrangements are typically for a period of one to three years.
Perpetual license revenue. Perpetual license revenue reflects the revenue recognized from sales of perpetual licenses to new customers and additional perpetual licenses to existing customers. We generally recognize the license fee portion of the arrangement in advance, provided all revenue recognition criteria are satisfied. Our perpetual license agreements are typically one year.
Professional services revenue. Professional services revenue consists of fees related to implementation, data extraction, integration and configuration and training on our applications. We generally recognize the revenue associated with these professional services on a time and materials basis as we deliver the services or provide training to our customers.
Cost of Revenue
Cost of product revenue. Cost of product revenue consists primarily of personnel and related costs of our customer success and operations teams, including salaries, benefits, bonuses, payroll taxes, stock-based compensation and allocated overhead, as well as software license fees, hosting costs, Internet connectivity and depreciation expenses directly related to delivering our applications. We expect that cost of revenues may increase in the future depending on the growth rate of our new customers and billings and our need to support the implementation, hosting and support of those new customers. We intend to continue to invest additional resources in expanding the delivery capability of our applications. As we add data center capacity and support personnel in advance of anticipated growth, our cost of product revenue will increase and if such anticipated revenue growth does not occur, our product gross profit will be adversely affected both in terms of absolute dollars and as a percentage of total revenues in any particular quarterly or annual period. Our cost of product revenue is generally expensed as the costs are incurred.    
Cost of professional services revenue. Cost of professional services revenue consists primarily of personnel and related costs, including salaries, benefits, bonuses, payroll taxes, stock-based compensation and allocated overhead, as well as the costs of contracted third-party vendors and reimbursable expenses. As most of our personnel are employed on a full-time basis, our cost of professional services revenue is largely fixed in the short-term, while

33
Table of Contents

our professional services revenue may fluctuate, leading to fluctuations in professional services gross profit. We expect that cost of professional services as a percentage of total revenues could fluctuate from period to period depending on the growth of our professional services business, the timing of sales of applications, and any associated costs relating to the delivery of services. Our cost of professional services revenue is generally expensed as costs are incurred.
Operating Expenses
Our operating expenses are classified into six categories: sales and marketing, research and development, refundable Canadian tax credits, general and administrative, depreciation and amortization and acquisition-related expenses. For each category, other than refundable Canadian tax credits and depreciation and amortization, the largest expense component is personnel and related costs, which includes salaries, employee benefit costs, bonuses, commissions, stock-based compensation and payroll taxes. Operating expenses also include allocated overhead costs for facilities, which are allocated to each department based on relative department headcount. Operating expenses are generally recognized as incurred.
Sales and marketing. Sales and marketing expenses primarily consist of personnel and related costs for our sales and marketing staff, including salaries, benefits, commissions, bonuses, payroll taxes, stock-based compensation and allocated overhead, as well as costs of promotional events, corporate communications, online marketing, product marketing and other brand-building activities. We expense sales commissions when the initial customer contract is signed and upon any renewal as our obligation to pay a sales commission arises at these times. We expect that sales and marketing expenses will continue to increase in absolute dollars as a result of our expected growth, and sales and marketing expenses may fluctuate as a percentage of total revenues due to the timing of such expenses, in any particular quarterly or annual period.
Research and development. Research and development expenses primarily consist of personnel and related costs of our research and development staff, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, allocated overhead and costs of certain third-party contractors. Research and development costs related to the development of our software applications are generally recognized as incurred. For example, we are parties to a technology services agreement pursuant to which we generally recognize expenses for services as they are received. See Note 17 of the Notes to Condensed Consolidated Financial Statements for more information regarding how expenses under such agreement are recognized. We have devoted our product development efforts primarily to enhancing the functionality, and expanding the capabilities, of our applications. We expect that our research and development expenses will continue to increase in absolute dollars as we increase our research and development headcount to further strengthen and enhance our applications.
Refundable Canadian tax credits. Investment tax credits are accounted for as a reduction of research and development costs. Credits are accrued in the year in which the research and development costs of the capital expenditures are incurred, provided that we are reasonably certain that the credits will be received. The investment tax credit must be examined and approved by the tax authorities, and it is possible that the amounts granted will differ from the amounts recorded.
General and administrative. General and administrative expenses primarily consist of personnel and related costs for our executive, administrative, finance, information technology, legal, accounting and human resource staff, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, allocated overhead, professional fees and other corporate expenses. We have recently incurred, and expect to continue to incur, additional expenses as we grow our operations and prepare to operate as a public company, including higher legal, corporate insurance, accounting and auditing expenses, and the additional costs of enhancing and maintaining our internal control environment through the adoption of new corporate policies. General and administrative expenses may fluctuate as a percentage of revenue, and we expect that general and administrative expenses will continue to increase in absolute dollars as we expand our operations and operate as a public company.
Depreciation and amortization. Depreciation and amortization expenses primarily consist of depreciation and amortization of acquired intangible assets as a result of business combination purchase accounting adjustments. The valuation of identifiable intangible assets reflects management’s estimates based on, among other factors, use of established valuation methods. Customer relationships are valued using an income approach, which estimates fair value based on the earnings and cash flow capacity of the subject asset and are amortized over a 10-year period. The

34
Table of Contents

value of the trade name intangibles are determined using a relief from royalty method, which estimates fair value based on the value the owner of the asset receives from not having to pay a royalty to use the asset and are amortized over mostly a three-year period. Developed technology is valued using a cost-to-recreate approach and is amortized over a four- to seven-year period.
Acquisition-related expenses. Acquisition-related expenses consist of one-time costs in connection with each of our acquisitions, including legal fees, accounting fees, financing fees, restructuring costs, integration costs and other transactional fees and bonuses. We intend to continue executing our focused strategy of acquisitions to enhance the features and functionality of our applications, expand our customer base and provide access to new markets and increased benefits of scale. We expect acquisition-related expenses to be relatively constant as a percentage of revenue in the near team.
Total Other Expense
Total other expense consists primarily of changes in the estimated fair value of our preferred stock warrant liabilities, amortization of deferred financing costs over the term of the related loan and security agreement and interest expense on outstanding debt, including amortization of debt discount and effect of beneficial conversion features in our convertible promissory notes payable.

35
Table of Contents

Provision for Income Taxes
Because we have not generated domestic net income in any period to date, we have recorded a full valuation allowance against our domestic net deferred tax assets, exclusive of tax deductible goodwill. We have historically not recorded any material provision for federal or state income taxes, other than deferred taxes related to tax deductible goodwill. The balance of the tax provision for the three and nine months ended September 30, 2014 and 2013, outside of tax deductible goodwill, is related to foreign income taxes, primarily operations of our Canadian subsidiary. Realization of any of our domestic deferred tax assets depends upon future earnings, the timing and amount of which are uncertain. Based on analysis of acquired net operating losses, utilization of our net operating losses will be subject to annual limitations due to the ownership change rules under the Internal Revenue Code of 1986, as amended, or the Code, and similar state provisions. In the event we have subsequent changes in ownership, including as a result of this offering, the availability of net operating losses and research and development credit carryovers could be further limited.

36
Table of Contents

Results of Operations
Consolidated Statements of Operations Data
The following tables set forth our results of operations for the specified periods, as well as our results of operations for the specified periods as a percentage of revenue. The period-to-period comparisons of results of operations are not necessarily indicative of results for future periods.
 
 
 Three Months Ended September 30,
 
 Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
Amount
Percent of Revenue
 
Amount
 
Percent of Revenue
 
Amount
Percent of Revenue
 
Amount
 
Percent of Revenue
 
 
(dollars in thousands, except share and per share data)

Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscription and support
 
$
12,368

 
76
 %
 
$
7,731

 
74
 %
 
$
35,910

 
75
 %
 
$
21,913

 
75
 %
Perpetual license
 
850

 
5
 %
 
647

 
6
 %
 
1,947

 
4
 %
 
1,135

 
4
 %
Total product revenue
 
13,218

 
81
 %
 
8,378

 
80
 %
 
37,857

 
79
 %
 
23,048

 
79
 %
Professional services
 
3,057

 
19
 %
 
2,014

 
20
 %
 
10,242

 
21
 %
 
6,011

 
21
 %
Total revenue
 
16,275

 
100
 %
 
10,392

 
100
 %
 
48,099

 
100
 %
 
29,059

 
100
 %
Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscription and support (1)(2)
 
3,488

 
21
 %
 
2,087

 
20
 %
 
10,092

 
21
 %
 
5,358

 
18
 %
Professional services
 
2,305

 
14
 %
 
1,400

 
13
 %
 
7,042

 
15
 %
 
4,255

 
15
 %
Total cost of revenue
 
5,793

 
35
 %
 
3,487

 
33
 %
 
17,134

 
36
 %
 
9,613

 
33
 %
Gross profit
 
10,482

 
65
 %
 
6,905

 
67
 %
 
30,965

 
64
 %
 
19,446

 
67
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing (1)
 
3,767

 
23
 %
 
2,726

 
26
 %
 
10,918

 
23
 %
 
7,129

 
25
 %
Research and development (1)
 
3,793

 
23
 %
 
2,730

 
26
 %
 
22,186

 
46
 %
 
7,136

 
25
 %
Refundable Canadian tax credits
 
(138
)
 
(1
)%
 
(144
)
 
(1
)%
 
(412
)
 
(1
)%
 
(440
)
 
(2
)%
General and administrative (1)
 
3,555

 
22
 %
 
1,662

 
16
 %
 
9,231

 
19
 %
 
4,582

 
16
 %
Depreciation and amortization
 
1,067

 
7
 %
 
688

 
7
 %
 
3,188

 
7
 %
 
2,935

 
10
 %
Acquisition-related expenses
 
108

 
1
 %
 
22

 
—
 %
 
629

 
1
 %
 
550

 
2
 %
Total operating expenses
 
12,152

 
75
 %
 
7,684

 
74
 %
 
45,740

 
95
 %
 
21,892

 
76
 %
Loss from operations
 
(1,670
)
 
(10
)%
 
(779
)
 
(7
)%
 
(14,775
)
 
(31
)%
 
(2,446
)
 
(9
)%
Other Expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
(397
)
 
(2
)%
 
(434
)
 
(4
)%
 
(1,231
)
 
(3
)%
 
(981
)
 
(3
)%
Other income (expense), net
 
60

 
—
 %
 
49

 
—
 %
 
(308
)
 
(1
)%
 
122

 
—
 %
Total other expense
 
(337
)
 
(2
)%
 
(385
)
 
(4
)%
 
(1,539
)
 
(4
)%
 
(859
)
 
(3
)%
Loss before provision for income taxes
 
(2,007
)
 
(12
)%
 
(1,164
)
 
(11
)%
 
(16,314
)
 
(35
)%
 
(3,305
)
 
(12
)%
Provision for income taxes
 
(438
)
 
(3
)%
 
(69
)
 
(1
)%
 
(1,128
)
 
(2
)%
 
(202
)
 
(1
)%
Loss from continuing operations
 
(2,445
)
 
(15
)%
 
(1,233
)
 
(12
)%
 
(17,442
)
 
(37
)%
 
(3,507
)
 
(13
)%
Loss from discontinued operations
 
                -

 
—
 %
 
(195
)
 
(2
)%
 
—

 
—
 %
 
(511
)

(2
)%
Net loss
 
$
(2,445
)
 
(15
)%
 
$
(1,428
)
 
(14
)%
 
$
(17,442
)
 
(37
)%
 
$
(4,018
)
 
(15
)%
Preferred stock dividends and accretion
 
(445
)
 
(3
)%
 
(11
)
 
—
 %
 
(1,320
)
 
(3
)%
 
(33
)
 
—
 %
Net loss attributable to common shareholders
 
$
(2,890
)
 
(18
)%
 
$
(1,439
)
 
(14
)%
 
$
(18,762
)
 
(40
)%
 
$
(4,051
)
 
(15
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from continuing operations per common share, basic and diluted
 
$
(0.80
)
 
 
 
$
(1.01
)
 
 
 
$
(5.60
)
 
 
 
$
(3.16
)
 
 

37
Table of Contents

Loss from discontinued operations per common share, basic and diluted
 
—

 
 
 
(0.16
)
 
 
 
—

 
 
 
(0.46
)
 
 
Net loss per common share, basic and diluted
 
$
(0.80
)
 
 
 
$
(1.17
)
 
 
 
$
(5.60
)
 
 
 
$
(3.62
)
 
 
Weighted-average common shares outstanding, basic and diluted
 
3,610,459

 
 
 
1,232,626

 
 
 
3,350,786

 
 
 
1,118,813

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Includes stock-based compensation.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2) Includes depreciation and amortization of $792 and $435 for the three months ended September 30, 2014 and 2013, respectively. Includes depreciation and amortization of $2,276 and $1,151 for the nine months ended September 30, 2014 and 2013, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



38
Table of Contents

Comparison of the Three and Nine Months Ended September 30, 2014 and 2013
Revenue
 
 
 
 
 Three Months Ended September 30,
   
 Nine Months Ended September 30,
 
 
 
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
 
 
 
 
(dollars in thousands)
 
 
 
(dollars in thousands)
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscription and support
   
$
12,368

 
$
7,731

 
60%
 
$
35,910

 
$
21,913

 
64%
 
Perpetual license
   
850

 
647

 
31%
 
1,947

 
1,135

 
72%
 
 
Total product revenue
   
13,218

 
8,378

 
58%
 
37,857

 
23,048

 
64%
 
Professional services
   
3,057

 
2,014

 
52%
 
10,242

 
6,011

 
70%
 
 
Total revenue
   
$
16,275

 
$
10,392

 
57%
 
$
48,099