424B4 1 d710680d424b4.htm FINAL PROSPECTUS Final Prospectus
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Filed pursuant to 424(b)(4)
Registration No. 333-198574

 

PROSPECTUS

3,846,154 Shares

 

LOGO

Common Stock

 

 

This is the initial public offering of 3,846,154 shares of common stock of Upland Software, Inc. Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is $12.00 per share.

 

 

We have been approved to list our common stock on the NASDAQ Global Market under the symbol “UPLD.”

 

 

We are an “emerging growth company” under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements.

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 15.

 

     Per Share      Total  

Initial public offering price

   $ 12.00       $ 46,153,848   

Underwriting discounts and commissions(1)

   $ 0.84       $ 3,230,769   

Proceeds, before expenses, to us

   $ 11.16       $ 42,923,079   

 

(1) See “Underwriting.”

Certain of our existing stockholders, including John T. McDonald, our Chief Executive Officer and chairman of our board of directors, entities associated with Austin Ventures, each of which is an affiliate of a member of our board of directors, and ESW Capital, LLC or its affiliates, will purchase an aggregate of 384,615 shares of common stock at the initial public offering price of $12.00 per share. The underwriters will receive the same discount from shares of our common stock purchased by such stockholders as they will from other shares of our common stock sold to the public in this offering.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

We have granted the underwriters the option to purchase up to an additional 576,923 shares of common stock at the public offering price, less the underwriting discount, within 30 days of the date of this prospectus to cover over-allotments.

The underwriters expect to deliver the shares of common stock to purchasers on November 12, 2014.

 

 

Joint Book-Running Managers

 

William Blair   Raymond James

 

 

Canaccord Genuity   Needham & Company

 

The date of this prospectus is November 5, 2014


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     15   

Special Note Regarding Forward-Looking Statements

     40   

Market, Industry and Other Data

     42   

Use of Proceeds

     43   

Dividend Policy

     43   

Capitalization

     44   

Dilution

     46   

Selected Consolidated Financial Data

     48   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     52   

Business

     86   

Management

     99   

Executive Compensation

     107   

Certain Relationships and Related Party Transactions

     115   

Principal Stockholders

     120   

Description of Capital Stock

     122   

Shares Eligible For Future Sale

     127   

Material U.S. Federal Tax Considerations For Non-U.S. Holders

     130   

Underwriting

     134   

Legal Matters

     140   

Experts

     140   

Where You Can Find Additional Information

     140   

Index to Financial Statements

     F-1   

Neither we nor the underwriters have authorized anyone to provide you with any additional information or information that is different from that contained in this prospectus or any related free writing prospectus. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. Our business, financial condition, results of operations and prospects may have changed since that date.

No action is being taken in any jurisdiction outside the United States to permit a public offering of our common stock or possession or distribution of this prospectus in any such jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to those jurisdictions.

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, including independent data, research opinions and viewpoints published by International Data Corporation, or IDC, and McKinsey & Company, or McKinsey, on assumptions that we have made that are based on those and other similar sources and on our knowledge of the markets for our applications. See “Market, Industry and Other Data” for further information.

 

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PROSPECTUS SUMMARY

The following summary highlights information contained elsewhere in this prospectus but may not contain all of the information that you consider important in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes included in this prospectus and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Unless the context requires otherwise, the words “Upland,” “we,” “company,” “us” and “our” refer to Upland Software, Inc. and its subsidiaries.

UPLAND SOFTWARE, INC.

Company Overview

Upland is a leading provider of cloud-based enterprise work management software. We define enterprise work management software as software applications that enable organizations to plan, manage and execute projects and work. Our software applications help organizations better optimize the allocation and utilization of their people, time and money. We provide a family of cloud-based enterprise work management software applications for the information technology, marketing, finance, professional services and process excellence functions within organizations. Our software applications address a broad range of enterprise work management needs, from strategic planning to task execution.

We provide organizations and their knowledge workers with software applications that better align resources with business objectives and increase visibility, governance, collaboration and responsiveness to changes in the business environment. This results in increased work capacity, higher productivity and better execution. 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.

 

    Professional Services Automation: Enables customers to more effectively manage their knowledge workers to better track work, expenses and client billing while improving scheduling, utilization and alignment of human capital.

 

    Financial Management: Enables customers to have visibility into the cost, quality and value of internal services delivered within their organizations, which helps improve alignment during planning and budgeting processes, and better assess and validate proposed investments and initiatives of a particular line of business.

We sell our software applications primarily through a direct sales organization and 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 use of that initial application across the organization, as

 

 

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well as cross-sell additional applications to address other enterprise work management needs of the organization. In addition to our direct sales organization, we have an indirect sales organization, which sells to distributors and value-added resellers. Our subscription agreements are typically sold either on a per-seat basis or on a minimum contracted volume basis with overage fees billed in arrears, depending on the application being sold. We service customers ranging from large global corporations and government agencies to small- and medium-sized businesses. As of December 31, 2013, 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 and scale in a relatively short period of time. Through a series of acquisitions, we have established a diverse family of software applications under the Upland brand, each of which addresses a specific enterprise work management need. Our revenue has grown from $22.8 million in fiscal 2012 to $41.2 million in fiscal 2013 and from $18.7 million in the first six months of 2013 to $31.8 million in the first six months of 2014, representing an 80% and 70% period-over-period growth rate, respectively. We recorded Adjusted EBITDA of $0.7 million, $2.7 million and $2.6 million in fiscal 2012 and 2013 and the first six months of 2014, respectively, and a net loss of $2.5 million, $9.2 million and $15.0 million in fiscal 2012 and 2013 and the first six months of 2014, respectively. See “—Summary Consolidated Financial Data” for the definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP measure.

Industry Background

A Rapidly Changing Business Environment

The continued growth of an information-based economy driven by technological innovation and globalization is causing a fundamental change in the business environment and the way work is done. To be successful, organizations must be able to quickly adapt to changes in this complex and rapidly evolving environment and optimize the utilization of their people, time and money. These changes have given rise to a large and growing group of knowledge workers who operate in dynamic work settings as part of geographically dispersed and virtual teams. To be successful, these knowledge workers must quickly synthesize, analyze and act on large amounts of information and collaborate effectively at any time, from anywhere and on any device.

Legacy Processes and Systems are Insufficient

Many organizations continue to utilize manual processes and traditional tools, such as paper-based techniques, spreadsheets and email, as well as legacy on-premise enterprise systems, to manage knowledge work. The limitations of these processes and systems include siloed and disparate information, limited visibility and transparency, poor collaboration among teams, lost productivity and misalignment of work efforts and overall business objectives. In addition, legacy on-premise enterprise systems can be expensive and time intensive to implement, inflexible and difficult to use, and costly to upgrade and maintain.

The Need for Cloud-Based Enterprise Work Management Software

Enterprise work management software is an emerging category of software applications that enable organizations to effectively plan, manage and execute projects and work in order to maximize work capacity, productivity and profitability. Recently, cloud computing and software-as-a-service, or SaaS, has begun to transform enterprise work management with rapid speed-to-value, low total cost of ownership and reduced financial risk. As a result of these benefits, the annual growth rate of the SaaS market is expected to be significantly greater than the worldwide application software market. IDC estimates that the worldwide SaaS applications market will grow at a compound annual growth rate of 19%, from $18 billion in 2012 to $42 billion

 

 

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in 2017, while the worldwide application software market will grow at a compound annual growth rate of 6%, from $168 billion to $225 billion in 2017.

We currently participate in various areas of enterprise work management, including the markets that IDC identifies as worldwide project and portfolio management, worldwide business process management software, worldwide financial performance and strategy management applications, worldwide collaborative applications and worldwide content management software. In aggregate, IDC estimates these markets will exceed $27 billion globally in 2014. While these markets today are largely served by legacy on-premise enterprise systems, we believe there will continue to be increased market adoption of cloud-based enterprise work management software applications.

The Upland Approach

Our award-winning cloud-based enterprise work management software applications improve visibility, collaboration and productivity and are disrupting and replacing legacy processes and systems. Unlike legacy solutions, our applications have been developed with the unique requirements of today’s knowledge worker in mind. We enable knowledge workers to interact, collaborate and make business decisions using real-time information from a wide variety of sources, at any time, from anywhere and on any device.

We believe our applications benefit customers in the following ways:

 

    Do the right work. Our applications enable our customers to more effectively align programs, initiatives, investments and projects with overall business objectives, helping ensure the right work is done at the right time. This alignment drives increased productivity and optimizes the allocation and utilization of people, time and money within organizations.

 

    Do the work right. Our applications help customers to more effectively manage projects and tasks by enabling real-time visibility, collaboration, structured workflows and access to the right content and information. This provides teams of distributed workers with clarity into priorities and expectations as well as the tools to execute effectively, resulting in increased productivity, transparency and accountability and the ability to respond rapidly to change.

 

    Single source of truth. Our applications collect real-time data regarding the planning, management and execution of projects and work processes across teams and business units from disparate sources and integrate such data into a single repository, which we call a “single source of truth.” This enables a more complete view of teams, projects and resources than the siloed information repositories legacy processes and systems typically provide.

 

    Responsiveness to change. Our applications provide analytics and reporting capabilities that transform disparate data in real-time into actionable intelligence, enabling users to make better informed business decisions. Our applications enable organizations to conduct dynamic and sophisticated “what-if” and scenario analyses that can improve their ability to respond effectively to changing business conditions.

 

    Easy to implement and use. Customers can easily access our cloud-based applications with an Internet browser. Our applications do not require large up-front software expenditures or significant ongoing infrastructure or information technology support. In addition, we provide a common user interface with a modern look and feel that ensures a consistent user experience across our applications.

 

    Flexible, scalable and secure. Our applications are highly configurable, which provides us with flexibility to meet the unique business requirements of individual customers. Our applications are also scalable and are able to support large deployments while maintaining required performance levels. We provide tools to help our customers manage the critical elements of application security, including authentication, authorization and regulatory compliance.

 

 

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Our Competitive Strengths

The following competitive strengths are keys to our success:

 

    Large, attractive customer base. As of December 31, 2013, we had over 1,200 customers in a wide variety of industries. We believe our applications provide our customers with significant benefits, which we believe provides us with a substantial opportunity to expand our footprint within our existing customer base and drive their further adoption of our applications.

 

    Diversified family of software applications. We offer a family of software applications that addresses a broad range of enterprise work management needs, from strategic planning to task execution. We believe this benefits our customers as compared to many of our cloud-based competitors who offer only a single point solution for a more limited and discrete work management need.

 

    Recurring revenue model with high visibility. We believe we have a highly attractive operating model due to the recurring nature of our subscription revenue, which results in greater visibility and predictability of future revenue and enhances our ability to effectively manage our business. In addition, the cloud-based nature of our model accommodates significant additional business volume with limited incremental costs, providing us with opportunities to improve our operating margins.

 

    Proven M&A capability. We have a proven ability to successfully identify, acquire and integrate complementary businesses to grow our company, as evidenced by the six acquisitions we have completed since the beginning of 2012. We have a dedicated and experienced corporate development team that continually monitors hundreds of companies in order to maintain a robust pipeline of potential acquisition candidates.

 

    Experienced, proven management team. Our management team has significant operating experience and previously occupied key leadership roles at both private and public companies. We believe our management’s experience in building businesses through both organic growth opportunities and strategic acquisitions has enabled us to quickly establish a leading position within the enterprise work management software market.

 

    Cloud-based platform. We deliver our software applications and functionality primarily through the cloud, with no hardware or software installation required by our customers. This model allows us to provide reliable, cost-effective applications to our customers, add customers with minimal incremental expense and deploy new functionality and upgrades quickly and efficiently.

 

    Commitment to customer success. We have a dedicated customer success organization whose mission is to drive adoption and value realization, retention and loyalty across our customer base. Our focus on enabling our customers’ success is a key reason our customer annual net dollar retention rate was 90% in fiscal 2013. See “—Summary Consolidated Financial Data” for the definition of annual net dollar retention rate.

Our Growth Strategy

Our objective is to be the world’s leading provider of enterprise work management software. The key elements of our strategy for growth are as follows:

 

    Add new customers. We believe the market for cloud-based enterprise work management software is large, growing and underpenetrated. We are expanding our direct sales force and indirect sales channels, as well as our ability to provide a range of integrations between our software and third-party applications and platforms, to drive new customer acquisition.

 

   

Increase sales to existing customers. We believe there is a significant opportunity to expand the adoption of our applications within existing customers. We also intend to cross-sell applications to our existing customers and penetrate divisions or departments where our applications are not in use.

 

 

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Additionally, we intend to address more functions within the enterprise work management spectrum by adding new applications to drive increased adoption of multiple applications by our customers.

 

    Acquire complementary software businesses. We intend to pursue acquisitions of complementary technologies, products and businesses to enhance the features and functionality of our applications, expand our customer base and provide access to new markets and increased benefits of scale.

 

    Expand globally. In fiscal 2013 and the first six months of 2014, approximately 24% and 19%, respectively, of our revenue was derived from sales outside the United States. We believe there is a significant opportunity to grow sales of our applications globally. We intend to expand our business in Europe and evaluate future opportunities in Asia through the hiring of additional sales personnel, selective acquisitions and entering into strategic partnerships.

 

    Improve and enhance applications. We will continue to invest in research and development and work closely with our customers to identify and improve new applications, features and functionalities that address customer requirements across the enterprise work management spectrum. We also intend to continue to expand the breadth of our applications with additional analytics, third-party integrations and social and mobile capabilities, and we will continue to implement our consistent user interface across all of our applications.

Recent Developments

Preliminary Estimated Unaudited Financial Results for the Three and Nine Months Ended September 30, 2014

Although our unaudited financial results for the three and nine months ended September 30, 2014 are not yet final, the following information reflects certain of our preliminary estimated unaudited financial results based on currently available information:

 

     Three months ended
September 30, 2014
    Nine months ended
September 30, 2014
 
     Range     Range  
     Low     High     Low     High  
    

(estimated)

(in millions)

 

GAAP

        

Revenue

   $ 16.0      $ 16.5      $ 47.8      $ 48.3   

Gross Profit

     10.2        11.0        30.7        31.5   

Net loss

     (2.9     (1.9     (17.8     (16.9

Non-GAAP

        

Adjusted EBITDA

   $ 0.2      $ 0.8      $ 2.8      $ 3.4   

The following table reconciles estimated Adjusted EBITDA to estimated net loss for the three months and nine months ended September 30, 2014:

 

     Three months ended
September 30, 2014
    Nine months ended
September 30, 2014
 
     Range     Range  
     Low     High     Low     High  
    

(estimated)

(in millions)

 

Net Loss

   $ (2.9   $ (1.9   $ (17.8   $ (16.9

Discontinued operations

     —          —          —          —     

Depreciation and amortization expense

     1.9        1.8        5.5        5.4   

Interest expense, net

     0.4        0.4        1.3        1.2   

Other expense (income), net

     (0.0     (0.1     0.3        0.2   

Provision for income taxes

     0.4        0.4        1.1        1.0   

Stock-based compensation expense

     0.3        0.2        0.6        0.7   

Acquisition-related expenses

     0.1        0.1        0.6        0.7   

Stock-based compensation — related party vendor

     —          —          11.2        11.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 0.2      $ 0.8      $ 2.8      $ 3.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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Revenue. For the three months ended September 30, 2014, revenue is estimated to be between $16.0 and $16.5 million, representing an increase of 54% to 59% over revenue of $10.4 million for the three months ended September 30, 2013. For the nine months ended September 30, 2014, revenue is estimated to be between $47.8 and $48.3 million, representing an increase of 64% to 66% over revenue of $29.1 million for the nine months ended September 30, 2013. The estimated increase in our revenue for the three months and nine months ended September 30, 2014 is primarily a result of our acquisitions of FileBound Solutions, Inc. and Marex Group Inc., ComSci, LLC, and Clickability Inc., as pre-acquisition revenue from these acquired businesses was not included in our operating results in the prior year periods.

Gross Profit. For the three months ended September 30, 2014, gross profit is estimated to be between $10.2 and $11.0 million, representing an increase of 48% to 59% over gross profit of $6.9 million for the three months ended September 30, 2013. For the nine months ended September 30, 2014, gross profit is estimated to be between $30.7 and $31.5 million, representing an increase of 58% to 62% over gross profit of $19.4 million for the nine months ended September 30, 2013. The estimated increase in our gross profit for the three months and nine months ended September 30, 2014 is primarily a result of our acquisitions of FileBound Solutions, Inc. and Marex Group Inc., ComSci, LLC, and Clickability Inc., as pre-acquisition revenue and cost of revenue from these acquired businesses were not included in our operating results in the prior year periods.

Net Loss. For the three months ended September 30, 2014, net loss is estimated to be between $2.9 and $1.9 million, representing an increase of 107% to 36% over net loss of $1.4 million for the three months ended September 30, 2013. For the nine months ended September 30, 2014, net loss is estimated to be between $17.8 and $16.9 million, representing an increase of 345% to 323% over net loss of $4.0 million for the nine months ended September 30, 2013. The estimated increase in our net loss for the three months ended September 30, 2014 is primarily a result of increases in non-cash amortization expense of acquired intangible assets and an increase in operating expenses as we have continued to invest in personnel, technology, infrastructure and other growth-related activities. The estimated increase in our net loss for the nine months ended September 30, 2014 is primarily a result of increases in non-cash amortization expense of acquired intangible assets and a one-time, non-cash stock-based compensation charge in January 2014 in connection with the amendment of a technology services agreement with a related party. See “Certain Relationships and Related Party Transactions—Technology Services Agreement.”

Adjusted EBITDA. For the three months ended September 30, 2014, Adjusted EBITDA is expected be between $0.2 and $0.8 million, representing a decrease of 60% to an increase of 60% over Adjusted EBITDA of $0.5 million for the three months ended September 30, 2013. For the nine months ended September 30, 2014, Adjusted EBITDA is expected to be between $2.8 and $3.4 million, representing an increase of 8% to 31% over Adjusted EBITDA of $2.6 million for the nine months ended September 30, 2013. The estimated change in Adjusted EBITDA for the three months ended September 30, 2014 is primarily a result of an increase in operating expenses as we have continued to invest in personnel, technology, infrastructure and other growth-related activities. The estimated increase in Adjusted EBITDA for the nine months ended September 30, 2014 is primarily a result of our acquisitions of FileBound Solutions, Inc. and Marex Group Inc., ComSci, LLC, and Clickability Inc., as pre-acquisition Adjusted EBITDA from these acquired businesses was not included in our operating results in the prior year periods. Adjusted EBITDA is a non-GAAP metric used by management to measure our operating performance. See the section titled “—Summary Consolidated Financial Data” for an additional description of Adjusted EBITDA and the table above for a reconciliation of Adjusted EBITDA to net loss for the ranges presented above for the three months and nine months ended September 30, 2014 (estimated) and the three months and nine months ended September 30, 2013 (actual).

The preliminary estimated unaudited financial results presented above reflects management’s estimates based solely upon information available to us as of the date of this prospectus, is not a comprehensive statement of our unaudited financial results for the three months and nine months ended September 30, 2014 and has not

 

 

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been audited, reviewed or compiled by our independent registered public accounting firm. The preliminary estimated unaudited financial results presented above are subject to the completion of our financial closing procedures, which have not yet been completed. Our complete unaudited third quarter results will not be available until after this offering is completed, may differ materially from these preliminary estimated unaudited financial results and are not necessarily indicative of the results to be expected for the entire fiscal year. Accordingly, you should not place undue reliance upon these preliminary estimated unaudited financial results. For example, during the course of the preparation of the respective financial statements and related notes, additional items that would require material adjustments to be made to the preliminary estimated unaudited financial results presented above may be identified. This summary is not meant to be a comprehensive statement of our unaudited financial results for this quarter and our actual results may differ from these estimates. There can be no assurance that these estimates will be realized, and estimates are subject to risks and uncertainties, many of which are not within our control. See the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

Risks Associated with Our Business

Our business is subject to a number of risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. Some of these risks are:

 

    we have a limited operating history and may be unable to achieve or sustain profitability or accurately predict our future results;

 

    our growth is dependent on our ability to retain existing customers and secure additional subscriptions and cross-sell opportunities from existing customers, and nonrenewals or downgrades could harm our future operating results;

 

    any failure to offer high-quality customer service may adversely affect our relationships with our customers and our financial results;

 

    if the market for cloud-based enterprise work management applications develops more slowly than we expect, or declines, our business could be adversely affected;

 

    if we fail to manage our growth effectively, we may be unable to execute our business plan and maintain high levels of customer satisfaction;

 

    we have made and expect to continue to make acquisitions as a primary component of our growth strategy; we may not be able to identify suitable acquisition candidates or consummate acquisitions on acceptable terms, or we may be unable to successfully integrate acquisitions, which could disrupt our operations and adversely impact our business and operating results;

 

    we recognize revenue from customers over the term of the related agreement; therefore, downturns or upturns may not be immediately reflected in our operating results;

 

    our quarterly operating results may fluctuate in the future; as a result, we may fail to meet or exceed the expectations of research analysts or investors, which could cause our stock price to decline and you may lose part or all of your investment; and

 

    upon completion of this offering, our directors, executive officers and holders of more than 5% of our common stock, together with their respective affiliates, will beneficially own, in the aggregate, approximately 55.7% of our outstanding common stock.

If we are unable to adequately address these and other risks we face, our business, financial condition, operating results and prospects may be adversely affected.

 

 

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In addition, we are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, enacted in April 2012, and therefore we may take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. We may take advantage of these exemptions for up to five years or until we are no longer an “emerging growth company.”

Corporate Information

We were incorporated in Delaware in July 2010 under the name Silverback Acquisition Corporation, changed our name to Silverback Enterprise Group, Inc. in September 2011, and changed our name to Upland Software, Inc. in November 2013. Our principal executive offices are located at 401 Congress Avenue, Suite 1850, Austin, Texas 78701, and our telephone number is (512) 960-1010. Our website address is www.uplandsoftware.com. The information contained in, or that can be accessed through, our website is not a part of this prospectus. Investors should not rely on any such information in deciding whether to purchase our common stock. We have included our website address in this prospectus solely as an inactive textual reference.

UPLAND, the Upland Software logo and other trademarks or service marks of Upland appearing in this prospectus are the property of Upland. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective holders.

 

 

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The Offering

 

Common stock offered

3,846,154 shares

 

Common stock to be outstanding after this offering

14,335,673 shares

 

Option to purchase additional shares

576,923 shares

 

Use of proceeds

Although we do not have current specific plans for the net proceeds of this offering, we generally intend to use the net proceeds of this offering for working capital and other general corporate purposes, including to finance our growth by investing in or acquiring complementary companies, products or technologies, expanding our sales force, growing sales of our applications globally and improving and enhancing our applications. We do not have agreements or commitments for any investments or acquisitions at this time. See “Use of Proceeds.”

 

Risk factors

You should read the section titled “Risk Factors” immediately following this prospectus summary and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

NASDAQ Global Market symbol

“UPLD”

 

Proposed purchase by certain current stockholders

Certain of our existing stockholders, including John T. McDonald, our Chief Executive Officer and chairman of our board of directors, entities associated with Austin Ventures, each of which is an affiliate of a member of our board of directors, and ESW Capital, LLC or its affiliates, will purchase an aggregate of 384,615 shares of common stock at the initial public offering price of $12.00 per share. The underwriters will receive the same discount from shares of our common stock purchased by such stockholders as they will from other shares of our common stock sold to the public in this offering. All shares purchased by these investors will be subject to lock-up restrictions described in “Underwriting.”

The number of shares of common stock to be outstanding after this offering is based on 10,489,519 shares of our common stock outstanding as of June 30, 2014, and excludes:

 

    588,132 shares of common stock issuable upon exercise of stock options outstanding as of June 30, 2014, at a weighted-average exercise price of $3.49 per share;

 

    2,459 shares of common stock issuable upon exercise of warrants to purchase shares of common stock outstanding as of June 30, 2014, at a weighted-average exercise price of $1.77 per share;

 

    76,514 shares of common stock issuable upon exercise of warrants to purchase shares of our preferred stock outstanding as of June 30, 2014, at a weighted-average exercise price of $6.10 per share;

 

 

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    246,000 shares of common stock reserved for issuance under our Amended and Restated 2010 Stock Plan as of June 30, 2014, which will become available for grants under our 2014 Equity Incentive Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under our 2014 Equity Incentive Plan, which will become effective upon the execution of the underwriting agreement related to this offering;

 

    294,010 shares of restricted stock issued pursuant to restricted stock grants subsequent to June 30, 2014, at a purchase price of $8.73 per share;

 

    123,785 shares of common stock issuable upon exercise of stock options issued subsequent to June 30, 2014, at a weighted-average exercise price of $8.73 per share; and

 

    41,664 shares of restricted stock in the aggregate granted to our non-employee directors on November 5, 2014.

Unless we specifically state otherwise, all information in this prospectus reflects or assumes:

 

    the 6.099-for-one reverse stock split of our capital stock that occured on October 24, 2014;

 

    that our amended and restated certificate of incorporation, which we will file prior to the closing of this offering, and our amended and restated bylaws are effective;

 

    the conversion of all outstanding shares of our preferred stock into an aggregate of 6,834,476 shares of common stock prior to the closing of this offering; and

 

    no exercise of the underwriters’ option to purchase additional shares of common stock.

 

 

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Summary Consolidated Financial Data

The following table summarizes our consolidated financial data. We have derived the summary consolidated statements of operations data for the fiscal years ended December 31, 2012 and 2013 and the summary consolidated balance sheet data as of December 31, 2013 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated statements of operations data for the six months ended June 30, 2013 and 2014 and the summary consolidated balance sheet data as of June 30, 2014 from our unaudited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results. The following consolidated financial data set forth below should be read together with our consolidated financial statements and related notes and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each contained elsewhere in this prospectus.

 

    Fiscal Year Ended
December 31,
    Six Months Ended
June 30,
 
    2012     2013     2013     2014  
                         
    (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

       

Revenue:

       

Subscription and support

  $ 18,281      $ 30,887      $ 14,182      $ 23,542   

Perpetual license

    641        2,003        488        1,097   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total product revenue

    18,922        32,890        14,670        24,639   
 

 

 

   

 

 

   

 

 

   

 

 

 

Professional services

    3,841        8,303        3,997        7,185   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    22,763        41,193        18,667        31,824   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

       

Subscription and support(1)(2)

    4,189        7,787        3,271        6,604   

Professional services(1)

    3,121        5,680        2,855        4,737   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    7,310        13,467        6,126        11,341   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    15,453        27,726        12,541        20,483   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

       

Sales and marketing(1)

    6,331        10,625        4,403        7,151   

Research and development(1)

    5,308        10,340        4,406        18,393   

Refundable Canadian tax credits

    (728     (583     (296     (274

General and administrative(1)

    4,574        6,832        2,920        5,676   

Depreciation and amortization

    1,812        3,670        2,247        2,121   

Acquisition-related expenses

    1,933        1,461        528        521   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    19,230        32,345        14,208        33,588   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (3,777     (4,619     (1,667     (13,105

Other expense:

       

Interest expense, net

    (528     (2,797     (547     (834

Other expense, net

    (65     (431     73        (368
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

    (593     (3,228     (474     (1,202
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (4,370     (7,847     (2,141     (14,307

Provision for income taxes

    72        (708     (133     (690
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

    (4,298     (8,555     (2,274     (14,997

Income (loss) from discontinued operations

    1,791        (642     (316     —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (2,507   $ (9,197     (2,590   $ (14,997
 

 

 

   

 

 

   

 

 

   

 

 

 

Preferred stock dividends and accretion

    (44     (98     (22     (875
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common shareholders

  $ (2,551   $ (9,295   $ (2,612   $ (15,872
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share(3):

       

Loss from continuing operations per common share, basic and diluted

  $ (5.78   $ (7.23   $ (2.16   $ (4.92

Income (loss) from discontinued operations per common share, basic and diluted

  $ 2.39      $ (0.54   $ (0.30   $ —     

Net loss per common share, basic and diluted

  $ (3.39   $ (7.77   $ (2.46   $ (4.92

Weighted-average common shares outstanding, basic and diluted

    751,416        1,196,668        1,061,906        3,225,077   

Pro forma net loss per common share (unaudited), basic and diluted(4)

    $ (1.55     $ (1.49

Pro forma weighted-average common shares outstanding (unaudited), basic and diluted(4)

      5,998,613          10,059,553   
   

 

 

     

 

 

 

 

 

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(1) Includes stock-based compensation.

 

(2) Includes depreciation and amortization of $660,000 and $1,640,000 in fiscal 2012 and 2013, respectively. Includes depreciation and amortization of $717,000 and $1,484,000 for the six months ended June 30, 2013 and 2014, respectively.

 

(3) See Note 13 to our consolidated financial statements included elsewhere in this prospectus for a discussion and reconciliation of historical and pro forma net loss attributable to common stockholders and weighted-average shares outstanding for historical and pro forma basic and diluted net loss per share calculations.

 

(4)  Pro forma net loss per common share (unaudited) and pro forma weighted-average common shares outstanding (unaudited) gives effect to (i) a 6.099-for-one reverse stock split of our capital stock that occurred on October 24, 2014; (ii) the conversion of all of our outstanding shares of preferred stock into 6,834,476 shares of our common stock immediately prior to the closing of this offering; and (iii) the filing of our amended and restated certificate of incorporation.

 

     As of June 30, 2014  
     Actual     Pro
Forma(1)
     Pro Forma As
Adjusted(2)
 
     (unaudited)  
     (in thousands)  

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

   $ 3,059      $ 3,059       $ 42,667   

Property and equipment, net

     3,365        3,365         3,365   

Intangible assets, net

     32,210        32,210         32,210   

Goodwill

     33,580        33,580         33,580   

Total assets

     94,326        94,326         133,934   

Deferred revenue

     20,060        20,060         20,060   

Total liabilities

     64,337        64,337         64,337   

Redeemable convertible preferred stock

     51,516        —           —     

Total stockholders’ deficit

     (21,527     29,989         69,597   

 

(1)  The pro forma column gives effect to (i) a 6.099-for-one reverse stock split of our capital stock that occurred on October 24, 2014; (ii) the conversion of all of our outstanding shares of preferred stock into 6,834,476 shares of our common stock immediately prior to the closing of this offering; and (iii) the filing of our amended and restated certificate of incorporation.

 

(2) The pro forma as adjusted column gives further effect to the sale by us of common stock in this offering at the initial public offering price of $12.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     As of December 31,     As of June 30,  
         2012              2013         2013      2014  
     (in thousands, except %)  

Key Metrics:

          

Annualized recurring revenue value at year-end(1)

   $ 27,093       $ 49,061        n/a         n/a   

Annual net dollar retention rate(2)

     n/a         90     n/a         n/a   

Adjusted EBITDA (fiscal year ended December 31 and six months ended June 30)(3)

   $ 720       $ 2,650      $ 2,074       $ 2,608   

 

(1) Annualized recurring revenue value as of December 31 equals the monthly value of our recurring revenue contracts measured as of December 31 multiplied by 12. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics” for additional discussion of this key metric.

 

 

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(2) We define annual net dollar retention as of December 31 as the aggregate annualized recurring revenue value at December 31 from those customers that were also customers as of December 31 of the prior fiscal year, divided by the aggregate annualized recurring revenue value from all customers as of December 31 of the prior fiscal year. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics” for additional discussion of this key metric.

 

(3) 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 income (expense), net, provision for income taxes, stock-based compensation expense and acquisition-related expenses.

The following table provides a reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP measure:

 

     Fiscal Year Ended
December 31,
    Six Months Ended
June 30,
 
     2012     2013     2013     2014  
     (in thousands)  

Net loss

   $ (2,507   $ (9,197   $ (2,590   $ (14,997

Discontinued operations

     (1,791     642        316        —     

Depreciation and amortization expense

     2,472        5,310        2,964        3,605   

Interest expense, net

     528        2,797        547        834   

Other expense (income), net

     65        431        (73     368   

Provision for income taxes

     (72     708        133        690   

Stock-based compensation expense

     92        498        249        367   

Acquisition-related expenses

     1,933        1,461        528        521   

Stock-based compensation—related party vendor

     —          —          —          11,220   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 720      $ 2,650      $ 2,074      $ 2,608   
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

 

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Adjusted EBITDA should not be considered as an alternative to net loss or any other measure of financial performance calculated and presented in accordance with GAAP. The use of Adjusted EBITDA as an analytical tool has limitations such as:

 

    depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect cash requirements for such replacements; however, much of the depreciation and amortization currently reflected relates to amortization of acquired intangible assets as a result of business combination purchase accounting adjustments, which will not need to be replaced in the future;

 

    Adjusted EBITDA may not reflect changes in, or cash requirements for, our working capital needs or contractual commitments;

 

    Adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation;

 

    Adjusted EBITDA does not reflect interest or tax payments that could reduce cash available for use; and

 

    other companies, including companies in our industry, might calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as comparative measures.

Because of these limitations, you should consider Adjusted EBITDA together with other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information included in this prospectus, including our consolidated financial statements and the related notes appearing elsewhere in this prospectus, before deciding to invest in our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations and future growth prospects could be harmed. In that case, the market price of our common stock could decline, and you may lose all or part of your investment. The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in such forward-looking statements.

Risks Related to Our Business and Our Industry

We have a limited operating history and may be unable to achieve or sustain profitability or accurately predict our future results.

We were formed in July 2010 and acquired our first business and commenced operations in September 2011. Prior to September 2011, our business activity was devoted to raising capital, building infrastructure and reviewing potential acquisitions. As such, we have a very limited operating history of selling our products and professional services to third parties. Our limited operating history makes it difficult to evaluate our current business and future prospects and may increase the risk of your investment. We incurred net losses of $2.5 million, $9.2 million and $15.0 million in fiscal 2012 and 2013 and the six months ended June 30, 2014, respectively. As of June 30, 2014, we had an accumulated deficit of $30.1 million. Our losses in prior periods and accumulated deficit reflect the investments we have made to date to grow our business. We expect to have significant operating expenses in the future to further support and grow our business, including expanding the range of integrations between our software and third-party applications and platform, expanding our direct and indirect sales capabilities, pursuing acquisitions of complementary businesses, investing in our data center infrastructure and research and development and increasing our international presence, and as a result we may be unable to achieve or sustain profitability or accurately predict our future results. You should not consider our recent growth in revenue as indicative of our future performance, and we cannot assure you that we will achieve profitability in the future, nor that if we do become profitable, we will sustain profitability.

Our growth is dependent on our ability to retain existing customers and secure additional subscriptions and cross-sell opportunities from existing customers, and nonrenewals and downgrades could harm our future operating results.

In order for us to improve our operating results, it is important that our customers renew or upgrade their agreements with us when the applicable contract term expires, which is typically one to three years for subscription agreements and one year for perpetual license agreements, and also purchase additional applications from us. Upon expiration, customers can renew their existing subscriptions, upgrade their subscriptions to add more seats or additional minimum contracted volume, downgrade their subscriptions to fewer seats or lower minimum contracted volume or not renew. A renewal constitutes renewing an existing contract for an application under the same terms and an upgrade includes purchasing additional seats or volume under an existing contract. We may also cross-sell additional applications to existing customers. Our ability to grow revenue and achieve profitability depends, in part, on customer renewals, upgrades and cross-sales to existing customers exceeding downgrades and nonrenewals. However, we may not be able to increase our penetration within our existing customer base as anticipated and we may not otherwise retain subscriptions from existing customers. Our customers may choose to not renew or upgrade their subscriptions, or may downgrade, because of several factors, including dissatisfaction with our prices, features or performance relative to competitive offerings, reductions in our customers’ spending levels, unused seats or volume or limited adoption or use of our applications. In addition, we may not be successful in cross-selling new applications to our existing customers. If our customers

 

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do not upgrade or renew their subscriptions or purchase additional applications from us, or if they downgrade their subscriptions, our revenue may grow more slowly than expected or may decline, and our financial performance may be adversely affected.

Any failure to offer high-quality customer service may adversely affect our relationships with our customers and our financial results.

Our customers depend on our customer success organization to manage the post-sale customer lifecycle, including to implement new applications for our customers, provide training and ongoing education services and resolve technical issues relating to our applications. We may be unable to respond quickly enough to accommodate short-term increases in demand for our customer success services. We also may be unable to modify the format of our customer success services to compete with changes in similar services provided by our competitors. Increased customer demand for these services, without corresponding revenue, could increase costs and adversely affect our operating results. In addition, our sales process is highly dependent on the reliable functional operation of our applications, our business reputation and positive recommendations from our existing customers. Any failure to maintain high-quality customer service, or a market perception that we do not maintain high-quality customer service, could adversely affect our reputation, our ability to sell our applications to existing and prospective customers and our business, operating results and financial position.

If the market for cloud-based enterprise work management applications develops more slowly than we expect, or declines, our business could be adversely affected.

The market for cloud-based enterprise work management applications is not as mature as the market for legacy on-premise enterprise systems, and it is uncertain whether cloud-based applications will achieve and sustain high levels of customer demand and market acceptance. Our success will depend to a substantial extent on increased adoption of cloud-based applications, and of our enterprise work management software applications in particular. Many large organizations have invested substantial personnel and financial resources to integrate legacy on-premise enterprise systems into their businesses, and therefore may be reluctant or unwilling to migrate to cloud-based applications or away from their traditional vendors or to new practices because of the organizational changes often required to successfully implement new enterprise work management systems. In addition, we do not know whether the adoption of enterprise work management software will continue to grow and displace manual processes and traditional tools, such as paper-based techniques, spreadsheets and email. It is difficult to predict customer adoption rates and demand for our applications, the future growth rate and size of the cloud-based software application market or the entry of competitive products. The expansion of the cloud-based software application market depends on a number of factors, including the cost, performance and perceived value associated with cloud-based applications, as well as the ability of cloud-based application companies to address security and privacy concerns. If other cloud-based software application providers experience security incidents, loss of customer data, disruptions in delivery or other problems, the market for cloud-based applications as a whole, including our enterprise work management applications, may be negatively affected. If cloud-based applications do not achieve widespread adoption, or there is a reduction in demand for cloud-based applications caused by a lack of customer acceptance, technological challenges, weakening economic conditions, security or privacy concerns, competing technologies and products, decreases in corporate spending or otherwise, our revenues may decrease and our business could be adversely affected.

If we fail to manage our growth effectively, we may be unable to execute our business plan and maintain high levels of customer satisfaction.

We have recently experienced a period of rapid growth in our personnel and operations. In particular, we increased our number of full-time employees from three as of December 31, 2011 to 277 as of December 31, 2013, and have also increased the size of our customer base. In addition, our revenue grew from $712,000 in fiscal 2011 to $41.2 million in fiscal 2013 and from $18.7 million in the first six months of 2013 to $31.8 million in the first six months of 2014. Acquisitions are a primary component of our growth strategy and, as a result, we

 

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anticipate that we will continue to experience further rapid growth in our personnel and operations in the future. Our growth has placed, and future growth will place, a significant strain on our managerial, administrative, operational, financial and other resources. To manage the expected growth of our personnel and operations, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. Failure to effectively manage our growth could result in difficulty or delays in deploying our applications, declines in quality or customer satisfaction, increases in costs, difficulties in introducing new features or other operational difficulties, and any of these difficulties could adversely impact our business performance and results of operations.

We have made and expect to continue to make acquisitions as a primary component of our growth strategy. We may not be able to identify suitable acquisition candidates or consummate acquisitions on acceptable terms, or we may be unable to successfully integrate acquisitions, which could disrupt our operations and adversely impact our business and operating results.

A primary component of our growth strategy has been to acquire complementary businesses to grow our company. For example, we acquired the businesses of PowerSteering Software, Inc., Tenrox Inc. and LMR Solutions, LLC, dba EPM Live, in fiscal 2012 and the businesses of FileBound Solutions, Inc. and Marex Group Inc., ComSci, LLC, and Clickability Inc., in fiscal 2013. We intend to continue to pursue acquisitions of complementary technologies, products and businesses as a primary component of our growth strategy to enhance the features and functionality of our applications, expand our customer base and provide access to new markets and increase benefits of scale. Acquisitions involve certain known and unknown risks that could cause our actual growth or operating results to differ from our expectations. For example:

 

    we may not be able to identify suitable acquisition candidates or to consummate acquisitions on acceptable terms;

 

    we may pursue international acquisitions, which inherently pose more risks than domestic acquisitions;

 

    we compete with others to acquire complementary products, technologies and businesses, which may result in decreased availability of, or increased price for, suitable acquisition candidates;

 

    we may not be able to obtain the necessary financing, on favorable terms or at all, to finance any or all of our potential acquisitions;

 

    we may ultimately fail to consummate an acquisition even if we announce that we plan to acquire a technology, product or business; and

 

    acquired technologies, products or businesses may not perform as we expect and we may fail to realize anticipated revenue and profits.

In addition, our acquisition strategy may divert management’s attention away from our existing business, resulting in the loss of key customers or employees, and expose us to unanticipated problems or legal liabilities, including responsibility as a successor for undisclosed or contingent liabilities of acquired businesses or assets.

If we fail to conduct due diligence on our potential targets effectively, we may, for example, not identify problems at target companies or fail to recognize incompatibilities or other obstacles to successful integration. Our inability to successfully integrate future acquisitions could impede us from realizing all of the benefits of those acquisitions and could severely weaken our business operations. The integration process may disrupt our business and, if new technologies, products or businesses are not implemented effectively, may preclude the realization of the full benefits expected by us and could harm our results of operations. In addition, the overall integration of new technologies, products or businesses may result in unanticipated problems, expenses, liabilities and competitive responses. The difficulties integrating an acquisition include, among other things:

 

    issues in integrating the target company’s technologies, products or businesses with ours;

 

    incompatibility of marketing and administration methods;

 

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    maintaining employee morale and retaining key employees;

 

    integrating the cultures of both companies;

 

    preserving important strategic customer relationships;

 

    consolidating corporate and administrative infrastructures and eliminating duplicative operations; and

 

    coordinating and integrating geographically separate organizations.

In addition, even if the operations of an acquisition are integrated successfully, we may not realize the full benefits of the acquisition, including the synergies, cost savings or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, or at all.

Further, acquisitions may cause us to:

 

    issue common stock that would dilute our current stockholders’ ownership percentage;

 

    use a substantial portion of our cash resources;

 

    increase our interest expense, leverage and debt service requirements if we incur additional debt to pay for an acquisition;

 

    assume liabilities for which we do not have indemnification from the former owners; further, indemnification obligations may be subject to dispute or concerns regarding the creditworthiness of the former owners;

 

    record goodwill and non-amortizable intangible assets that are subject to impairment testing and potential impairment charges;

 

    experience volatility in earnings due to changes in contingent consideration related to acquisition earn-out liability estimates;

 

    incur amortization expenses related to certain intangible assets;

 

    lose existing or potential contracts as a result of conflict of interest issues;

 

    become subject to adverse tax consequences or deferred compensation charges;

 

    incur large and immediate write-offs; or

 

    become subject to litigation.

We depend on our senior management team and the loss of one or more key personnel or an inability to attract and retain highly skilled personnel may impair our ability to grow our business.

Our success depends in part upon the continued services of our key executive officers, including John T. McDonald, Michael D. Hill, Ludwig Melik, Timothy W. Mattox and R. Brian Henley, as well as other key personnel. We do not have employment agreements with most of our executive officers or other key personnel that require them to continue to work for us for any specified period and, therefore, they may terminate employment with us at any time with no advance notice. The replacement of our senior management team or other key personnel likely would involve significant time and costs, and the loss of these employees may significantly delay or prevent the achievement of our business objectives.

We face intense competition for qualified individuals from numerous technology and software companies. If we fail to attract and retain suitably qualified individuals, including software engineers and sales personnel, our ability to implement our business plan and develop and maintain our applications could be adversely affected. As a result, our ability to compete would decrease, our operating results would suffer and our revenue would decrease.

 

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Failure to maintain and expand our sales organization may negatively impact our revenue growth.

We sell our applications primarily through a direct sales organization comprised of inside sales and field sales personnel. In addition, we have an indirect sales organization, which sells to distributors and value-added resellers. Growing sales to both new and existing customers is in part dependent on our ability to maintain and expand our sales force. Identifying, recruiting and training additional sales personnel requires significant time, expense and attention. It can take several quarters or longer before our sales representatives are fully-trained and productive. Our business may be adversely affected if our efforts to expand and train our sales organization do not generate a corresponding increase in revenue. In particular, if we are unable to hire, develop and retain sales personnel or if our new sales personnel are unable to achieve expected sales productivity levels in a reasonable period of time or at all, our revenue may grow more slowly than expected or decline and our business may be harmed.

Because we generally recognize revenue from our customers over the terms of their agreements but incur most costs associated with generating such agreements in advance, rapid growth in our customer base may increase our losses in the short-term.

Expenses associated with acquiring customers, such as the expenses related to our sales organizations and related commissions, are generally expensed as incurred while most of our revenue is recognized ratably over the life of the applicable agreements. Therefore, increased sales will result in our recognition of more costs than revenue during the early periods covered by such agreements, even in cases where the agreements are expected to be profitable for us over their full terms. As a result, even if we are successful in increasing our customer base, our short-term operating results may suffer.

We recognize revenue from customers over the term of the related agreement; therefore, downturns or upturns in our business may not be immediately reflected in our operating results.

We recognize revenue from customer agreements ratably over the terms of these agreements. As a result, a significant portion of the revenue we report in each quarter is generated from customer agreements entered into during previous periods, which is reflected as deferred revenue on our balance sheet. Consequently, a decline in new or renewed agreements, or a downgrade of renewed agreements to fewer seats or less minimum contracted volume, in any one quarter may not be fully reflected in our revenue in that quarter. Such a decline, however, will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our applications, and potential changes in our pricing policies or rates of renewals, may not be fully reflected in our results of operations until future periods. Similarly, it would be difficult for us to rapidly increase our revenue through new sales, renewals and upgrades of existing customer agreements, or through additional cross-selling opportunities, in a given period due to the timing of revenue recognition inherent in our subscription model.

Perpetual license revenue is unpredictable and a material increase or decrease in perpetual license revenue from period to period can produce substantial variation in the total revenue and earnings we recognize in a given period.

Perpetual license revenue reflects the revenue recognized from sales of perpetual licenses relating to our workflow automation and enterprise content management applications to new customers and additional licenses for such applications to existing customers. We generally recognize the license fee portion of the arrangement in advance. Perpetual licenses of our workflow automation and enterprise content management applications are sold through third-party resellers and, as such, the timing of sales of perpetual licenses is difficult to predict with the timing of recognition of associated revenue unpredictable. A material increase or decrease in the sale of perpetual licenses from period to period could produce substantial variation in the revenue we recognize. Accordingly, comparing our perpetual license revenue on a period to period basis may not be a meaningful indicator of a trend or future results.

 

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Our quarterly operating results may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of research analysts or investors, which could cause our stock price to decline and you may lose part or all of your investment.

Our quarterly operating results may fluctuate as a result of a variety of factors, many of which are outside of our control. Accordingly, the results of any one quarter may not fully reflect the underlying performance of our business and should not be relied upon as an indication of future performance. If our quarterly operating results or outlook fall below the expectations of research analysts or investors, the price of our common stock could decline substantially. Fluctuations in our quarterly operating results or outlook may be due to a number of factors, including, but not limited to:

 

    the extent to which our existing customers purchase additional seats or volume for our applications and the timing and terms of those purchases;

 

    the extent to which our existing customers renew their customer agreements for our applications and the timing and terms of those renewals;

 

    the extent to which we cross-sell additional applications to our existing customers and the timing and terms of such cross-selling;

 

    the addition or loss of customers, including through acquisitions or consolidations;

 

    the extent to which new customers are attracted to our applications to satisfy their enterprise work management needs;

 

    the rate of adoption and market acceptance of enterprise work management applications;

 

    the mix of our revenue, particularly between product and professional services revenue, for which the timing of revenue recognition is substantially different;

 

    changes in the gross profit we realize on our applications and professional services due to our differing revenue recognition policies applicable to subscription and product and professional services revenue and other variables;

 

    the extent to which we enter into multi-year contracts, in which the support fees are typically paid in advance;

 

    the number and size of new customers and the number and size of renewals in a particular period;

 

    changes in our pricing policies or those of our competitors;

 

    the mix of applications sold during a period;

 

    the timing and expenses related to the acquisition of technologies, products or businesses and potential future charges for impairment of goodwill from such acquisitions;

 

    the amount and timing of operating expenses, including those related to the maintenance and expansion of our business, operations and infrastructure;

 

    the amount and timing of expenses related to the development of new products and technologies, including enhancements to our applications;

 

    the amount and timing of commissions earned by our sales personnel;

 

    the timing and success of new applications introduced by us or new offerings offered by our competitors;

 

    the length of our sales cycles;

 

    changes in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic collaborators;

 

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    our ability to manage our existing business and future growth, including increases in the number of customers using our applications;

 

    the seasonality of our business or cyclical fluctuations in our industry;

 

    the timing and expenses related to any international expansion efforts we may undertake and the success of such efforts;

 

    various factors related to disruptions in access and delivery of our cloud-based applications, errors or defects in our applications, privacy and data security and exchange rate fluctuations, each of which is described elsewhere in these risk factors; and

 

    general economic, industry and market conditions.

We may need financing in the future, and any additional financing may result in restrictions on our operations or substantial dilution to our stockholders. We may seek to renegotiate or refinance our loan and security agreements, and we may be unable to do so on acceptable terms or at all.

We have funded our operations since inception primarily through equity financings, cash from operations and cash available under our loan and security agreements. We may need to raise funds in the future, for example, to expand our business, acquire complementary businesses, develop new technologies, respond to competitive pressures or react to unanticipated situations. We may try to raise additional funds through public or private financings, strategic relationships or other arrangements. Our ability to obtain debt or equity funding will depend on a number of factors, including market conditions, our operating performance and investor interest. Additional funding may not be available to us on acceptable terms or at all. If adequate funds are not available, we may be required to reduce expenditures, including curtailing our growth strategies, reducing our product-development efforts or foregoing acquisitions. If we succeed in raising additional funds through the issuance of equity or convertible securities, it could result in substantial dilution to existing stockholders. If we raise additional funds through the issuance of debt securities or preferred stock, these new securities would have rights, preferences and privileges senior to those of the holders of our common stock. In addition, any debt financing obtained by us in the future or issuance of preferred stock could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Additionally, we may need to renegotiate the terms of our loan and security agreements, and our lender may be unwilling to do so, or may agree to such changes subject to additional restrictive covenants on our operations and ability to raise capital.

Our loan agreements contain operating and financial covenants that may restrict our business and financing activities.

On March 5, 2012, we entered into a loan and security agreement with Comerica Bank, as amended, the U.S. Loan Agreement. The U.S. Loan Agreement provides to us and certain of our 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. On February 10, 2012, Tenrox Inc., a Canadian corporation and wholly-owned 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 June 30, 2014, we had $3.6 million outstanding as revolving loans and $17.9 million outstanding as term loans under the U.S. Loan Agreement. As of June 30, 2014, there was a zero balance on the revolving loans and $1.0 million outstanding as term loans under the Canadian Loan Agreement.

Our obligations and the obligations of the co-borrowers and any guarantors under the U.S. Loan Agreement are secured by a security interest in substantially all of our assets and assets of the co-borrowers’ and of any guarantors, including intellectual property. The obligations of Tenrox Inc., our obligations and the obligations of any other guarantors under the Canadian Loan Agreement are secured by a security interest in substantially all of

 

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Tenrox Inc.’s assets, our assets and assets of any other guarantors, including intellectual property. The loan and security agreements and related guaranties and security agreements limit, among other things, our ability to:

 

    sell, lease, license or otherwise dispose of assets;

 

    undergo a change in control;

 

    consolidate or merge with or into other entities;

 

    make or own loans, investments and acquisitions;

 

    create, incur or assume guarantees in respect of obligations of other persons;

 

    create, incur or assume liens and other encumbrances; or

 

    pay dividends or make distributions on, or purchase or redeem, our capital stock.

Furthermore, the loan and security agreements require us and our subsidiaries to comply with certain financial covenants. The operating and other restrictions and covenants in the loan and security agreements and related guaranties and security agreements, and in any future financing arrangements that we may enter into, may restrict our ability to finance our operations, engage in certain business activities, or expand or fully pursue our business strategies, or otherwise limit our discretion to manage our business. Our ability to comply with these restrictions and covenants may be affected by events beyond our control, and we may not be able to meet those restrictions and covenants. A breach of any of the restrictions and covenants could result in a default under the loan and security agreements, related guarantees and security agreements or any future financing arrangements, which could cause any outstanding indebtedness under the loan and security agreements or under any future financing arrangements to become immediately due and payable, and result in the termination of commitments to extend further credit.

If we are unable to increase market awareness of our company and our applications, our revenue may not continue to grow, or may decline.

Market awareness of our company and our applications is essential to our ability to generate new leads for expanding our business and our continued growth. If we fail to sufficiently invest in our marketing programs or they are unsuccessful in creating market awareness of our company and our applications, our revenue may grow more slowly than expected or may decline and our financial performance may be adversely affected.

The markets in which we participate are intensely competitive, and if we do not compete effectively, our operating results could be adversely affected.

The overall market for enterprise work management software is rapidly evolving and subject to changing technology, shifting customer needs and frequent introductions of new applications. The intensity and nature of our competition varies significantly across our family of enterprise work management software applications. Many of our competitors and potential competitors are larger and have greater brand name recognition, longer operating histories, larger marketing budgets and significantly greater resources than we do. Some of our smaller competitors may offer applications on a stand-alone basis at a lower price than us due to lower overhead or other factors, while some of our larger competitors may offer applications at a lower price in an attempt to cross-sell additional products in the future or retain a customer using a different application.

We believe there are a limited number of direct competitors that provide a comprehensive enterprise work management software offering. However, we face competition both from point solution providers, including legacy on-premise enterprise systems, and other cloud-based work management software vendors that may address one or more of the functional elements of our applications, but are not designed to address a broad range of enterprise work management needs. In addition, we face competition from manual processes and traditional tools, such as paper-based techniques, spreadsheets and email.

 

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Our primary competitors for each of our enterprise work management applications currently include:

 

    Program and Portfolio Management: Clarity (a division of Computer Associates), Changepoint, Instantis and Planview;

 

    Project Management and Collaboration: Microsoft Project, AtTask and Clarizen;

 

    Workflow Automation and Enterprise Content Management: Hyland Software, Laserfiche, OpenText, Perceptive Software (a division of Lexmark), Adobe and Sitecore;

 

    Professional Services Automation: Deltek, Infor, OpenAir (a product of NetSuite), and Replicon; and

 

    Financial Management: Apptio, Hewlett Packard’s Information Technology Financial Management Solution and VMware’s Information Technology Business Management Suite.

If our competitors’ products, services or technologies become more accepted than our enterprise work management applications, if they are successful in bringing their products or services to market earlier than ours, or if their products or services are more technologically capable than ours, our revenues could be adversely affected.

Mergers of, or other strategic transactions by, our competitors could weaken our competitive position or reduce our revenue.

If one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscape could adversely affect our ability to compete effectively. In order to take advantage of customer demand for cloud-based software applications, vendors of legacy systems are expanding their cloud-based enterprise workplace management applications through acquisitions and organic development. A potential result of such expansion is that certain of our current or potential competitors may be acquired by third parties with greater available resources and the ability to further invest in product improvements and initiate or withstand substantial price competition. Our competitors also may establish or strengthen cooperative relationships with our current or future value-added resellers, third-party consulting firms or other parties with whom we have relationships, thereby limiting our ability to promote our applications. Disruptions in our business caused by these events could reduce our revenue.

Our growth and long-term success depends in part on our ability to expand our international sales and operations.

A core component of our growth strategy is international expansion. In fiscal 2013 and the first six months of 2014, we generated approximately 24% and 19%, respectively, of our revenue from sales outside the United States. We currently maintain international offices and have sales, marketing, support or research and development personnel in Canada and the United Kingdom. As we continue to expand our international footprint, we will be increasingly susceptible to the risks associated with international operations. We have a limited operating history outside of the United States and Canada and our ability to manage our international operations successfully requires significant resources and management attention and is subject to particular challenges of supporting a rapidly growing business in an environment of diverse cultures, languages, customs, legal systems, alternative dispute systems and economic, political and regulatory systems. In addition, we expect to incur significant costs associated with expanding our international operations, including hiring personnel internationally. The risks and challenges associated with doing business internationally and our international expansion include:

 

    uncertain political and economic climates;

 

    lack of familiarity and burdens of complying with foreign laws, accounting and legal standards, regulatory requirements, tariffs and other barriers;

 

    unexpected changes in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade restrictions;

 

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    lack of experience in connection with the localization of our applications, including translation into foreign languages and adaptation for local practices, and associated expenses and regulatory requirements;

 

    difficulties in adapting to differing technology standards;

 

    longer sales cycles and accounts receivable payment cycles and difficulties in collecting accounts receivable;

 

    difficulties in managing and staffing international operations, including differing legal and cultural expectations for employee relationships and increased travel, infrastructure and legal compliance costs associated with international operations;

 

    fluctuations in exchange rates that may increase the volatility of our foreign-based revenue and expenses;

 

    potentially adverse tax consequences, including the complexities of foreign value-added tax, goods and services tax and other transactional taxes;

 

    reduced or varied protection for intellectual property rights in some countries;

 

    difficulties in managing and adapting to differing cultures and customs;

 

    data privacy laws which require that customer data be stored and processed in a designated territory subject to laws different than the United States;

 

    new and different sources of competition as well as laws and business practices favoring local competitors and local employees;

 

    compliance with anti-bribery laws, including compliance with the Foreign Corrupt Practices Act;

 

    increased financial accounting and reporting burdens and complexities; and

 

    restrictions on the repatriation of earnings.

Further, our international expansion efforts may be hindered by lower levels of cloud adoption and increased price sensitivity for our applications or other cloud-based offerings in international markets. As a result of these and other factors, international expansion may be more difficult, take longer and not generate the results we anticipate, which could negatively impact our growth and business.

Fluctuations in the exchange rate of foreign currencies could result in losses on currency transactions.

Our customers are generally invoiced in the currency of the country in which they are located. In addition, we incur a portion of our operating expenses in foreign currencies, including Canadian dollars, British pounds and Euros, and in the future, as we expand into other foreign countries, we expect to incur operating expenses in other foreign currencies. In addition, our customers are generally invoiced in the currency of the country in which they are located. We are exposed to foreign exchange rate fluctuations as the financial results of our international operations are translated from the local functional currency into U.S. dollars upon consolidation. A decline in the U.S. dollar relative to foreign functional currencies would increase our non-U.S. revenue and improve our operating results. Conversely, if the U.S. dollar strengthens relative to foreign functional currencies, our revenue and operating results would be adversely affected. We have not previously engaged in foreign currency hedging. If we decide to hedge our foreign currency exchange rate exposure, we may not be able to hedge effectively due to lack of experience, unreasonable costs or illiquid markets.

Our sales cycles can be lengthy and variable, which may cause changes in our operating results.

Our sales cycle can vary substantially from customer to customer. A number of factors influence the length and variability of our sales cycles, including, for example:

 

    the need to educate potential customers about the uses and benefits of our applications;

 

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    the duration of the commitment customers make in their agreements with us, which are typically one to three years;

 

    the discretionary nature of potential customers’ purchasing and budget cycles and decisions;

 

    the competitive nature of potential customers’ evaluation and purchasing processes;

 

    the functionality demands of potential customers;

 

    fluctuations in the enterprise work management needs of potential customers;

 

    the announcement or planned introduction of new products by us or our competitors; and

 

    the purchasing approval processes of potential customers.

Our sales cycles can make it difficult to predict the quarter in which revenue from a new customer may first be recognized. We may incur significant sales and marketing expenses and invest significant time and effort in anticipation of a sale that may never occur or only occur in a smaller amount or at a later date than anticipated. Delays inherent to our sales cycles could cause significant variability in our revenue and operating results for any particular period.

We have a limited history with our pricing models and, as a result, we may be forced to change the prices we charge for our applications or the pricing models upon which they are based.

We have limited experience with respect to determining the optimal prices and pricing models for certain of our applications and certain geographic markets. As the markets for our applications mature, or as competitors introduce products or services that compete with ours, including bundling competing offerings with additional products or services, we may be unable to attract new customers at the same price or based on the same pricing models as we have used historically. As a result, in the future we may be required to reduce our prices, which could adversely affect our financial performance. In addition, we may offer volume price discounts based on the number of seats purchased by a customer or the number of our applications purchased by a customer, which would effectively reduce the prices we charge for our applications. Also, we may be unable to renew existing customer agreements or enter into new customer agreements at the same prices or upon the same terms that we have historically, which could have a material adverse effect on our financial position.

Any disruption of service at the data centers that house our equipment and deliver our applications could harm our business.

While we procure and operate all infrastructure equipment delivering our applications, third parties operate the data centers that we use. While we control and have access to our servers and all of the other components of our network that are located in our external data centers, we do not control the operation of these data centers and we are therefore vulnerable to disruptions, power outages or other issues the data centers experience. We have experienced and expect that we will in the future experience interruptions, delays and outages in service and availability from time to time.

The owners of our data centers have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, or if one of our data center operators is acquired, we may be required to transfer our servers and other infrastructure to new data centers, and we may incur significant costs and possible service interruption in connection with doing so.

Our data centers are vulnerable to damage or interruption from human error, malicious acts, earthquakes, hurricanes, tornados, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events. For example, certain of our data centers are located in an area known for seismic activity, increasing our susceptibility to the risk that an earthquake could significantly harm the operations of this facility. The occurrence of a natural disaster or an act of terrorism, vandalism or other misconduct, a decision to close the data centers without adequate notice or other unanticipated problems could result in lengthy interruptions in availability of our applications.

 

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Any changes in third-party service levels at our data centers or any errors, defects, disruptions or other performance problems with our applications could harm our reputation and may damage our customers’ businesses. Interruptions in availability of our applications might reduce our revenue, cause us to issue credits to customers, subject us to potential liability, and cause customers to terminate their subscriptions or decide not to renew their subscriptions with us.

If we fail to adequately manage our data center infrastructure capacity, our existing customers may experience service outages and our new customers may experience delays in the deployment of our applications.

We have experienced significant growth in the number of seats and volume of data that our hosting infrastructure supports. We seek to maintain sufficient excess capacity in our operations infrastructure to meet the needs of all of our customers. We also seek to maintain excess capacity to facilitate the rapid provision of new customer deployments and the expansion of existing customer deployments. However, obtaining new data center infrastructure requires lead time. If we do not accurately predict our infrastructure capacity requirements with sufficient lead time, our customers could experience service impairment that may subject us to financial penalties and liabilities and cause us to lose customers. If our data center infrastructure capacity fails to keep pace with increased subscriptions, customers may experience delays or reductions in the quality of our service as we seek to obtain additional capacity, which could harm our reputation and harm our business.

Security breaches may harm our business.

Our applications involve the storage and transmission of our customers’ proprietary and confidential information, including personal or identifying information regarding their employees and customers. Any security breaches, unauthorized access, unauthorized usage, virus or similar breach or disruption could result in loss of confidential information, damage to our reputation, early termination of our contracts, litigation, regulatory investigations, indemnity obligations or other liabilities. If our security measures or those of our third-party data centers are breached as a result of third-party action, employee error, malfeasance or otherwise and, as a result, someone obtains unauthorized access to customer data, our reputation will be damaged, our business may suffer and we could incur significant liability. Because the techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any or all of these issues could negatively affect our ability to attract new customers, cause existing customers to elect not to renew or upgrade their subscriptions, result in reputational damage or subject us to third-party lawsuits, regulatory fines or other action or liability, which could adversely affect our operating results.

Our success depends on our ability to adapt to technological change and continue to innovate.

The overall market for enterprise work management software is rapidly evolving and subject to changing technology, shifting customer needs and frequent introductions of new applications. Our ability to attract new customers and increase revenue from existing customers will depend in large part on our ability to develop or acquire new applications and enhance and improve existing applications. To achieve market acceptance for our applications, we must effectively anticipate and offer applications that meet changing customer demands in a timely manner. Customers may require features and capabilities that our current applications do not have. We may experience difficulties that could delay or prevent our development, acquisition or implementation of new applications and enhancements.

If we are unable to successfully develop or acquire new enterprise work management capabilities and functionality, enhance our existing applications to anticipate and meet customer preferences, sell our applications into new markets or adapt to changing industry standards in enterprise work management, our revenue and results of operations would be adversely affected.

 

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Adverse economic conditions may reduce our customers’ ability to spend money on information technology or enterprise work management software, or our customers may otherwise choose to reduce their spending on information technology or enterprise work management software, which may adversely impact our business.

Our business depends on the overall demand for information technology and enterprise work management software spend and on the economic health of our current and prospective customers. If worldwide economic conditions become unstable, our existing customers and prospective customers may re-evaluate their decision to purchase our applications. Weak global economic conditions or a reduction in information technology or enterprise work management software spending by our customers, could harm our business in a number of ways, including longer sales cycles and lower prices for our applications.

We rely on third-party software that is required for the development and deployment of our applications, which may be difficult to obtain or which could cause errors or failures of our applications.

We rely on software licensed from or hosted by third parties to offer our applications. In addition, we may need to obtain licenses from third parties to use intellectual property associated with the development of our applications, which might not be available to us on acceptable terms, or at all. Any loss of the right to use any software required for the development, maintenance and delivery of our applications could result in delays in the provision of our applications until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. Any errors or defects in third-party software could result in errors or a failure of our applications, which could harm our business.

If our applications contain serious errors or defects we may lose revenue and market acceptance and we may incur costs to defend or settle product liability claims.

Complex software applications such as ours often contain errors or defects, particularly when first introduced or when new versions or enhancements are released. Our current and future applications may contain serious defects.

Since our customers use our applications for critical business purposes, defects or other performance problems could negatively impact our customers and could result in:

 

    loss or delayed market acceptance and sales;

 

    breach of warranty or product liability claims;

 

    sales credits or refunds for prepaid amounts related to unused subscription services;

 

    cancelled contracts and loss of customers;

 

    diversion of development and customer service resources; and

 

    injury to our reputation.

The costs incurred in correcting any material errors or defects might be substantial and could adversely affect our operating results. Although our customer agreements typically contain provisions designed to limit our exposure to certain of the claims above, existing or future laws or unfavorable judicial decisions could negate these limitations. Even if not successful, a product liability claim brought against us would likely be a distraction to management, time-consuming and costly to resolve, and could seriously damage our reputation in the marketplace, making it harder for us to sell our applications. Additionally, our errors and omissions insurance may be inadequate or may not be available in the future on acceptable terms, or at all, and our policy may not cover all claims made against us and defending a suit, regardless of its merit, could be costly and divert management’s attention.

 

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If we fail to integrate our applications with other software applications and competitive or adjacent offerings that are developed by others, or fail to make our applications available on mobile and other handheld devices, our applications may become less marketable, less competitive or obsolete and our operating results could be harmed.

Our applications integrate with a variety of other software applications, and also with competing and adjacent third-party offerings, and we need to continuously modify and enhance our platform to adapt to changes in cloud-enabled hardware, software, networking, browser and database technologies. Any failure of our applications to integrate effectively with other software applications and product offerings could reduce the demand for our applications or result in customer dissatisfaction and harm to our business. If we are unable to respond to changes in the applications and tools with which our applications integrate in a cost-effective manner, our applications may become less marketable, less competitive or obsolete. Competitors may also impede our attempts to create integration between our applications and competitive offerings, which may decrease demand for our applications. In addition, an increasing number of individuals within organizations are utilizing devices other than personal computers, such as mobile phones, tablets and other handheld devices, to access the Internet and corporate resources and to conduct business. If we cannot effectively make our applications available on these devices, we may experience difficulty attracting and retaining customers.

If we fail to develop and maintain relationships with third parties, our business may be harmed.

Our business depends in part on the development and maintenance of technology integration, joint sales and reseller relationships. Maintaining relationships with third parties requires significant time and resources, as does integrating third-party content and technology. Further, third parties may not perform as expected under any relationships that we may enter into, and we may have disagreements or disputes with third parties that could negatively affect our brands and reputation. If we are unsuccessful in establishing or maintaining relationships with third parties, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating results could suffer.

Our use of open source software could negatively affect our ability to sell our applications and subject us to possible litigation.

A portion of our applications incorporate open source software, and we expect to continue to incorporate open source software in the future. Few of the licenses applicable to open source software have been interpreted by courts, and their application to the open source software integrated into our proprietary software may be uncertain. Moreover, we cannot provide any assurance that we have not incorporated additional open source software in our applications in a manner that is inconsistent with the terms of the license or our current policies and procedures. If we fail to comply with these licenses, we may be subject to certain requirements, including requirements that we offer our applications that incorporate the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software and that we license such modifications or derivative works under the terms of applicable open source licenses. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from the sale of our applications that contained the open source software and required to comply with the foregoing conditions, which could disrupt the distribution and sale of some of our applications. In addition, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. As a result, we could be subject to suits by parties claiming infringement due to the reliance by our applications on certain open source software. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional research and development resources to change our applications.

 

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Certain of our operating results and financial metrics are difficult to predict as a result of seasonality.

We have historically experienced seasonality in terms of when we enter into customer agreements. We sign a significantly higher percentage of agreements with new customers, and renew agreements with existing customers, in the fourth quarter of each calendar year as our customers tend to follow budgeting cycles at the end of the calendar year. Our cash flow from operations has historically been higher in the first quarter of each calendar year than in other quarters. This seasonality is reflected to a much lesser extent, and sometimes is not immediately apparent, in our revenue, due to the fact that we defer revenue recognition. In addition, seasonality may be difficult to observe in our financial results during periods in which we acquire businesses as such results typically are most significantly impacted by such acquisitions. We expect this seasonality to continue, or possibly increase in the future, which may cause fluctuations in our operating results and financial metrics. If our quarterly operating results or outlook fall below the expectations of research analysts or investors, the price of our common stock could decline substantially.

We could incur substantial costs as a result of any claim of infringement of another party’s intellectual property rights.

In recent years, there has been significant litigation involving patents and other intellectual property rights in our industry. Companies providing software are increasingly bringing and becoming subject to suits alleging infringement of proprietary rights, particularly patent rights, and to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property infringement claims. We do not have a significant patent portfolio, which could prevent us from deterring patent infringement claims through our own patent portfolio, and our competitors and others may now and in the future have significantly larger and more mature patent portfolios than we have. The risk of patent litigation has been amplified by the increase in the number of a type of patent holder, which we refer to as a non-practicing entity, whose sole business is to assert such claims and against whom our own intellectual property portfolio may provide little deterrent value. We could incur substantial costs in prosecuting or defending any intellectual property litigation. If we sue to enforce our rights or are sued by a third-party that claims that our applications infringe its rights, the litigation could be expensive and could divert our management resources.

In addition, in most instances, we have agreed to indemnify our customers against claims that our applications infringe the intellectual property rights of third parties. Our business could be adversely affected by any significant disputes between us and our customers as to the applicability or scope of our indemnification obligations to them. Any intellectual property litigation to which we might become a party, or for which we are required to provide indemnification, may require us to do one or more of the following:

 

    cease selling or using applications that incorporate the intellectual property that we allegedly infringe;

 

    make substantial payments for legal fees, settlement payments or other costs or damages;

 

    obtain a license, which may not be available on reasonable terms or at all, to sell or use the relevant technology; or

 

    redesign the allegedly infringing applications to avoid infringement, which could be costly, time-consuming or impossible.

If we are required to make substantial payments or undertake any of the other actions noted above as a result of any intellectual property infringement claims against us or any obligation to indemnify our customers for such claims, such payments or actions could harm our business.

We could incur substantial costs in protecting our intellectual property from infringement, and any failure to protect our intellectual property could impair our business.

Our success and ability to compete depend in part upon our intellectual property. We seek to protect the source code for our proprietary software and other proprietary technology and information under a combination

 

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of copyright, trade secrets and patent law, and we seek to protect our brands through trademark law. Our policy is to enter into confidentiality agreements, or agreements with confidentiality provisions, with our employees, consultants, vendors and customers and to control access to our software, documentation and other proprietary information. Despite these precautions, it may be possible for unauthorized parties to copy our software or other proprietary technology or information, or to develop similar software independently.

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our applications or to obtain and use information that we regard as proprietary. Policing unauthorized use of our applications is difficult, and we are unable to determine the extent to which piracy of our software exists or will occur in the future. Litigation may be necessary in the future to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. Such litigation could be costly, time-consuming and distracting to management, result in a diversion of resources or the narrowing or invalidation of portions of our intellectual property and have a material adverse effect on our business, operating results and financial condition. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights or alleging that we infringe the counterclaimant’s own intellectual property. These steps may be inadequate to protect our intellectual property. Third parties may challenge the validity or ownership of our intellectual property, and these challenges could cause us to lose our rights, in whole or in part, to such intellectual property or narrow its scope such that it no longer provides meaningful protection. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our applications may be unenforceable under the laws of certain jurisdictions and foreign countries. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. To the extent we expand our international activities, our exposure to unauthorized copying, transfer and use of our applications and proprietary technology or information may increase.

There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology. If we fail to meaningfully protect our intellectual property, our business, brands, operating results and financial condition could be materially harmed.

Unanticipated changes in our effective tax rate or challenges by tax authorities could harm our future results.

We are subject to income taxes in the United States and various non-U.S. jurisdictions. Our effective tax rate could be adversely affected by changes in the allocation of our pre-tax earnings and losses among countries with differing statutory tax rates, in certain non-deductible expenses as a result of acquisitions, in the valuation of our deferred tax assets and liabilities, or in federal, state, local or non-U.S. tax laws and accounting principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents. In particular, the United States is currently considering various changes to the U.S. taxation of international business activities, which, if enacted, could impact the U.S. taxation of our non-U.S. earnings as well as our cash maintained outside the United States. Increases in our effective tax rate would adversely affect our operating results.

In addition, we may be subject to income tax audits by various tax jurisdictions throughout the world, many of which have not established clear guidance on the tax treatment of cloud-based companies. The application of tax laws in such jurisdictions may be subject to diverging and sometimes conflicting interpretations by tax authorities in these jurisdictions. Although we believe our income tax liabilities are reasonably estimated and accounted for in accordance with applicable laws and principles, an adverse resolution of one or more uncertain tax positions in any period could have a material impact on the results of operations for that period.

 

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Taxing authorities may successfully assert that we should have collected or in the future should collect additional sales and use taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations.

We have not historically filed sales and use tax returns or collected sales and use taxes in all jurisdictions in which we have sales, based on our belief that such taxes are not applicable. Taxing authorities may seek to impose such taxes on us, including for past sales, which could result in penalties and interest. Any such tax assessments may adversely affect the results of our operations.

Taxing authorities could reallocate our taxable income among our subsidiaries, which could increase our consolidated tax liability.

We conduct integrated operations internationally through subsidiaries in various tax jurisdictions pursuant to transfer pricing arrangements between our subsidiaries and between our subsidiaries and us. If two or more affiliated companies are located in different countries, the tax laws or regulations of each country generally require that transfer prices be the same as those between unrelated companies dealing at arms’ length and that contemporaneous documentation is maintained to support the transfer prices. While we believe that we operate in compliance with applicable transfer pricing laws and intend to continue to do so, our transfer pricing procedures are not binding on applicable tax authorities. If tax authorities in any of these countries were to successfully challenge our transfer prices as not reflecting arms’ length transactions, they could require us to adjust our transfer prices and thereby reallocate our income to reflect these revised transfer prices, which could result in a higher tax liability to us. Such reallocations may subject us to interest and penalties that would increase our consolidated tax liability and could adversely affect our financial condition, results of operations and cash flows.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

As of December 31, 2013, we had federal net operating loss carryforwards of approximately $45.0 million and research and development credit carryforwards of approximately $0.8 million, which begin expiring in 2018. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules apply under state tax laws. Based on analysis of acquired net operating losses, utilization of our net operating losses will be subject to annual limitations. The annual limitation will result in the expiration of $16.2 million of net operating losses and $0.8 million of credit carryforwards before utilization. In the event that it is determined that we have in the past experienced additional ownership changes, or if we experience one or more ownership changes as a result of this offering or future transactions in our stock, then we may be further limited in our ability to use our net operating loss carryforwards and other tax assets to reduce taxes owed on the net taxable income that we earn. Any such limitations on the ability to use our net operating loss carryforwards and other tax assets could adversely impact our business, financial condition and operating results.

Changes in laws or regulations related to the Internet may diminish the demand for our applications and any failure of the Internet infrastructure could have a negative impact on our business.

We deliver our cloud-based applications through the Internet. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting data privacy and the use of the Internet. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet or on commerce conducted via the Internet. Increased enforcement of existing laws and regulations, as well as any laws, regulations or changes that may be adopted or implemented in the future, could limit the growth of the use of cloud-based applications or communications generally, result in a decline in the use of the Internet and the viability of cloud-based applications such as ours and reduce the demand for our applications.

 

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The success of our enterprise work management software applications depends on the development and maintenance of the Internet infrastructure. This includes maintenance of a reliable network backbone with the necessary speed, data capacity and security, as well as the timely development of complementary products for providing reliable Internet access and services. The Internet has experienced, and is likely to continue to experience, significant growth in the amount of traffic and may be unable to support such demands. In addition, problems caused by viruses, worms, malware and similar programs may harm the performance of the Internet. Any outages and delays in the Internet could reduce the level of usage of our services, which could materially adversely affect our business, financial condition, results of operations and prospects.

Privacy concerns and laws or other domestic or foreign regulations may reduce the effectiveness of our applications and adversely affect our business.

Our customers can use our applications to collect, use and store personal or identifying information regarding their customers and employees. Federal, state and foreign government bodies and agencies have adopted, are considering adopting or may adopt laws and regulations regarding the collection, use, storage and disclosure of personal information obtained from individuals. The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to the businesses of our customers may limit the use and adoption of our applications and reduce overall demand, or lead to significant fines, penalties or liabilities for any noncompliance with such privacy laws. For example, the European Union and many countries in Europe have stringent privacy laws and regulations that may impact our ability to profitably operate in certain European countries. Furthermore, privacy concerns may cause our customers to resist providing the personal data necessary to allow them to use our applications effectively. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our applications in certain industries. All of these domestic and international legislative and regulatory initiatives may adversely affect our customers’ ability to process, handle, store, use and transmit demographic and personal information from their customers and employees, which could reduce demand for our applications.

In addition to government activity, privacy advocacy groups and the technology and other industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us. If the processing of personal information were to be curtailed in this manner, our applications would be less effective, which may reduce demand for our applications and adversely affect our business.

We are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing requirements and subject us to liability if we are not in compliance with applicable laws.

Our applications are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. Exports of our applications must be made in compliance with these laws and regulations. If we fail to comply with these laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including: the possible loss of export or import privileges; fines, which may be imposed on us and responsible employees or managers; and, in extreme cases, the incarceration of responsible employees or managers. Obtaining the necessary authorizations, including any required license, for a particular sale may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. In addition, changes in our applications or changes in applicable export or import regulations may create delays in the introduction and sale of our applications in international markets, prevent our customers with international operations from deploying our applications or, in some cases, prevent the export or import of our applications to certain countries, governments or persons altogether. Any change in export or import regulations, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could also result in decreased use of our applications, or in our decreased ability to export or sell our applications to existing or potential customers with international operations. Any decreased use of our applications or limitation on our ability to export or sell our applications would likely adversely affect our business.

 

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Furthermore, we incorporate encryption technology into certain of our applications. Various countries regulate the import of certain encryption technology, including through import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our applications or could limit our customers’ ability to implement our applications in those countries. Encrypted applications and the underlying technology may also be subject to export control restrictions. Governmental regulation of encryption technology and regulation of imports or exports of encryption products, or our failure to obtain required import or export approval for our applications, when applicable, could harm our international sales and adversely affect our revenue. Compliance with applicable regulatory requirements regarding the export of our applications, including with respect to new releases of our applications, may create delays in the introduction of our applications in international markets, prevent our customers with international operations from deploying our applications throughout their globally-distributed systems or, in some cases, prevent the export of our applications to some countries altogether.

Moreover, U.S. export control laws and economic sanctions programs prohibit the shipment of certain products and services to countries, governments and persons that are subject to U.S. economic embargoes and trade sanctions. Even though we take precautions to prevent our applications from being shipped or provided to U.S. sanctions targets, our applications and services could be shipped to those targets or provided by third parties despite such precautions. Any such shipment could have negative consequences, including government investigations, penalties and reputational harm.

If we are unable to implement and maintain effective internal controls over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.

As a public company, we will be required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act, requires that we evaluate and determine the effectiveness of our internal controls over financial reporting. Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting until the later of our second annual report or the first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company” as defined in the JOBS Act. If we have a material weakness in our internal controls over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We are in the process of designing and implementing the internal controls over financial reporting required to comply with this obligation, which process will be time consuming, costly and complicated. We may need additional finance and accounting personnel with certain skill sets to assist us with the reporting requirements we will encounter as a public company and to support our anticipated growth. In addition, implementing internal controls may distract our officers and employees, entail substantial costs to modify our existing processes and take significant time to complete.

In the future, if we identify material weaknesses in our internal controls over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, if we are unable to assert that our internal controls over financial reporting are effective, or if our independent registered public accounting firm is not required to express an opinion due to the provisions of the JOBS Act or is unable to express an opinion as to the effectiveness of our internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the Securities and Exchange Commission, or the SEC, or other regulatory authorities, which could require additional financial and management resources.

 

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We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could harm our operating results.

As a public company, we will incur significant legal, accounting, investor relations and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with current corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act, as well as rules implemented by the SEC and the exchange on which we list our common stock. We expect these rules and regulations to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We are unable to currently estimate these costs with any degree of certainty. We also expect that, as a public company, it will be more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantially higher costs to obtain coverage or to accept reduced policy limits and coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.

We are an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act and, for as long as we continue to be an emerging growth company, we may choose to take advantage of certain exemptions from various reporting requirements applicable to other public companies including, but not limited to: not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act; reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and exemptions from the requirements to hold a nonbinding advisory vote on executive compensation and to obtain stockholder approval of any golden parachute payments not previously approved. We may take advantage of these provisions for up to five years or such earlier time that we are no longer an “emerging growth company.” We will remain an “emerging growth company” for up to five years, although, we would cease to be an “emerging growth company” upon the earliest of the first fiscal year following the fifth anniversary of the consummation of this offering; the first fiscal year after our annual gross revenue is $1 billion or more; the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities; or the date on which we are deemed to be a “large accelerated filer” as defined in the Securities Exchange Act of 1934, or the Exchange Act. To the extent we take advantage of any of these reduced reporting burdens in this prospectus or in future filings, the information that we provide our security holders may be different than you might get from other public companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We are choosing to “opt out” of such extended transition period, however, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

Risks Related to This Offering and Ownership of Our Common Stock

An active trading market for our common stock may not develop, and you may not be able to resell your shares of our common stock at or above our initial public offering price.

Before this offering, there was no public trading market for our common stock. If a market for our common stock does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at an

 

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attractive price or at all. The initial public offering price of our common stock will be determined through negotiations between us and the underwriters. This initial public offering price may not be indicative of the market price of our common stock after the offering. In the absence of an active trading market for our common stock, investors may not be able to sell their common stock at or above the initial public offering price or at the time that they would like to sell. We cannot predict the prices at which our common stock will trade. It is possible that in one or more future periods our results of operations may be below the expectations of public market analysts and investors and, as a result of these and other factors, the price of our common stock may fall.

The market price of our common stock may be volatile, which could result in substantial losses for investors purchasing shares in this offering.

The market price of our common stock could be subject to significant fluctuations after this offering, and it may decline below the initial public offering price. Some of the factors that may cause the market price of our common stock to fluctuate include:

 

    actual or anticipated changes in the estimates of our operating results that we provide to the public, our failure to meet these projections or changes in recommendations by securities analysts that elect to follow our common stock;

 

    price and volume fluctuations in the overall equity markets from time to time;

 

    significant volatility in the market price and trading volume of comparable companies;

 

    changes in the market perception of enterprise work management software generally or in the effectiveness of our applications in particular;

 

    disruptions in our services due to computer hardware, software or network problems;

 

    announcements of technological innovations, new products, strategic alliances or significant agreements by us or by our competitors;

 

    announcements of new customer agreements or upgrades and customer downgrades or cancellations or delays in customer purchases;

 

    litigation involving us;

 

    our ability to successfully consummate and integrate acquisitions;

 

    investors’ general perception of us;

 

    recruitment or departure of key personnel;

 

    the expiration of market standoff or contractual lock-up agreements;

 

    sales of our common stock by us or our stockholders;

 

    fluctuations in the trading volume of our shares or the size of our public float; and

 

    general economic, legal, industry and market conditions and trends unrelated to our performance.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Because of the potential volatility of our stock price, we may become the target of securities litigation in the future. If we were to become involved in securities litigation, it could result in substantial costs, divert management’s attention and resources from our business and adversely affect our business.

If securities or industry analysts do not publish, or cease publishing, research or reports about us, our business or our market, if they publish negative evaluations of our stock, or if we fail to meet the expectations of analysts, the price of our stock and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. We do not currently have,

 

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and may never obtain, research coverage by financial analysts. If no or few analysts commence coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts covering our business downgrade their evaluation of our stock, the price of our stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could cause our stock price to decline. Furthermore, if our operating results fail to meet analysts’ expectations our stock price would likely decline.

Sales of a substantial number of shares of our common stock in the public market by our existing stockholders following this offering could cause our stock price to fall.

Sales of a substantial number of shares of our common stock in the public market could occur at any time after the expiration of the lock-up agreements described in the section titled “Underwriting.” These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After the closing of this offering, we will have 14,335,673 shares of common stock outstanding based on 10,489,519 shares of common stock outstanding at June 30, 2014 (assuming the conversion of all outstanding shares of preferred stock into 6,834,476 shares of common stock), assuming no exercise of the underwriters’ option to purchase additional shares of our common stock in this offering. This includes the 3,846,154 shares that we are selling in this offering, which, except for the 384,615 shares of common stock sold to certain of our existing stockholders, may be resold in the public market immediately. The remaining 10,489,519 shares, or 73.2% of our outstanding shares after this offering, are currently, and, together with the 384,615 shares of common stock sold in this offering to certain of our existing stockholders, will be following the closing of this offering, restricted as a result of securities laws or lock-up agreements but will be able to be sold, subject to any applicable volume limitations under federal securities laws with respect to affiliate sales, in the near future. See “Certain Relationships and Related Party Transactions—Participation in this Offering.”

In addition, as of June 30, 2014, there were an additional 588,132 shares reserved for issuance upon exercise of outstanding stock awards issued under our stock-based compensation plans that will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements, lock-up agreements and Rules 144 and 701 under the Securities Act of 1933, as amended, or the Securities Act. Moreover, after this offering, holders of an aggregate of 6,834,476 shares of our common stock as of June 30, 2014, or certain of their transferees, and the holders of 76,514 shares of common stock issuable upon exercise of warrants to purchase shares of our preferred stock, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register all shares of common stock that we may issue under our stock-based compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements and the restrictions imposed on our affiliates under Rule 144 under the Securities Act.

Additionally, William Blair & Company, L.L.C. and Raymond James & Associates, Inc., on behalf of the underwriters, may without our consent, at any time, release all or any portion of the shares subject to lock-up agreements to be entered into in connection with this offering, which would result in more shares being available for sale in the public market at earlier dates. Sales of common stock by existing stockholders in the public market, the availability of these shares for sale, our issuance of securities or the perception that any of these events might occur could materially and adversely affect the market price of our common stock. In addition, the sale of these securities could impair our ability to raise capital through the sale of additional stock.

Purchasers in this offering will incur immediate and substantial dilution in the book value of their investment as a result of this offering.

If you purchase common stock in this offering, you will incur immediate and substantial dilution of $11.73 per share, representing the difference between the initial public offering price of $12.00 per share and our pro forma as adjusted net tangible book value per share after giving effect to this offering and the conversion of all

 

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outstanding shares of our preferred stock immediately prior to the closing of this offering. Moreover, we issued warrants and options in the past that allow their holders to acquire common stock at prices significantly below the initial public offering price of $12.00 per share. As of June 30, 2014, there were 2,459 shares of common stock issuable upon exercise of warrants to purchase shares of our common stock at a weighted-average exercise price of $1.77 per share and there were 76,514 shares of common stock issuable upon exercise of warrants to purchase shares of our preferred stock at a weighted-average exercise price of $6.10 per share. In addition, as of June 30, 2014, there were 588,132 shares subject to outstanding options with a weighted-average exercise price of $3.49 per share. To the extent that these outstanding warrants or options are ultimately exercised, you will experience further dilution.

Our existing directors, executive officers and principal stockholders will continue to have substantial control over us after this offering, which could limit your ability to influence the outcome of key transactions, including a change of control.

After this offering and based on share ownership as of October 31, 2014, including shares issuable upon the exercise of outstanding options and warrants exercisable within 60 days of October 31, 2014, our directors, executive officers, principal stockholders and their affiliates will beneficially own or control, directly or indirectly, in the aggregate, approximately 55.7% of our outstanding common stock, assuming (i) no exercise of the underwriters’ option to purchase additional shares of our common stock in this offering, (ii) the issuance of an aggregate of 41,664 shares of restricted common stock to our non-employee directors in connection with grants made as of the effectiveness of this registration statement of which this prospectus forms a part, and (iii) the purchase by certain of our existing stockholders, including John T. McDonald, our Chief Executive Officer and chairman of our board of directors, entities associated with Austin Ventures and ESW Capital, LLC or its affiliates, of an aggregate of 384,615 shares of common stock in this offering. See “—Participation in this offering by certain of our existing stockholders would reduce the public float for our shares.” As a result, these stockholders, acting together, could have significant influence over the outcome of matters submitted to our stockholders for approval, including the election or removal of directors, any amendments to our certificate of incorporation or bylaws and any merger, consolidation or sale of all or substantially all of our assets, and over the management and affairs of our company. This concentration of ownership may also have the effect of delaying or preventing a change in control of our company or discouraging others from making tender offers for our shares and might affect the market price of our common stock.

Participation in this offering by certain of our existing stockholders will reduce the public float for our shares.

Certain of our existing stockholders, including John T. McDonald, our Chief Executive Officer and chairman of our board of directors, entities associated with Austin Ventures, each of which is an affiliate of a member of our board of directors, and ESW Capital, LLC or its affiliates, will purchase an aggregate of 384,615 shares of common stock at the initial public offering price of $12.00 per share. Upon the purchase by such stockholders of all such shares, assuming no exercise by the underwriters of their option to purchase additional shares, and upon the issuance of an aggregate of 41,664 shares of restricted common stock to our non-employee directors in connection with grants made on November 5, 2014, our executive officers, principal stockholders and their affiliates will beneficially own or control, in the aggregate, approximately 55.7% of our outstanding shares of common stock upon completion of this offering.

The purchase of such shares by certain of our existing stockholders will reduce the available public float for our shares because such stockholders will be restricted from selling the shares by a lock-up agreement they have entered into with our underwriters and, in some cases, by restrictions under applicable securities laws. As a result, the purchase of shares by such stockholders in this offering may reduce the liquidity of our common stock relative to what it would have been had these shares been purchased by investors that were not existing stockholders.

 

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Because we do not expect to pay any dividends on our common stock for the foreseeable future, investors in this offering may never receive a return on their investment.

We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. Instead, we plan to retain any earnings to maintain and expand our existing operations. In addition, our ability to pay cash dividends is currently limited by the terms of our existing loan and security agreements, which prohibits our payment of dividends on our capital stock without prior consent, and any future credit facility may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any return on their investment.

Our management will have broad discretion over the use of the proceeds we receive from this offering and might not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion to use our net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply our net proceeds of this offering in ways that increase the value of your investment. We expect to use the net proceeds to us from this offering for working capital and other general corporate purposes, including to finance our growth by investing in or acquiring complementary companies, products or technologies, expanding our sales force, growing sales of our applications and improving and enhancing our applications. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value. These investments may not yield a favorable return to our investors. You will not have the opportunity to influence our decisions on how to use our net proceeds from this offering.

Anti-takeover provisions in our amended and restated certificate of incorporation and our amended and restated bylaws, as well as provisions of Delaware law, might discourage, delay or prevent a change in control of our company or changes in our board of directors or management and, therefore, depress the trading price of our common stock.

Provisions in our certificate of incorporation and bylaws, as amended and restated prior to the closing of this offering, will contain provisions that may depress the market price of our common stock by acting to discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove members of our board of directors or our management. These provisions include the following:

 

    our certificate of incorporation provides for a classified board of directors with staggered three-year terms so that not all members of our board of directors are elected at one time;

 

    directors may be removed by stockholders only for cause;

 

    our board of directors has the right to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

    special meetings of our stockholders may be called only by our Chief Executive Officer, our board of directors or holders of not less than the majority of our issued and outstanding capital stock limiting the ability of minority stockholders to take certain actions without an annual meeting of stockholders;

 

    our stockholders may not act by written consent unless the action to be effected and the taking of such action by written consent are approved in advance by our board of directors and, as a result, a holder, or holders, controlling a majority of our capital stock would generally not be able to take certain actions without holding a stockholders’ meeting;

 

    our certificate of incorporation prohibits cumulative voting in the election of directors. This limits the ability of minority stockholders to elect director candidates;

 

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    stockholders must provide timely notice to nominate individuals for election to the board of directors or to propose matters that can be acted upon at an annual meeting of stockholders and, as a result, these provisions may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us; and

 

    our board of directors may issue, without stockholder approval, shares of undesignated preferred stock, making it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock from engaging in certain business combinations with us. For a description of our capital stock, see “Description of Capital Stock.”

Any provision of our certificate of incorporation and bylaws, as amended and restated prior to the closing of this offering, or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock. The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections titled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions. 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 factors discussed in this prospectus in the sections titled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the section titled “Risk Factors.” Moreover, we operate in a very competitive and rapidly-changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the

 

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future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.

 

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MARKET, INDUSTRY AND OTHER DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, including independent data, research opinions and viewpoints published by IDC and McKinsey, on assumptions that we have made that are based on those and other similar sources and on our knowledge of the markets for our solutions. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe the market position, market opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the markets in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of our common stock in this offering will be approximately $39.6 million, based on the initial public offering price of $12.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in full, we estimate that our net proceeds would be approximately $46.0 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use approximately $11.5 million of the net proceeds of this offering to repay outstanding and accrued interest under our loan and security agreements with Comerica Bank. As of June 30, 2014, we had $3.6 million outstanding as revolving loans and $18.9 million as term loans under our loan and security agreements. The revolving loans and term loans bear interest at a floating rate equal to Comerica Bank’s prime rate plus 1.75%. All outstanding revolving loan amounts must be repaid on April 11, 2015. All outstanding principal and interest under the term loan must be repaid on April 11, 2018.

The principal purposes of this offering are to increase our financial flexibility, improve our visibility in the marketplace and create a public market for our common stock. Although we do not have current specific plans for the net proceeds of this offering, we generally intend to use the net proceeds of this offering for working capital and other general corporate purposes, including to finance our growth by investing in or acquiring complementary companies, products or technologies, expanding our sales force, growing sales of our applications and improving and enhancing our applications. We do not have agreements or commitments for any investments or acquisitions at this time. Our management will have broad discretion in the application of the net proceeds from this offering, and investors will be relying on the judgment of our management regarding the application of the proceeds.

Pending the use of the proceeds from this offering as described above, we plan to invest the net proceeds in short-term, investment-grade interest-bearing securities, such as money market accounts, certificates of deposit, commercial paper or obligations issued or guaranteed by the U.S. government.

DIVIDEND POLICY

We intend to retain future earnings, if any, to finance the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare dividends will be subject to the discretion of our board of directors and will be dependent on a number of factors, including our operating results, capital requirements and overall financial condition and any other factors deemed relevant by our board of directors. In addition, the terms of our loan and security agreements limit our ability to pay dividends.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2014, as follows:

 

    on an actual basis;

 

    on a pro forma basis, giving effect to (i) a 6.099-for-one reverse stock split of our capital stock that occured on October 24, 2014; (ii) the conversion of all outstanding shares of our preferred stock into 6,834,476 shares of common stock immediately prior to the consummation of this offering; and (iii) the filing of our amended and restated certificate of incorporation; and

 

    on a pro forma as adjusted basis to further reflect the sale by us of 3,846,154 shares of common stock in this offering based on the initial public offering price of $12.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma as adjusted information set forth in the table below is for illustrative purposes only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

You should read the information in this table together with our consolidated financial statements and related notes and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this prospectus.

 

     As of June 30, 2014  
     Actual      Pro Forma      Pro Forma As
Adjusted
 
    

(unaudited)

(in thousands)

 

Cash and cash equivalents

   $ 3,059       $ 3,059       $ 42,667   
  

 

 

    

 

 

    

 

 

 

Total debt (including current portion)

   $ 27,384       $ 27,384       $ 27,384   

Redeemable Convertible Preferred Stock:

        

Series A redeemable convertible preferred stock, $0.0001 par value; 2,990,703 shares authorized, 2,821,181 shares issued and outstanding, actual, no shares issued and outstanding, pro forma and pro forma as adjusted

     17,138         —           —     

Series B redeemable convertible preferred stock, $0.0001 par value; 1,767,912 shares authorized, 1,701,909 shares issued and outstanding, actual, no shares issued and outstanding, pro forma and pro forma as adjusted

     10,369         —           —     

Series B-1 convertible preferred stock, $0.0001 par value; 983,767 shares authorized, 237,740 shares issued and outstanding, actual, no shares issued and outstanding, pro forma and pro forma as adjusted

     1,276         —           —     

Series B-2 redeemable convertible preferred stock, $0.0001 par value; 1,639,613 shares authorized, 155,598 shares issued and outstanding, actual, no shares issued and outstanding, pro forma and pro forma as adjusted

     949         —           —     

Series C redeemable convertible preferred stock, $0.0001 par value; 1,918,347 shares authorized, 1,918,048 shares issued and outstanding, actual, no shares issued and outstanding, pro forma and pro forma as adjusted

     21,784         —           —     

Stockholders’ Equity (Deficit):

        

Preferred stock, $0.0001 par value; no shares authorized, issued and outstanding, actual and pro forma, 9,300,342 shares authorized, no shares issued and outstanding, pro forma as adjusted

     —           —           —     

 

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     As of June 30, 2014  
     Actual     Pro Forma     Pro Forma As
Adjusted
 
    

(unaudited)

(in thousands)

 

Common stock, $0.0001 par value; 13,989,998 shares authorized, 3,655,043 shares issued and outstanding, actual, 10,489,519 shares issued and outstanding, pro forma, and 14,335,673 shares issued and outstanding, pro forma as adjusted

     —          1        1   

Additional paid-in capital

     9,276        60,791        100,399   

Accumulated deficit

     (30,106     (30,106     (30,106

Accumulated other comprehensive loss

     (697     (697     (697
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (21,527     29,989        69,597   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 57,373      $ 57,373      $ 96,981   
  

 

 

   

 

 

   

 

 

 

The table above excludes the following shares:

 

    588,132 shares of common stock issuable upon exercise of stock options outstanding as of June 30, 2014, at a weighted-average exercise price of $3.49 per share;

 

    2,459 shares of common stock issuable upon exercise of warrants to purchase shares of common stock outstanding as of June 30, 2014, at a weighted-average exercise price of $1.77 per share;

 

    76,514 shares of common stock issuable upon exercise of warrants to purchase shares of our preferred stock outstanding as of June 30, 2014, at a weighted-average exercise price of $6.10 per share;

 

    246,000 shares of common stock reserved for issuance under our Amended and Restated 2010 Stock Plan as of June 30, 2014, which will become available for grants under our 2014 Equity Incentive Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under our 2014 Equity Incentive Plan, which will become effective upon the execution of the underwriting agreement related to this offering;

 

 

    294,010 shares of restricted stock issued pursuant to restricted stock grants subsequent to June 30, 2014, at a purchase price of $8.73 per share;

 

    123,785 shares of common stock issuable upon exercise of stock options issued subsequent to June 30, 2014, at a weighted-average exercise price of $8.73 per share; and

 

    41,664 shares of restricted stock in the aggregate granted to our non-employee directors on November 5, 2014.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the as adjusted net tangible book value per share of our common stock immediately after the closing of this offering.

As of June 30, 2014, we had a net tangible book value of $(35.8) million, or $(3.41) per share. Net tangible book value per share represents our total tangible assets (total assets less intangible assets) less our total liabilities, divided by the number of shares of outstanding common stock, after giving effect to the conversion of all outstanding shares of our preferred stock into shares of common stock upon the completion of this offering.

After giving effect to the receipt of the net proceeds from our sale of 3,846,154 shares of common stock in this offering at the initial public offering price of $12.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our as adjusted net tangible book value as of June 30, 2014 would have been $3.8 million, or $0.27 per share. This represents an immediate increase in as adjusted net tangible book value of $3.68 per share to our existing stockholders and an immediate dilution of $11.73 per share to investors purchasing common stock in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

Initial public offering price per share

     $ 12.00   

Net tangible book value per share as of June 30, 2014

   $ (3.41  

Increase in net tangible book value per share attributed to new investors purchasing shares from us in this offering

   $ 3.68     

As adjusted net tangible book value per share after giving effect to this offering

     $ 0.27   
    

 

 

 

Dilution in as adjusted net tangible book value per share to new investors in this offering

     $ 11.73   
    

 

 

 

If the underwriters exercise their option to purchase additional shares in full, the as adjusted net tangible book value per share of our common stock after this offering would be $0.69 per share, and the dilution in as adjusted net tangible book value per share to investors in this offering would be $11.31 per share.

The following table summarizes, as of June 30, 2014 and after giving effect to this offering, a 6.099-for-one reverse stock split of our capital stock that occured on October 24, 2014, and the conversion of all outstanding shares of our preferred stock into shares of common stock upon the completion of this offering, the number of shares of our common stock, the total consideration and the average price per share (i) paid to us by our existing stockholders and (ii) to be paid by new investors purchasing our common stock in this offering at the initial public offering price of $12.00 per share, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     10,489,519         73.2     50,093,252         52   $ 4.78   

New investors

     3,846,154         26.8        46,153,848         48        12.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     14,335,673         100.0     96,247,100         100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

The foregoing discussion and tables are based on 10,489,519 shares of our common stock outstanding as of June 30, 2014, and excludes:

 

    588,132 shares of common stock issuable upon exercise of stock options outstanding as of June 30, 2014, at a weighted-average exercise price of $3.49 per share;

 

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    2,459 shares of common stock issuable upon exercise of warrants to purchase shares of common stock outstanding as of June 30, 2014, at a weighted-average exercise price of $1.77 per share;

 

    76,514 shares of common stock issuable upon exercise of warrants to purchase shares of our preferred stock outstanding as of June 30, 2014, at a weighted-average exercise price of $6.10 per share;

 

    246,000 shares of common stock reserved for issuance under our Amended and Restated 2010 Stock Plan as of June 30, 2014, which will become available for grants under our 2014 Equity Incentive Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under our 2014 Equity Incentive Plan, which will become effective upon the execution of the underwriting agreement related to this offering;

 

    294,010 shares of restricted stock issued pursuant to restricted stock grants subsequent to June 30, 2014, at a purchase price of $8.73 per share;

 

    123,785 shares of common stock issuable upon exercise of stock options issued subsequent to June 30, 2014, at a weighted-average exercise price of $8.73 per share; and

 

    41,664 shares of restricted stock in the aggregated granted to our non-employee directors on November 5, 2014.

The foregoing discussion and tables do not reflect purchases by certain of our existing stockholders, including John T. McDonald, our Chief Executive Officer and chairman of our board of directors, or entities affiliated with Austin Ventures and ESW Capital, LLC, of an aggregate of 384,615 shares of common stock at the initial public offering price of $12.00 per share, as described in “Related Party Transactions” and “Underwriting.”

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following table summarizes our selected consolidated financial data. We have derived the selected consolidated statements of operations data for the fiscal years ended December 31, 2012 and 2013 and the selected consolidated balance sheet data as of December 31, 2013 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated statements of operations data for the six months ended June 30, 2013 and 2014 and the summary consolidated balance sheet data as of June 30, 2014 from our unaudited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results. The following consolidated financial data set forth below should be read together with our consolidated financial statements and related notes and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each contained elsewhere in this prospectus.

 

    Fiscal Year Ended
December 31,
    Six Months Ended
June 30,
 
    2012     2013     2013     2014  
    (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

       

Revenue:

       

Subscription and support

  $ 18,281      $ 30,887      $ 14,182      $ 23,542   

Perpetual license

    641        2,003        488        1,097   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total product revenue

    18,922        32,890        14,670        24,639   
 

 

 

   

 

 

   

 

 

   

 

 

 

Professional services

    3,841        8,303        3,997        7,185   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    22,763        41,193        18,667        31,824   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

       

Subscription and support(1)(2)

    4,189        7,787        3,271        6,604   

Professional services(1)

    3,121        5,680        2,855        4,737   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    7,310        13,467        6,126        11,341   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    15,453        27,726        12,541        20,483   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

       

Sales and marketing(1)

    6,331        10,625        4,403        7,151   

Research and development(1)

    5,308        10,340        4,406        18,393   

Refundable Canadian tax credits

    (728     (583     (296     (274

General and administrative(1)

    4,574        6,832        2,920        5,676   

Depreciation and amortization

    1,812        3,670        2,247        2,121   

Acquisition-related expenses

    1,933        1,461        528        521   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    19,230        32,345        14,208        33,588   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (3,777     (4,619     (1,667     (13,105

Other expense:

       

Interest expense, net

    (528     (2,797     (547     (834

Other expense, net

    (65     (431     73        (368
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

    (593     (3,228     (474     (1,202
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (4,370     (7,847     (2,141     (14,307

Provision for income taxes

    72        (708     (133     (690
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

    (4,298     (8,555     (2,274     (14,997

Income (loss) from discontinued operations

    1,791        (642     (316     —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (2,507   $ (9,197   $ (2,590   $ (14,997
 

 

 

   

 

 

   

 

 

   

 

 

 

Preferred stock dividends and accretion

    (44     (98     (22     (875
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common shareholders

  $ (2,551   $ (9,295   $ (2,612   $ (15,872
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share(3):

       

Loss from continuing operations per common share, basic and diluted

  $ (5.78   $ (7.23   $ (2.16   $ (4.92

Income (loss) from discontinued operations per common share, basic and diluted

  $ 2.39      $ (0.54   $ (0.30   $ —     

Net loss per common share, basic and diluted

  $ (3.39   $ (7.77   $ (2.46   $ (4.92

Weighted-average common shares outstanding, basic and diluted

    751,416        1,196,668        1,061,906        3,225,077   

Pro forma net loss per common share (unaudited), basic and diluted(4)

    $ (1.55     $ (1.49

Pro forma weighted-average common shares outstanding (unaudited), basic and diluted(4)

      5,998,613          10,059,553   
   

 

 

     

 

 

 

 

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(1) Includes stock-based compensation.

 

(2) Includes depreciation and amortization of $660,000 and $1,640,000 in fiscal 2012 and 2013, respectively. Includes depreciation and amortization of $717,000 and $1,484,000 for the six months ended June 30, 2013 and 2014, respectively.

 

(3) See Note 13 to our consolidated financial statements included elsewhere in this prospectus for a discussion and reconciliation of historical and pro forma net loss attributable to common stockholders and weighted- average shares outstanding for historical and pro forma basic and diluted net loss per share calculations.

 

(4) Pro forma net loss per common share (unaudited) and pro forma weighted-average common shares outstanding (unaudited) gives effect to (i) a 6.099-for-one reverse stock split of our capital stock that occured on October 24, 2014; (ii) the conversion of all of our outstanding shares of preferred stock into 6,834,476 shares of our common stock immediately prior to the closing of this offering; and (iii) the filing of our amended and restated certificate of incorporation.

 

     As of June 30, 2014  
     Actual     Pro Forma(1)      Pro forma As
Adjusted(2)
 
     (unaudited)  
     (in thousands)  

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

   $ 3,059      $ 3,059       $ 42,667   

Property and equipment, net

     3,365        3,365         3,365   

Intangible assets, net

     32,210        32,210         32,210   

Goodwill

     33,580        33,580         33,580   

Total assets

     94,326        94,326         133,934   

Deferred revenue

     20,060        20,060         20,060   

Total liabilities

     64,337        64,337         64,337   

Redeemable convertible preferred stock

     51,516        —           —     

Total stockholders’ deficit

     (21,527     29,989         69,597   

 

(1) The pro forma column gives effect to (i) a 6.099-for-one reverse stock split of our capital stock that occured on October 24, 2014; (ii) the conversion of all of our outstanding shares of preferred stock into 6,834,476 shares of our common stock immediately prior to the closing of this offering; and (iii) the filing of our amended and restated certificate of incorporation.

 

(2) The pro forma as adjusted column gives further effect to the sale by us of common stock in this offering at the initial public offering price of $12.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     As of December 31,     As of June 30,  
             2012                      2013                     2013                      2014          
     (in thousands, except %)  

Key Metrics:

          

Annualized recurring revenue value at year-end(1)

   $ 27,093       $ 49,061        n/a         n/a   

Annual net dollar retention rate(2)

     n/a         90     n/a         n/a   

Adjusted EBITDA (fiscal year ended December 31 and six months ended June 30)(3)

   $ 720       $ 2,650      $ 2,074       $ 2,608   

 

(1) Annualized recurring revenue value as of December 31 equals the monthly value of our recurring revenue contracts measured as of December 31 multiplied by 12. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics” for additional discussion of this key metric.

 

(2)

We define annual net dollar retention rate as of December 31 as the aggregate annualized recurring revenue value at December 31 from those customers that were also customers as of December 31 of the prior fiscal

 

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  year, divided by the aggregate annualized recurring revenue value from all customers as of December 31 of the prior fiscal year. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics” for additional discussion of this key metric.

 

(3) 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 income (expense), net, provision for income taxes, stock-based compensation expense, and acquisition-related expenses.

The following table provides a reconciliation of Adjusted EBITDA to net loss, which is the most directly comparable GAAP measure:

 

     Fiscal Year Ended
December 31,
    Six Months Ended
June 30,
 
     2012     2013     2013     2014  
     (in thousands)  

Net loss

   $ (2,507   $ (9,197   $ (2,590   $ (14,997

Discontinued operations

     (1,791     642        316       
—  
  

Depreciation and amortization expense

     2,472        5,310        2,964        3,605   

Interest expense, net

     528        2,797        547        834   

Other expense (income), net

     65        431        (73     368   

Provision for income taxes

     (72     708        133        690   

Stock-based compensation expense

     92        498        249        367   

Acquisition-related expenses

     1,933        1,461        528        521   

Stock-based compensation—related party vendor

     —          —          —          11,220   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 720      $ 2,650      $ 2,074      $ 2,608   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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such replacements; however, much of the depreciation and amortization currently reflected relates to amortization of acquired intangible assets as a result of business combination purchase accounting adjustments, which will not need to be replaced in the future;

 

    Adjusted EBITDA may not reflect changes in, or cash requirements for, our working capital needs or contractual commitments;

 

    Adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation;

 

    Adjusted EBITDA does not reflect interest or tax payments that could reduce cash available for use; and

 

    other companies, including companies in our industry, might calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as comparative measures.

Because of these limitations, you should consider Adjusted EBITDA together with other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements, the related notes and other financial information included elsewhere in this prospectus. This discussion contains information with respect to our plans and strategy as well as forward-looking statements based upon current expectations that involve risks and uncertainties. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Throughout this management’s discussion and analysis of financial condition and results of operations we may from time to time refer to fiscal years and the reference relates to the fiscal year-end; for example, fiscal 2013 would represent the fiscal year that ended on December 31, 2013. All references herein to the first, second, third and fourth fiscal quarters refer to the three months ended March 31, June 30, September 30 and December 31, respectively.

Upland is a leading provider of cloud-based enterprise work management software. We define enterprise work management software as software applications that enable organizations to plan, manage and execute projects and work. Our software applications help organizations better optimize the allocation and utilization of their people, time and money. We provide a family of cloud-based enterprise work management software applications for the information technology, marketing, finance, professional services and process excellence functions within organizations. Our software applications address a broad range of enterprise work management needs, from strategic planning to task execution.

We provide organizations and their knowledge workers with software applications that better align resources with business objectives and increase visibility, governance, collaboration and responsiveness to changes in the business environment. This results in increased work capacity, higher productivity and better execution. 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 management challenges in the following categories:

 

    Program and Portfolio Management;

 

    Project Management and Collaboration;

 

    Workflow Automation and Enterprise Content Management;

 

    Professional Services Automation; and

 

    Financial Management.

We were founded in 2010 to deliver cloud-based enterprise work management applications to organizations of all sizes. Acquisitions are a primary component of our growth strategy, and we have a proven ability to successfully identify, acquire and integrate complementary businesses to grow our company. We have a dedicated and experienced corporate development team that continually monitors hundreds of companies in order to maintain a robust pipeline of potential acquisition candidates, many of which are smaller scale or address only limited enterprise work management challenges, which often operate outside the scope of some of our larger competitors. We believe that our acquisition experience and strategy gives us a competitive advantage in identifying additional opportunities to expand our family of cloud-based applications to better serve our customers. This strategy also has enabled us to develop a family of applications that addresses a broad range of enterprise work management needs. In addition, we believe our ongoing investment in new applications and the enhancement of our existing applications will allow us to expand our customer base and generate additional revenue from existing customers.

We have achieved significant growth since our inception, substantially all of which has been as a result of our acquisition strategy. For the first six months of 2013 compared to the first six months of 2014, our

 

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subscription and support revenue grew from $14.2 million to $23.5 million, representing a 66% period-over-period growth rate, and our total revenue grew from $18.7 million to $31.8 million, representing an 70% period-over-period growth rate. For the first six months of 2014 and 2013, we recorded Adjusted EBITDA of $2.6 million and $2.1 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. From fiscal 2012 to fiscal 2013, our subscription and support revenue grew from $18.3 million to $30.9 million, representing a 69% year-over-year growth rate, and our total revenue grew from $22.8 million to $41.2 million, representing an 81% year-over-year growth rate. We recorded Adjusted EBITDA of $0.7 million and $2.7 million in fiscal 2012 and 2013, respectively. For the first six months of 2014 and 2013 and fiscal 2013 and 2012 we recorded net losses of $15.0 million, $2.6 million, $9.2 million and $2.5 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 first six months of 2014 and in fiscal 2013, our subscription and support revenue accounted for 74% and 76% of our total revenue, respectively. Our customer agreements for program and portfolio management, project management and collaboration, and professional services automation typically are sold on a per-seat basis with terms varying from one to three years, paid in advance. Our customer agreements for workflow automation and enterprise content management and financial management historically have been sold on a volume basis with a one-year term, paid in advance. We generally seek to enter into multi-year contracts with our customers when possible. In each case, our customer agreements provide us with revenue visibility over a number of quarters. We typically negotiate the total number of seats or total minimum contracted volume a customer is entitled to use as part of its subscription, but these seats or minimum contracted volume may not be fully utilized over the term of the agreement. In addition, where customers exceed the minimum contracted volume, additional overage fees are billed in arrears.

Historically, we have sold certain of our applications under perpetual licenses, which also are paid in advance. For the first six months of 2014 and in fiscal 2013, our perpetual license revenue accounted for 3% and 3% of our total revenue, respectively. We expect perpetual license revenue to decrease as a percentage of revenue in the future. The support agreements related to our perpetual licenses are one-year in duration and entitle the customer to support and unspecified upgrades. The revenue related to such support agreements is included as part of our subscription and support revenue.

Professional services revenue consists of fees related to implementation, data extraction, integration and configuration and training on our applications. For the first six months of 2014 and in fiscal 2013, our professional services revenue accounted for 23% and 21%, respectively, of our total revenue. 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 lifecycle.

 

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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 have made six acquisitions since the beginning of 2012.

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.

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

 

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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:

 

     As of December 31,     As of June 30,  
     2012      2013     2013      2014  
     (in thousands, except %)  

Annualized recurring revenue value

   $ 27,093       $ 49,061        n/a         n/a   

Annual net dollar retention rate

     n/a         90     n/a         n/a   

Adjusted EBITDA (fiscal year ended December 31 and six months ended June 30)

   $ 720       $ 2,650      $ 2,074       $ 2,608   

Annualized recurring revenue value. Annualized recurring revenue value as of December 31 equals the monthly value of our recurring revenue contracts, determined from our internal customer tracking systems and measured as of December 31, multiplied by 12. For example, the monthly value of our recurring revenue contracts on December 31, 2013 was $4.1 million. As such, our annualized recurring revenue value for fiscal 2013 was $49.1 million. Because our growth strategy involves acquisitions, the timing of which may vary, we believe the presentation of this metric annually at year-end provides the most useful indicator of the growth trend of our business.

Annual net dollar retention rate. We define annual net dollar retention rate as of December 31 as the aggregate annualized recurring revenue value at December 31 from those customers that were also customers as of December 31 of the prior fiscal year, divided by the aggregate annualized recurring revenue value from all customers as of December 31 of the prior fiscal year. We believe that our ability to retain our customers and expand their recurring revenue growth over time will be an indicator of the stability of our revenue base and the long-term value of our customer relationships. We track the annual net dollar retention rate for contracts corresponding to applications that have been part of the Upland family for five quarters or more. Therefore, we do not report an annual net dollar retention rate for fiscal 2012. Our annual net dollar retention rate for fiscal 2013 was 90% and includes contracts corresponding to our program and portfolio management and professional services automation applications, which have been part of the Upland family for five quarters or more.

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

 

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loss, calculated in accordance with GAAP, plus discontinued operations, depreciation and amortization expense, interest expense, net, other income (expense), net, provision for income taxes, stock-based compensation expense, and acquisition-related expenses. 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.

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

 

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short-term, while 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 Consolidated Financial Statements included elsewhere in this prospectus 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.

 

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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 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.

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 fiscal 2012 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 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.

 

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Results of Operations

Consolidated Statements of Operations Data

The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.

 

    Fiscal Year Ended
December 31,
    Six Months
Ended June 30,
 
    2012     2013     2013     2014  
    (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

       

Revenue:

       

Subscription and support

  $ 18,281      $ 30,887      $ 14,182        23,542   

Perpetual license

    641        2,003        488        1,097   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total product revenue

    18,922        32,890        14,670        24,639   
 

 

 

   

 

 

   

 

 

   

 

 

 

Professional services

    3,841        8,303        3,997        7,185   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    22,763        41,193        18,667        31,824   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

       

Subscription and support(1)(2)

    4,189        7,787        3,271        6,604   

Professional services(1)

    3,121        5,680        2,855        4,737   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    7,310        13,467        6,126        11,341   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    15,453        27,726        12,541        20,483   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

       

Sales and marketing(1)

    6,331        10,625        4,403        7,151   

Research and development(1)

    5,308        10,340        4,406        18,393   

Refundable Canadian tax credits

    (728     (583     (296     (274

General and administrative(1)

    4,574        6,832        2,920        5,676   

Depreciation and amortization

    1,812        3,670        2,247        2,121   

Acquisition-related expenses

    1,933        1,461        528        521   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    19,230        32,345        14,208        33,588   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (3,777     (4,619     (1,667     (13,105

Other expense:

       

Interest expense, net

    (528     (2,797     (547     (834

Other income (expense), net

    (65     (431     73        (368
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

    (593     (3,228     (474     (1,202
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (4,370     (7,847     (2,141     (14,307

Provision for income taxes

    72        (708     (133     (690
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

    (4,298     (8,555     (2,274     (14,997

Income (loss) from discontinued operations

    1,791        (642     (316     —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (2,507   $ (9,197   $ (2,590   $ (14,997
 

 

 

   

 

 

   

 

 

   

 

 

 

Preferred stock dividends and accretion

    (44     (98     (22     (875
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common shareholders

  $ (2,551   $ (9,295   $ (2,612   $ (15,872
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share(3):

       

Loss from continuing operations per common share, basic and diluted

  $ (5.78   $ (7.23   $ (2.16   $ (4.92

Income (loss) from discontinued operations per common share, basic and diluted

  $ 2.39      $ (0.54   $ (0.30   $ —     

Net loss per common share, basic and diluted

  $ (3.39   $ (7.77   $ (2.46   $ (4.92

Weighted-average common shares outstanding, basic and diluted

    751,416        1,196,668        1,061,906        3,225,077   

Pro forma net loss per common share (unaudited), basic and diluted(4)

    $ (1.55     $ (1.49

Pro forma weighted-average common shares outstanding (unaudited), basic and diluted(4)

      5,998,613          10,059,553   
   

 

 

     

 

 

 

 

(1)  Includes stock-based compensation.

 

(2)  Includes depreciation and amortization of $660,000 and $1,640,000 in 2012 and 2013, respectively. Includes depreciation and amortization of $717,000 and $1,484,000 for the six months ended June 30, 2013 and 2014, respectively.

 

(3)  See Note 13 to our consolidated financial statements included elsewhere in this prospectus for a discussion and reconciliation of historical and pro forma net loss attributable to common stockholders and weighted average shares outstanding for historical and pro forma basic and diluted net loss per share calculations.

 

(4) Pro forma net loss per common share (unaudited) and pro forma weighted-average common shares outstanding (unaudited) gives effect to (i) a 6.099-for-one reverse stock split of our capital stock that occured on October 24, 2014; (ii) the conversion of all of our outstanding shares of preferred stock into 6,834,476 shares of our common stock immediately prior to the closing of this offering; and (iii) the filing of our amended and restated certificate of incorporation.

 

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Table of Contents
     Fiscal Year Ended
December 31,
    Six Months Ended
June 30,
 
     2012     2013     2013     2014  

Consolidated Statements of Operations Data:

        

Revenue:

        

Subscription and support

     80     75     76     74

Perpetual license

     3     5     3     3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total product revenue

     83     80     79     77
  

 

 

   

 

 

   

 

 

   

 

 

 

Professional services

     17     20     21     23
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

        

Subscription and support(1)(2)

     18     19     18     21

Professional services(1)

     14     14     15     15
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     32     33     33     36
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     68     67     67     64
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Sales and marketing(1)

     28     26     24     22

Research and development(1)

     23     25     24     58

Refundable Canadian tax credits

     (3 )%      (1 )%      (2 )%      (1 )% 

General and administrative(1)

     20     16     16     18

Depreciation and amortization

     9     9     12     7

Acquisition-related expenses

     8     3     3     2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     85     78     77     106
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (17 )%      (11 )%      (10 )%      (42 )% 

Other expense:

        

Interest expense, net

     (2 )%      (7 )%      (3 )%      (3 )% 

Other income (expense), net

     —          (1 )%      —          (1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (2 )%      (8 )%      (3 )%      (4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (19 )%      (19 )%      (13 )%      (46 )% 

Provision for income taxes

     —          (2 )%      (1 )%      (2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (19 )%      (21 )%      (14 )%      (48 )% 

Income (loss) from discontinued operations

     8     (1 )%      (2 )%      —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (11 )%      (22 )%      (16 )%      (48 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Includes stock-based compensation.

 

(2)  Includes depreciation and amortization of 3% and 4% in fiscal 2012 and 2013, respectively. Includes depreciation and amortization of 4% and 5% for the six months ended June 30, 2013 and 2014, respectively.

 

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Comparison of Six Months Ended June 30, 2013 and 2014

Revenue

 

     Six Months
Ended June 30,
    % Change  
     2013     2014        
     (dollars in thousands)        
     (unaudited)        

Revenue:

      

Subscription and support

   $ 14,182      $ 23,542        66

Perpetual license

     488        1,097        125
  

 

 

   

 

 

   

 

 

 

Total product revenue

     14,670        24,639        68

Professional services

     3,997        7,185        80
  

 

 

   

 

 

   

 

 

 

Total revenue

   $ 18,667      $ 31,824        70
  

 

 

   

 

 

   

Percentage of revenue:

      

Subscription and support

     76     74  

Perpetual license

     3     3  
  

 

 

   

 

 

   

Total product revenue

     79     77  

Professional services

     21     23  
  

 

 

   

 

 

   

Total revenue

     100     100  
  

 

 

   

 

 

   

Total revenue increased by $13.2 million, or 70%, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Of the increase in total revenue, $12.5 million was due to total revenues from FileBound, ComSci, and Clickability, over the total revenue for FileBound recognized for the six months ended June 30, 2013. Additionally, subscription and support revenues from our Canada operations were $0.5 million lower during the six months ended June 30, 2014 compared to the six months ended June 30, 2013 due to the change in the foreign currency exchange rate between the Canadian dollar versus the U.S. dollar for those periods.

Subscription and support revenue increased $9.4 million, or 66%, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Of the increase in subscription and support revenues, $10.1 million was due to subscription and support revenues from our 2013 acquisitions of FileBound, ComSci, and Clickability, over the subscription and support revenues for FileBound recognized for the six months ended June 30, 2013. Additionally, as noted above, subscription and support revenues from our Canada operations were $0.5 million lower during the six months ended June 30, 2014 compared to the six months ended June 30, 2013 due to the change in the foreign currency exchange rate between the Canadian dollar versus the U.S. dollar for those periods.

Perpetual license revenue increased $0.6 million, or 125%, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. This increase is primarily attributable to the acquisition of FileBound in May 2013, which contributed $0.3 million in perpetual license revenue for the six months ended June 30, 2014, over the perpetual license revenue for FileBound recognized for the six months ended June 30, 2013.

Professional services revenue increased $3.2 million, or 80%, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. This increase is primarily attributable to the acquisition of Clickability in December 2013, which contributed $1.8 million in professional services revenue for the six months ended June 30, 2014.

 

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Cost of Revenue

 

     Six Months
Ended June 30,
    % Change  
     2013     2014        
     (dollars in thousands)        
     (unaudited)        

Cost of revenue:

      

Product(1)

   $ 3,271      $ 6,604        102

Professional services

     2,855        4,737        66
  

 

 

   

 

 

   

Total cost of revenue

   $ 6,126      $ 11,341        85
  

 

 

   

 

 

   

Gross profit:

      

Product

     18     21  

Professional services

     15     15  

Total gross profit

     67     64  

 

(1) Includes depreciation and amortization expense as follows:

 

Depreciation

   $ 202       $ 576   

Amortization

   $ 515       $ 908   

For the six months ended June 30, 2014, cost of product revenues increased by $3.3 million, or 102%, compared to the six months ended June 30, 2013. This increase was primarily attributable to our 2013 acquisitions of FileBound, ComSci, and Clickability, which contributed $1.2 million in personnel and related costs, and $0.6 million in data center hosting costs, over the same costs recognized for FileBound in the six months ended June 30, 2013.

For the six months ended June 30, 2014, cost of professional services revenues increased by $1.9 million, or 66%, compared to the six months ended June 30, 2013. This increase was primarily attributable to our 2013 acquisitions of FileBound and Clickability, which contributed $1.1 million in personnel and related costs, over the same costs recognized for FileBound in the six months ended June 30, 2013.

Operating Expenses

Sales and Marketing

 

     Six Months
Ended June 30,
    % Change  
     2013     2014        
     (dollars in thousands)        
     (unaudited)        

Sales and marketing

   $ 4,403      $ 7,151        62

Percentage of total revenue

     24     22  

For the six months ended June 30, 2014, sales and marketing expense increased by $2.7 million, or 62%, compared to the six months ended June 30, 2013. This increase was primarily attributable to our 2013 acquisitions of FileBound, ComSci, and Clickability, which contributed $1.0 million in personnel and related costs, and $0.6 million primarily related to trade show and public relations costs, over the same costs recognized for FileBound in the six months ended June 30, 2013.

Research and Development

 

     Six Months
Ended June 30,
    % Change  
     2013     2014        
     (dollars in thousands)        
     (unaudited)        

Research and development

   $ 4,406      $ 18,393        317

Percentage of total revenue

     24     58  

 

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For the six months ended June 30, 2014, research and development expense increased by $14.0 million, or 317%, compared to the six months ended June 30, 2013. In January 2014, we issued 1,803,574 shares of common stock in connection with an amendment of a technology services agreement with a related party and took a noncash charge of $11.2 million. Our agreement with the related party is viewed as a fixed purchase commitment contract that obligates us to annual purchase commitments even if we do not take delivery of the contracted services. Since the amended agreement still requires payments for future services that we believe are not discounted from amounts charged to other customers, we believe the fair value of the common stock consideration provided to the related party to amend the agreement does not represent an asset and, accordingly, was expensed immediately. The 2013 acquisitions of FileBound, ComSci, and Clickability contributed $1.7 million in personnel and related costs, and $0.3 million in outsourced product development services, over the same costs recognized for FileBound in the six months ended June 30, 2013.

Refundable Canadian tax credits

 

     Six Months
Ended June 30,
    % Change  
     2013     2014        
     (dollars in thousands)        
     (unaudited)        

Refundable Canadian tax credits

   $ (296   $ (274     (7 )% 

Percentage of total revenue

     (2 )%      (1 )%   

For the six months ended June 30, 2014, refundable Canadian tax credits decreased by $0.02 million, or 7%, compared to the six months ended June 30, 2013. The decrease was due to fewer costs incurred by our Canadian subsidiary in 2014 that were eligible for reimbursement pursuant to local Canadian government programs.

General and Administrative

 

     Six Months
Ended June 30,
    % Change  
     2013     2014        
     (dollars in thousands)        
     (unaudited)        

General and administrative

   $ 2,920      $ 5,676        94

Percentage of total revenue

     16     18  

For the six months ended June 30, 2014, general and administrative expense increased by $2.8 million, or 94%, compared to the six months ended June 30, 2013. This increase was primarily attributable to our 2013 acquisitions of FileBound, ComSci, and Clickability. These acquisitions contributed an increase of $0.9 million in personnel and related costs, $0.5 million in rent and office expenses, and $0.07 million in professional services fees, over the same costs recognized for FileBound in the six months ended June 30, 2013. Our organic businesses increased $0.7 million during the same period due to increased legal and other professional services as a result of business complexity and in preparation for operating as a public company, $0.3 million due to increased personnel and related expenses as a result of growth, and $0.2 million due to increases in rent and office related expenses as a result of growth.

Depreciation and Amortization

 

     Six Months
Ended June 30,
    % Change  
     2013     2014        
     (dollars in thousands)        
     (unaudited)        

Depreciation and amortization

   $ 2,247      $ 2,121        (6 )% 

Percentage of total revenue

     12     7  

 

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For the six months ended June 30, 2014, depreciation and amortization expense decreased by $0.1 million, or 6%, compared to the six months ended June 30, 2013. Depreciation increased $0.3 million primarily due to the increase in equipment used for corporate operations. Amortization expense increased by $0.6 million, primarily due to the acquisitions of FileBound, ComSci, and Clickability, over the same costs recognized for FileBound in the six months ended June 30, 2013. This increase in amortization was offset by the $1.1 million impairment of the PowerSteering trade name, which occurred in the first six months ended June 30, 2013. See Note 4 of the Notes to Consolidated Financial Statements included elsewhere in this prospectus for more information regarding Goodwill and Other Intangible Assets.

Acquisition-related Expenses

 

     Six Months
Ended June 30,
    % Change  
     2013     2014        
     (dollars in thousands)        
     (unaudited)        

Acquisition-related expenses

   $ 528      $ 521        (1 )% 

Percentage of total revenue

     3     2  

For the six months ended June 30, 2014, one-time acquisition related expense decreased by $0.01 million, compared to the six months ended June 30, 2013. This increase was primarily attributable to legal fees, accounting fees, financing fees, restructuring costs, integration costs, and other transactional fees and bonuses related to our 2013 acquisitions.

Total Other Expense

 

     Six Months
Ended June 30,
    % Change  
     2013     2014        
     (dollars in thousands)        
     (unaudited)        

Other expense:

      

Interest expense

   $ (547   $ (834     52

Other expense

     73        (368     604
  

 

 

   

 

 

   

Total other expense

     (474     (1,202     154

Percentage of total revenue

     (3 )%      (4 )%   

For the six months ended June 30, 2014, total other expense increased by $0.7 million, compared to the six months ended June 30, 2013. The $0.3 million increase in interest expense for the six months ended June 30, 2014 is primarily the result of an increase in our long-term note balance that was used to finance our 2013 acquisitions. The increase in other expense is primarily the result of an increase of $0.3 million in the fair value of our preferred stock warrant liabilities.

 

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Comparison of Fiscal Years Ended December 31, 2012 and 2013

Revenue

 

     Fiscal Year Ended December 31,     % Change  
               2012                         2013                  
     (dollars in thousands)        

Revenue:

      

Subscription and support

   $ 18,281      $ 30,887        69

Perpetual license

     641        2,003        212
  

 

 

   

 

 

   

 

 

 

Total product revenue

     18,922        32,890        74

Professional services

     3,841        8,303        116
  

 

 

   

 

 

   

 

 

 

Total revenue

   $ 22,763      $ 41,193        81
  

 

 

   

 

 

   

Percentage of revenue:

      

Subscription and support

     80     75  

Perpetual license

     3     5  
  

 

 

   

 

 

   

Total product revenue

     83     80  

Professional services

     17     20  
  

 

 

   

 

 

   

Total revenue

     100     100  
  

 

 

   

 

 

   

Subscription and support revenue increased $12.6 million, or 69%, from fiscal 2012 to fiscal 2013. Substantially all of the increase in subscription and support revenue during fiscal 2013 resulted from the acquisitions of FileBound and ComSci in fiscal 2013, as well as the inclusion of the full year of ownership of our 2012 acquisitions.

Perpetual license revenue increased $1.4 million, or 212%, from fiscal 2012 to fiscal 2013. Substantially all of increase in perpetual license revenue resulted from our acquisition of FileBound during fiscal 2013, as well as the inclusion of the full year of ownership of EPM Live, both of which offer perpetual license software products.

Professional services revenue increased $4.5 million, or 116%, from fiscal 2012 to fiscal 2013. Substantially all of the increase resulted from the acquisitions of FileBound and ComSci in fiscal 2013, as well as the inclusion of the full year of ownership of our 2012 acquisitions, all of which provide professional services revenue.

Cost of Revenue

 

     Fiscal Year Ended December 31,     % Change  
               2012                         2013                  
     (dollars in thousands)        

Cost of revenue:

      

Product(1)

   $ 4,189      $ 7,787        86

Professional services

     3,121        5,680        82
  

 

 

   

 

 

   

Total cost of revenue

   $ 7,310      $ 13,467        84
  

 

 

   

 

 

   

Gross profit:

      

Product

     18     19  

Professional services

     14     14  

Total gross profit

     68     67  

 

(1)       Includes depreciation and amortization expense as follows:

      

Depreciation

   $ —        $ 455     

Amortization

   $ 660      $ 1,185     

 

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Table of Contents

Cost of product revenue increased $3.6 million, or 86%, from fiscal 2012 to fiscal 2013. This increase was primarily a result of $1.6 million of increased personnel and related costs associated with acquisitions from fiscal 2012 to fiscal 2013.

Cost of professional services revenue increased $2.6 million, or 82%, from fiscal 2012 to fiscal 2013. This increase was primarily a result of $2.5 million of increased personnel and related costs associated with acquisitions from fiscal 2012 to fiscal 2013. This increase resulted primarily from our acquisitions of the 2013 Acquisitions.

Operating Expenses

Sales and Marketing

 

     Fiscal Year Ended December 31,     % Change  
               2012                         2013                  
     (dollars in thousands)        

Sales and marketing

   $ 6,331      $ 10,625        68

Percentage of total revenue

     28     26  

Sales and marketing expenses increased $4.3 million, or 68%, from fiscal 2012 to fiscal 2013. The increase was primarily due to an increase of $2.6 million in personnel and related costs associated with acquisitions. We also incurred $1.3 million of increased marketing expenses mainly in the form of a new company-branding campaign and marketing events, including our first user conference in the fourth quarter of 2013.

Research and Development

 

     Fiscal Year Ended December 31,     % Change  
               2012                         2013                  
     (dollars in thousands)        

Research and development

   $ 5,308      $ 10,340        95

Percentage of total revenue

     23     25  

Research and development expenses increased $5.0 million, or 95%, from fiscal 2012 to fiscal 2013. The increase was primarily due to an increase of $1.9 million in personnel and related costs and an increase of $1.0 million in outsourced contractor fees each associated with acquisitions, as well as an increase of $1.1 million in fees pursuant to a third-party technology services agreement. Each of these costs related to enhancing existing applications and adding new functionality to our applications.

Refundable Canadian tax credits

 

     Fiscal Year Ended December 31,     % Change  
               2012                         2013                  
     (dollars in thousands)        

Refundable Canadian tax credits

   $ (728   $ (583     (20 )% 

Percentage of total revenue

     (3 )%      (1 )%   

Refundable Canadian tax credits decreased $0.1 million, or 20%, from fiscal 2012 to fiscal 2013. The decrease was due to fewer costs incurred by our Canadian subsidiary in 2013 that were eligible for reimbursement pursuant to local Canadian government programs.

 

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General and Administrative

 

     Fiscal Year Ended December 31,     % Change  
               2012                         2013                  
     (dollars in thousands)        

General and administrative

   $ 4,574      $ 6,832        49

Percentage of total revenue

     20     16  

General and administrative expenses increased $2.3 million, or 49%, from fiscal 2012 to fiscal 2013. The increase was primarily due to an increase of $2.3 million in personnel and related costs associated with acquisitions.

Depreciation and Amortization

 

     Fiscal Year Ended December 31,     % Change  
               2012                         2013                  
     (dollars in thousands)        

Depreciation and amortization

   $ 1,812      $ 3,670        103

Percentage of total revenue

     9     9  

Depreciation and amortization expenses increased $1.9 million, or 103%, from fiscal 2012 to fiscal 2013. Substantially all of the increase relates to amortization of acquired intangible assets as a result of business combination purchase accounting adjustments, which includes an impairment charge of $1.1 million relating to a change in useful life from indefinite to definite for a trade name. These assets will not need to be replaced in the future.

Acquisition-related Expenses

 

     Fiscal Year Ended December 31,     % Change  
               2012                         2013                  
     (dollars in thousands)        

Acquisition-related expenses

   $ 1,933      $ 1,461        (24 %) 

Percentage of total revenue

     8     3  

Acquisition-related expenses decreased $0.5 million, or 24%, from fiscal 2012 to fiscal 2013. The decrease was a result of lower legal fees, accounting fees, financing fees, restructuring costs, integration costs, and other transactional fees and bonuses related to our 2013 acquisitions as compared to similar fees and costs for our 2012 acquisitions.

Total Other Expense

 

     Fiscal Year Ended December 31,     % Change  
               2012                         2013                  
     (dollars in thousands)        

Other expense:

      

Interest expense

   $ (528   $ (2,797     (430 )% 

Other expense

     (65     (431     (563 )% 
  

 

 

   

 

 

   

Total Other expense

     (593     (3,228     (444 )% 

Percentage of total revenue

     (2 )%      (8 )%   

Total other expense increased $2.6 million, or 444%, from fiscal 2012 to fiscal 2013. The increase was due to the fact that fiscal 2013 included changes in the estimated fair value of our preferred stock warrant liabilities, higher amortization of deferred financing costs and debt discount over the term of the related loan and security agreement, higher interest expense on outstanding debt and the effect of a beneficial conversion feature on convertible promissory notes payable.

 

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Quarterly Results of Operations

The following table sets forth our unaudited quarterly condensed consolidated statements of operations data for each of the last ten quarters through June 30, 2014. The data has been prepared on the same basis as the unaudited consolidated financial statements and related notes included in this prospectus and you should read the following tables together with such financial statements. The quarterly results of operations include all normal recurring adjustments necessary for a fair presentation of this data. Results of interim periods are not necessarily indicative of results for the entire year and are not necessarily indicative of future results.

 

    Quarter Ended  
    March 31,
2012
    June 30,
2012
    September 30,
2012
    December 31,
2012
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
    March 31,
2014
    June 30,
2014
 
    (in thousands, unaudited)        

Consolidated Statements of Operations Data:

                   

Revenue:

                   

Subscription and support

  $ 2,418      $ 4,434      $ 5,372      $ 6,057      $ 6,810      $ 7,372      $ 7,731      $ 8,974      $ 11,737     

$

11,805

  

Perpetual license

    41        96        43        461        35        453        647        868        440        657   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total product revenue

    2,459        4,530        5,415        6,518        6,845        7,825        8,378        9,842        12,177        12,462   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Professional services

    704        833        809        1,495        1,805        2,192        2,014        2,292        3,436        3,749   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    3,163        5,363        6,224        8,013        8,650        10,017        10,392        12,134        15,613        16,211   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

                   

Subscription and support(1)(2)

    643        1,153        1,231        1,162        1,484        1,787        2,087        2,429        3,258        3,346   

Professional services(1)

    463        851        816        991        1,350        1,505        1,400        1,425        2,397        2,340   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    1,106        2,004        2,047        2,153        2,834        3,292        3,487        3,854        5,655        5,686   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    2,057        3,359        4,177        5,860        5,816        6,725        6,905        8,280        9,958        10,525   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                   

Sales and marketing(1)

    1,112        1,773        1,788        1,658        1,931        2,472        2,726        3,496        3,136        4,015   

Research and development(1)

    880        1,395        1,524        1,509        2,087        2,319        2,730        3,204        14,899        3,494   

Refundable Canadian tax credits

    (111     (204     (206     (207     (149     (147     (144     (143     (136     (138

General and administrative(1)

    675        930        972        1,997        1,315        1,605        1,662        2,250        2,623        3,053   

Depreciation and amortization

    286        481        544        501        562        1,685        688        735        1,055        1,066   

Acquisition-related expenses

    1,724        (26     (5     240        9        519        22        911        290        231   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    4,566        4,349        4,617        5,698        5,755        8,453        7,684        10,453        21,867        11,721   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (2,509     (990     (440     162        61        (1,728     (779     (2,173     (11,909  

 

(1,196

Other expense:

                   

Interest expense, net

    (50     (99     (118     (261     (223     (324     (434     (1,816     (415     (419

Other expense, net

    104        (177     70        (62     (46     119        49        (553     114        (482
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

    54        (276     (48     (323     (269     (205     (385     (2,369     (301     (901
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

-68-


Table of Contents
    Quarter Ended  
    March 31,
2012
    June 30,
2012
    September 30,
2012
    December 31,
2012
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
    March 31,
2014
    June 30,
2014
 
    (in thousands, unaudited)        

Loss before provision for income taxes

    (2,455     (1,266     (488     (161     (208     (1,933     (1,164     (4,542     (12,210     (2,097

Provision for income taxes

    201        21        (222     72        (243     110        (69     (506     (410     (280
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

    (2,254     (1,245     (710     (89     (451     (1,823     (1,233     (5,048     (12,620    
(2,377

Income (loss) from discontinued operations

    586        187        785        233        (139     (177     (195     (131     —          —     

Net income (loss)

  $ (1,668   $ (1,058   $ 75      $ 144      $ (590   $ (2,000   $ (1,428   $ (5,179   $ (12,620   $ (2,377
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Preferred stock dividends and accretion

    (11     (11     (11     (11     (11     (11     (11     (65     (435  

 

(440

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common shareholders

  $ (1,679   $ (1,069   $ 64      $ 133      $ (601   $ (2,011   $ (1,439   $ (5,244   $ (13,055   $
(2,817

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes stock-based compensation.
(2) Includes depreciation and amortization.

 

    Quarter Ended  

Percentage of revenue:

  March 31,
2012
    June 30,
2012
    September 30,
2012
    December 31,
2012
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
    March 31,
2014
    June 30,
2014
 
    (in thousands, unaudited)        

Consolidated Statements of Operations Data:

                   

Revenue:

                   

Subscription and support

    76     83     86     76     79     74     74     74     75     73

Perpetual license

    1     2     1     6     —          5     6     7     3     4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total product revenue

    77     85     87     82     79     79     80     81     78     77
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Professional services

    23     15     13     18     21     21     20     19     22     23
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    100     100     100     100     100     100     100     100     100     100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

                   

Subscription and support(1)(2)

    20     21     20     15     17     18     20     20     21  

 

21

Professional services(1)

    15     16     13     12     16     15     13     12     15     14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    35     37     33     27     33     33     33     32     36     35
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    65     63     67     73     67     67     67     68     64     65
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
    Quarter Ended  

Percentage of revenue:

  March 31,
2012
    June 30,
2012
    September 30,
2012
    December 31,
2012
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
    March 31,
2014
    June 30,
2014
 
    (in thousands, unaudited)        

Operating expenses:

                   

Sales and marketing(1)

    35     33     29     21     22     25     26     29     20  

 

25

Research and development(1)

    28     26     24     19     24     23     26     26     95     22

Refundable Canadian tax credits

    (4 )%      (4 )%      (3 )%      (3 )%      (2 )%      (1 )%      (1 )%      (1 )%      (1 )%      (1 )% 

General and administrative(1)

    21     17     16     25     15     16     16     19     17     19

Depreciation and amortization

    9     9     9     6     6     17     7     6     7     7

Acquisition-related expenses

    55     —          —          3     —          5     —          8     2     1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    144     81     75     71     65     85     74     87     140     73
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (79 )%      (18 )%      (8 )%      2     2     (18 )%      (7 )%      (19 )%      (76 )%      (8 )% 

Other expense:

                   

Interest expense, net

    (2 )%      (2 )%      (2 )%      (3 )%      (3 )%      (3 )%      (4 )%      (15 )%      (3 )%      (3 )% 

Other expense, net

    3     (3 )%      1     (1 )%      (1 )%      1     —          (5 )%      1     (3 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

    1     (5 )%      (1 )%      (4 )%      (4 )%      (2 )%      (4 )%      (20 )%      (2 )%      (6 )% 

Loss before provision for income taxes

    (78 )%      (23 )%      (9 )%      (2 )%      (2 )%      (20 )%      (11 )%      (39 )%      (78 )%      (14 )% 

Provision for income taxes

    6     —          (4 )%      1     (3 )%      1     (1 )%      (4 )%      (3 )%      (2 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

    (72 )%      (23 )%      (13 )%      (1 )%      (5 )%      (19 )%      (12 )%      (43 )%      (81 )%      (16 )% 

Income (loss) from discontinued operations

    19     3     13     3     (2 )%      (2 )%      (2 )%      (1 )%      —       

 

—  

  

Net loss

    (53 )%      (20 )%      —          2     (7 )%      (21 )%      (14 )%      (44 )%      (81 )%      (16 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Preferred stock dividends and accretion

    —          —          —          —          —          —          —          (1 )%      (3 )%   

 

(3

)% 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common shareholders

    (53 )%      (20 )%      —          2     (7 )%      (21 )%      (14 )%      (45 )%      (84 )%   

 

(19

)% 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes stock-based compensation.
(2) Includes depreciation and amortization.

 

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Table of Contents

Our revenue increased in each of the quarters presented above as a result of growth in the number of customers using our applications. This growth is due to our acquisitions of PowerSteering and Tenrox in the first fiscal quarter of 2012, EPM Live in the fourth fiscal quarter of 2012, FileBound in the second fiscal quarter of 2013, ComSci and Clickability in the fourth fiscal quarter of 2013.

Cost of product revenue and cost of professional services revenue increased primarily due to increased personnel and related costs associated with acquisitions from fiscal 2012 and fiscal 2013.

Sales and marketing expense increased primarily due to acquisitions from fiscal 2012 to fiscal 2013 as well as increased marketing expenses mainly in the form of a new company-branding campaign and marketing events, including our first user conference in the fourth fiscal quarter of 2013.

Research and development expenses increased primarily due to increased personnel and related costs and outsourced contractor fees each associated with acquisitions from fiscal 2012 to fiscal 2013. In January 2014, we issued 1,803,574 shares of common stock in connection with an amendment of a technology service agreement with a related party and took a noncash charge of $11.2 million. Our agreement with the related party is viewed as a fixed purchase commitment contract that obligates us to annual purchase commitments even if we do not take delivery of the contracted services. Since the amended agreement still requires payments for future services that we believe are not discounted from amounts charged to other customers, we believe the fair value of the common stock consideration provided to the related party to amend the agreement does not represent an asset and, accordingly, was expensed immediately. Each of these costs related to enhancing existing applications and adding new functionality to our applications.

General and administrative expenses increased primarily due to increased personnel and related costs associated with acquisitions from fiscal 2012 to fiscal 2013 as well as additional professional fees in preparation for operating as a public company.

Seasonality

We have historically experienced seasonality in terms of when we enter into customer agreements. We sign a significantly higher percentage of agreements with new customers, and renewal agreements with existing customers, in the fourth quarter of each calendar year as our customers tend to follow budgeting cycles at the end of the calendar year. Our cash flow from operations has historically been higher in the first quarter of each calendar year than in other quarters. This seasonality is reflected to a much lesser extent, and sometimes is not immediately apparent, in our revenue, due to the fact that we defer revenue recognition. In addition, seasonality may be difficult to observe in our financial results during periods in which we acquire businesses as such results typically are most significantly impacted by such acquisitions.

Liquidity and Capital Resources

To date, we have financed our operations primarily through private placements of preferred stock and common stock and cash from operating activities, and to a lesser extent, borrowing under our loan and security agreements and the issuance of seller notes. As of December 31, 2013 and June 30, 2014, we had cash and cash equivalents of $4.7 million and $3.1 million, respectively, and $4.9 million and $8.0 million, respectively, of available borrowings under our loan and security agreements. As of December 31, 2013 and June 30, 2014, we had $23.9 million and $18.9 million, respectively, of borrowings outstanding under our loan and security agreements. As of December 31, 2013 and June 30, 2014, we had a working capital deficit of $11.3 million and $21.8 million, respectively, which included $16.6 million and $18.4 million, respectively, of deferred revenue recorded as a current liability as of December 31, 2013 and June 30, 2014, for succeeding periods. This deferred revenue will be recognized as revenue in accordance with our revenue recognition policy.

 

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Table of Contents

Cash Flows

The following table summarizes our cash flows for the periods indicated:

 

     Fiscal Year Ended December 31,     Six Months Ended June 30,  
               2012                         2013                     2013                 2014        
     (in thousands)  
                 (unaudited)  

Net cash provided by (used in) operating activities

   $ 1,604      $ (239   $ 214      $ 297   

Net cash used in investing activities

     (33,312     (28,565     (10,402     (324

Net cash provided by (used in) financing activities

     24,255        29,564        11,424        (1,623
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate fluctuations on cash

            51      $ (163   $ 6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

   $ (7,453   $ 811      $ 1,073      $ (1,644
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Fiscal Year Ended December 31,     

Six Months Ended June 30,

 
               2012                          2013                      2013                  2014        
     (in thousands)  
                   (unaudited)  

Cash and cash equivalents

   $ 3,892       $ 4,703       $ 4,965       $ 3,059   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash Flows from Operating Activities

Cash used in operating activities is significantly influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business. Our operating assets and liabilities consist primarily of receivables from clients and unbilled professional services, accounts payable and accrued expenses and deferred revenues. The volume of professional services rendered and the related timing of collections on those bookings, as well as payments of our accounts payable and accrued payroll and related benefits affect these account balances.

Our cash provided in operating activities for the first six months of 2014 primarily reflects our net loss of $15.0 million, offset by non-cash expenses that included a $11.2 million charge for the 1,803,574 shares of common stock issued to DevFactory, $3.6 million of depreciation and amortization, $0.5 million of non-cash interest expense, and $0.4 million of non-cash stock compensation expense. Working capital sources of cash included a $3.0 million increase in deferred revenue, a $0.7 million increase in accrued expenses and other liabilities and a $0.4 million increase in accounts payable. These sources of cash were offset by a $3.0 million increase in accounts receivable and a $1.6 million increase in prepaids and other assets.

Our cash used in operating activities for fiscal 2013 primarily reflects our net loss of $9.2 million, offset by non-cash expenses that included $5.6 million of depreciation and amortization, $1.6 million of non-cash interest expense, and $0.5 million of non-cash stock compensation expense. Working capital sources of cash included $2.9 million in collections on accounts receivable and $2.2 million of increases in accrued expenses and other liabilities. These sources of cash were offset by $1.6 million from an increase in prepaids and other, $1.1 million from a decrease in accounts payable, and $1.0 million resulting from a decrease in deferred revenue.

Our cash provided by operating activities for fiscal 2012 primarily reflects our net loss of $2.5 million, offset by $2.8 million of depreciation and amortization. Working capital sources of cash included $5.9 million in deferred revenue and $0.9 million from an increase in accounts payable. These sources of cash were partially offset by a use of $3.5 million from an increase in accounts receivable, $0.8 million from an increase in prepaids and other, and $0.4 million from a decrease in accrued expenses and other liabilities.

 

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Table of Contents

A substantial source of cash is provided as a result of booking for subscriptions in advance, which is recorded as deferred revenue, and is included on our consolidated balance sheet as a liability. Deferred revenue consists of the unearned portion of booked fees for our software subscriptions and support, which is amortized into revenue in accordance with our revenue recognition policy. We assess our liquidity, in part, through an analysis of new subscriptions booked, expected cash receipts on new and existing subscriptions, and our ongoing operating expense requirements.

Cash Flows from Financing Activities

Our primary financing activities have consisted of capital raised to fund our operations as well as proceeds from debt obligations entered into to finance our operations. For the six months ended June 30, 2014, we used $2.8 million of cash for repayment of debt. For fiscal 2013, cash provided by financing activities consisted primarily of $19.7 million in proceeds from the issuance of preferred stock and $28.0 million in proceeds from debt, offset by $17.5 million for repayment of debt. For fiscal 2012, cash provided by financing activities consisted primarily of $11.3 million in proceeds from the issuance of preferred stock and $17.0 million in proceeds from debt, offset by $3.6 million for repayment of debt.

Cash Flows from Investing Activities

Our primary investing activities have consisted of acquisitions of complementary technologies, products and businesses. As our business grows, we expect our primary investing activities to continue to further expand our family of software applications and infrastructure and support additional personnel. For the six months ended June 30, 2014, we used $0.3 million for the purchases of property and equipment. For fiscal 2013 and 2012, cash used in investing activities consisted of $28.6 million and $33.3 million, respectively, for business combinations, net of cash acquired and $0.3 million and $3 million, respectively, of additional consideration paid to sellers of acquired businesses. In addition, for fiscal 2013 and 2012, we used $0.3 million and $0.3 million, respectively, for the purchases of property and equipment.

We believe that our cash and cash equivalents remaining after this offering and the amount available pursuant to our loan and security agreements will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced applications and professional service offerings and acquisitions of complementary technologies, products and businesses. In the event that additional financing is required from outside sources, we may be unable to raise the funds on acceptable terms, if at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition could be adversely affected.

Loan and Security Agreements

U.S. Loan Agreement

On March 5, 2012, we entered into a loan and security agreement with Comerica Bank, as amended, the U.S. Loan Agreement. The U.S. Loan Agreement provides to us and certain of our 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, 2012, we had $7.6 million outstanding as term loans under the U.S. loan agreement. As of December 31, 2013, we had $2.1 million outstanding as revolving loans and $19.1 million as term loans under the U.S. Loan Agreement. As of June 30, 2014, we had $3.6 million outstanding as revolving loans and $17.9 million as term loans under the U.S. Loan Agreement. Loans drawn under the U.S. Loan Agreement may be used for working capital, to finance acquisitions and for general corporate purposes.

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

 

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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, we and the other borrowers may be required to begin prepaying certain term loan advances with a percentage of our excess cash flow, if any.

Our obligations and the obligations of the other borrowers under the loan facility are secured by a security interest in substantially all of our assets and the other borrowers’ assets, including intellectual property. Our other and future subsidiaries may also be required to become co-borrowers or guarantors under the loan facility and grant a security interest in their assets in connection therewith.

The U.S. Loan Agreement contains customary affirmative covenants and customary negative covenants limiting our 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. We 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 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 5.0%.

Canadian Loan Agreement

On February 10, 2012, Tenrox Inc., a Canadian corporation and our wholly-owned subsidiary or, 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, 2012, the Canadian Subsidiary had $5.4 million outstanding as term loans under the Canadian Loan Agreement. As of December 31, 2013, the Canadian Subsidiary had $1.0 million outstanding as revolving loans and $1.7 million outstanding as term loans under the Canadian Loan Agreement. As of June 30, 2014, the Canadian Subsidiary had a zero balance on their revolving loans and $1.0 million outstanding as term loans under the Canadian Loan Agreement. Loans drawn under the Canadian Loan Agreement may be used for working capital and for general corporate purposes.

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

 

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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 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 in 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 in their 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 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 5.0%.

Contractual Payment Obligations

The following summarizes our contractual commitments and obligations as of December 31, 2013:

 

     Payment Due by Period  
     Total      Less than
1 Year
     1–3
Years
     3–5
Years
     More than
5 Years
 
     (in thousands)  

Operating lease obligations

   $ 3,046       $ 1,095       $ 1,612       $ 339       $   

Capital lease obligations

     1,134         446         547         141