Upland Software, Inc. - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-36720

UPLAND SOFTWARE, INC.

(Exact name of registrant as specified in its charter)


Delaware			27-2992077
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

401 Congress Ave., Suite 1850

Austin, Texas 78701

(Address, including zip code, of registrant’s principal executive offices)

(512) 960-1010

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

UPLD

The Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

(Do not check if a smaller reporting company)

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

As of October 31, 2022, 31,778,044 shares of the registrant’s Common Stock were outstanding.

Table of Contents

Upland Software, Inc.

Table of Contents


		Page
Part I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021	1
	Condensed Consolidated Statements of Operations for the Three and Nine months ended September 30, 2022 and September 30, 2021	2
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine months ended September 30, 2022 and September 30, 2021	3
	Condensed Consolidated Statements of Equity for the Three and Nine months ended September 30, 2022 and September 30, 2021	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and September 30, 2021	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	46
Part II.	OTHER INFORMATION	47
Item1A.	Risk Factors	47
Item 6.	Exhibits	48
Exhibit Index		49
Signature		50

Table of Contents

Item 1. Financial Statements



Upland Software, Inc.
Condensed Consolidated Balance Sheets

(in thousands, except for share and per share information)	September 30, 2022		December 31, 2021

ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	241,720	$	189,158
Accounts receivable (net of allowance of $1,119 and $1,107 at September 30, 2022 and December 31, 2021, respectively)	38,174		50,499
Deferred commissions, current	10,091		9,824
Unbilled receivables	5,991		4,801
Prepaid expenses and other current assets	12,679		8,709
Total current assets	308,655		262,991
Tax credits receivable	3,256		3,345
Property and equipment, net	2,040		2,667
Operating lease right-of-use asset	6,395		6,454
Intangible assets, net	254,040		279,920
Goodwill	479,642		457,472
Deferred commissions, noncurrent	14,321		14,808
Interest rate swap assets	43,947		—
Other assets	1,332		1,350
Total assets	$	1,113,628	$	1,029,007

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	20,157	$	20,362
Accrued compensation	10,050		9,829
Accrued expenses and other current liabilities	10,658		9,086
Deferred revenue	98,676		102,847
Liabilities due to sellers of businesses	5,941		7,607
Operating lease liabilities, current	3,601		3,546
Current maturities of notes payable (includes unamortized discount of $2,269 and $2,233 at September 30, 2022 and December 31, 2021, respectively)	3,131		3,167
Total current liabilities	152,214		156,444

Notes payable, less current maturities (includes unamortized discount of $5,765 and $7,287 at September 30, 2022 and December 31, 2021, respectively)	512,635		515,163
Deferred revenue, noncurrent	3,028		2,058
Operating lease liabilities, noncurrent	5,504		6,773
Noncurrent deferred tax liability, net	19,080		22,793
Interest rate swap liabilities	—		8,409
Other long-term liabilities	1,168		1,079
Total liabilities	693,629		712,719

Series A Convertible Preferred stock, 0.0001 par value; 5,000,000 shares authorized: 115,000 shares issued and outstanding as of September 30, 2022; no shares issued and outstanding as of December 31, 2021, respectively.	111,066		—
Stockholders’ equity:

Common stock, $0.0001 par value; 50,000,000 shares authorized: 31,777,122 and 31,096,548 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively)	3		3
Additional paid-in capital	600,892		568,384
Accumulated other comprehensive loss	(5,640)		(11,514)
Accumulated deficit	(286,322)		(240,585)
Total stockholders’ equity	308,933		316,288
Total liabilities, convertible preferred stock and stockholders’ equity	$	1,113,628	$	1,029,007

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

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Upland Software, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except for share and per share information)



	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue:
Subscription and support	$	75,095	$	72,264	$	223,739	$	215,322
Perpetual license	1,684		684		5,320		1,451
Total product revenue	76,779		72,948		229,059		216,773
Professional services	2,770		3,105		9,433		9,513
Total revenue	79,549		76,053		238,492		226,286
Cost of revenue:
Subscription and support	23,553		22,968		69,747		68,811
Professional services and other	2,173		1,848		7,287		5,444
Total cost of revenue	25,726		24,816		77,034		74,255
Gross profit	53,823		51,237		161,458		152,031
Operating expenses:
Sales and marketing	14,361		14,364		45,285		41,094
Research and development	11,645		10,441		35,388		32,494

General and administrative	14,668		17,725		56,110		61,286
Depreciation and amortization	10,117		10,764		31,970		30,785
Acquisition-related expenses	3,586		3,685		18,924		18,805
Total operating expenses	54,377		56,979		187,677		184,464
Loss from operations	(554)		(5,742)		(26,219)		(32,433)
Other expense:
Interest expense, net	(7,354)		(7,971)		(22,870)		(23,700)

Other income (expense), net	339		(650)		1,698		(812)
Total other expense	(7,015)		(8,621)		(21,172)		(24,512)
Loss before benefit from income taxes	(7,569)		(14,363)		(47,391)		(56,945)
Benefit from income taxes	1,056		3,348		1,654		6,204


Net loss	$	(6,513)	$	(11,015)	$	(45,737)	$	(50,741)
Preferred stock dividends	(546)		—		(546)		—
Net loss attributable to common stockholders	$	(7,059)	$	(11,015)	$	(46,283)	$	(50,741)
Net loss per common share:
Net loss per common share, basic and diluted	$	(0.22)	$	(0.36)	$	(1.47)	$	(1.68)


Weighted-average common shares outstanding, basic and diluted	31,655,206		30,428,675		31,401,463		30,167,171

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

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Upland Software, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(unaudited)

(in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net loss	$	(6,513)	$	(11,015)	$	(45,737)	$	(50,741)
Other comprehensive income (loss):
Foreign currency translation adjustment	(13,869)		(4,548)		(32,272)		(5,611)
Unrealized translation loss on intercompany loans with foreign subsidiaries	(7,415)		(2,664)		(14,211)		(884)
Unrealized gain on interest rate swaps	17,988		2,112		52,357		14,391
Other comprehensive income (loss):	$	(3,296)	$	(5,100)	$	5,874	$	7,896
Comprehensive loss	$	(9,809)	$	(16,115)	$	(39,863)	$	(42,845)

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

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Upland Software, Inc.

Condensed Consolidated Statements of Equity

(unaudited)

(in thousands, except share amounts)


	Three Months Ended September 30, 2022
	Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount		Shares	Amount
Balance at June 30, 2022	—	$	—	31,632,628	$	3	$	594,080	$	(2,344)	$	(279,809)	$	311,930


Issuance of Convertible Preferred Stock	115,000	110,520		—	—		—		—		—		—
Dividends accrued - Convertible Preferred Stock	—	546		—	—		(546)		—		—		(546)
Issuance of stock under Company plans, net of shares withheld for tax	—	—		144,494	—		(169)		—		—		(169)

Stock-based compensation	—	—		—	—		7,527		—		—		7,527

Foreign currency translation adjustment	—	—		—	—		—		(13,869)		—		(13,869)
Unrealized translation loss on foreign currency denominated intercompany loans	—	—		—	—		—		(7,415)		—		(7,415)
Unrealized gain on interest rate swaps	—	—		—	—		—		17,988		—		17,988
Net loss	—	—		—	—		—		—		(6,513)		(6,513)
Balance at September 30, 2022	115,000	$	111,066	31,777,122	$	3	$	600,892	$	(5,640)	$	(286,322)	$	308,933




	Three Months Ended September 30, 2021
	Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount		Shares	Amount
Balance at June 30, 2021	—	$	—	30,413,246	$	3	$	546,771	$	(13,238)	$	(222,099)	$	311,437






Issuance of stock under Company plans, net of shares withheld for tax	—	—		103,104	—		(323)		—		—		(323)

Stock-based compensation	—	—		—	—		12,047		—		—		12,047
Foreign currency translation adjustment	—	—		—	—		—		(4,548)		—		(4,548)
Unrealized translation gain on foreign currency denominated intercompany loans	—	—		—	—		—		(2,664)		—		(2,664)
Unrealized loss on interest rate swaps	—	—		—	—		—		2,112		—		2,112
Net loss	—	—		—	—		—		—		(11,015)		(11,015)
Balance at September 30, 2021	—	$	—	30,516,350	$	3	$	558,495	$	(18,338)	$	(233,114)	$	307,046

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

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	Nine Months Ended September 30, 2022
	Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2021		—		31,096,548	$	3	$	568,384	$	(11,514)	$	(240,585)	$	316,288


Issuance of Convertible Preferred Stock	115,000	110,520		—	—		—		—		—		—
Dividends accrued - Convertible Preferred Stock	—	546		—	—		(546)		—		—		(546)
Issuance of stock under Company plans, net of shares withheld for tax	—	—		680,574	—		(969)		—		—		(969)

Stock-based compensation	—	—		—	—		34,023		—		—		34,023

Foreign currency translation adjustment	—	—		—	—		—		(32,272)		—		(32,272)
Unrealized translation loss on intercompany loans with foreign subsidiaries	—	—		—	—		—		(14,211)		—		(14,211)
Unrealized gain on interest rate swaps	—	—		—	—		—		52,357		—		52,357
Net loss	—	—		—	—		—		—		(45,737)		(45,737)
Balance at September 30, 2022	115,000	$	111,066	31,777,122	$	3	$	600,892	$	(5,640)	$	(286,322)	$	308,933




				Nine Months Ended September 30, 2021
	Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2020	—	$	—	29,987,114	$	3	$	515,219	$	(26,234)	$	(182,373)	$	306,615



Issuance of stock under Company plans, net of shares withheld for tax	—	—		529,236	—		(145)		—		—		(145)

Stock-based compensation	—	—		—	—		43,421		—		—		43,421

Foreign currency translation adjustment	—	—		—	—		—		(5,611)		—		(5,611)
Unrealized translation loss on intercompany loans with foreign subsidiaries	—	—		—	—		—		(884)		—		(884)
Unrealized gain on interest rate swaps	—	—		—	—		—		14,391		—		14,391
Net loss	—	—		—	—		—		—		(50,741)		(50,741)
Balance at September 30, 2021	—	$	—	30,516,350	$	3	$	558,495	$	(18,338)	$	(233,114)	$	307,046

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

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Upland Software, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)

	Nine Months Ended September 30,
	2022		2021
Operating activities
Net loss	$	(45,737)	$	(50,741)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	41,333		39,420
Change in fair value of liabilities due to sellers of businesses	(75)		(3,503)
Deferred income taxes	(3,291)		(7,726)
Amortization of deferred costs	9,041		6,283
Foreign currency re-measurement loss	40		18
Non-cash interest and other expense	1,687		1,682
Non-cash stock compensation expense	34,023		43,421


Non-cash loss on retirement of fixed assets	26		2

Changes in operating assets and liabilities, net of purchase business combinations:
Accounts receivable	18,187		11,748
Prepaid expenses and other current assets	(5,055)		(3,672)
Accounts payable	(1,464)		6,647
Accrued expenses and other liabilities	(11,256)		(8,111)
Deferred revenue	(13,321)		(6,822)
Net cash provided by operating activities	24,138		28,646
Investing activities
Purchase of property and equipment	(718)		(965)

Purchase business combinations, net of cash acquired	(62,356)		(92,417)

Net cash used in investing activities	(63,074)		(93,382)
Financing activities
Payments on finance leases	—		(12)
Proceeds from notes payable, net of issuance costs	(200)		(120)
Payments on notes payable	(4,050)		(4,050)

Issuance of Series A Convertible Preferred stock, net of issuance costs	110,520		—

Taxes paid related to net share settlement of equity awards	(1,159)		(373)
Issuance of common stock, net of issuance costs	190		228

Additional consideration paid to sellers of businesses	(8,174)		(769)
Net cash provided by (used in) financing activities	97,127		(5,096)
Effect of exchange rate fluctuations on cash	(5,629)		(613)
Change in cash and cash equivalents	52,562		(70,445)
Cash and cash equivalents, beginning of period	189,158		250,029
Cash and cash equivalents, end of period	$	241,720	$	179,584
Supplemental disclosures of cash flow information:
Cash paid for interest, net of interest rate swaps	$	21,804	$	22,043
Cash paid for taxes	$	3,163	$	1,772

Non-cash investing and financing activities:
Business combination consideration including holdbacks and earnouts	$	7,820	$	14,204

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

Upland Software, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The condensed consolidated financial statements include the accounts of Upland Software, Inc. and its wholly owned subsidiaries (collectively referred to as “Upland”, the “Company”, “we”, “us” or “our”). All intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation.

The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. In the opinion of management of the Company, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, in all material respects, and include all adjustments of a normal recurring nature necessary for a fair presentation. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any other period.

The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2021 Annual Report on Form 10-K filed with the SEC on February 24, 2022.

Use of Estimates

The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses. Significant items subject to such estimates include those related to revenue recognition, deferred commissions, allowance for credit losses, stock-based compensation, contingent consideration, acquired intangible assets, impairment of goodwill, intangibles and long-lived assets, the useful lives of intangible assets and property and equipment, the fair value of the Company’s interest rate swaps and income taxes. In accordance with GAAP, management bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Management regularly evaluates its estimates and assumptions using historical experience and other factors; however, actual results could differ from those estimates.

We assessed the impact of COVID-19 on the estimates and assumptions and determined there was no material impact. Upland is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of November 3, 2022, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

Concentrations of Credit Risk and Significant Customers

Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, accounts receivable and the Company’s interest rate swap hedges. The Company’s cash and cash equivalents are placed with high-quality financial institutions, which, at times, may exceed federally insured limits. The Company has not experienced any losses in these accounts, and the Company does not believe it is exposed to any significant credit risk related to cash and cash equivalents. The Company provides credit, in the normal course of business, to a number of its customers. To manage accounts receivable credit risk, the Company performs periodic credit evaluations of its customers and maintains current expected credit losses which considers such factors as historical loss information, geographic location of customers, current market conditions, and reasonable and supportable forecasts.

No individual customer represented more than 10% of total revenues for the nine months ended September 30, 2022, or more than 10% of accounts receivable as of September 30, 2022 or December 31, 2021.

Derivatives

Cash Flow Hedges—Interest Rate Swap Agreements

In August 2019 and in connection with borrowing funds under the Company’s credit facility, the Company entered into a floating-to-fixed interest rate swap agreements to limit exposure to interest rate risk related to our debt. These interest rate swaps effectively converted the entire balance of the Company's $540 million original principal term loans from variable interest payments to fixed interest rate payments, based on an annualized fixed rate of 5.4%, for a 7-year term of debt. ASC 815, Derivatives and Hedging, requires entities to recognize derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. The Company assessed the effectiveness of the hedging relationship under the hypothetical derivative method and noted that all of the critical terms of the hypothetical derivative and hedging instrument were the same. The hedging relationship continues to limit the Company’s exposure to the variability in interest rates under the Company’s term loans and related cash outflows. As such, the Company has deemed this hedging relationship as highly effective in offsetting cash flows attributable to hedged risk (variability in forecasted monthly interest payments) for the term of the term loans and interest rate swap agreements. All derivative financial instruments are recorded at fair value as a net asset or liability in the accompanying condensed consolidated balance sheets. As of September 30, 2022, the fair value of the interest rate swaps included in assets in the Company's condensed consolidated balance sheets was $43.9 million. As of December 31, 2021, the fair value of the interest rate swaps included in liabilities in the Company's condensed consolidated balance sheets was $8.4 million.

The interest rate swap has been designated as a cash flow hedge. As such, the change in the fair value of the hedging instruments is recorded in Other comprehensive income (loss) in the accompanying condensed consolidated statements of comprehensive income (loss). Amounts deferred in Other comprehensive income (loss) will be reclassified to Interest expense in the accompanying condensed consolidated statements of operations in the period in which the hedged item affects earnings.

Fair Value of Financial Instruments

The Company recognizes financial instruments in accordance with the authoritative guidance on fair value measurements and disclosures for financial assets and liabilities. This guidance defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. The guidance also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.

These tiers include Level 1, defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.

The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable and debt. The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value, primarily due to short maturities. The carrying values of the Company’s debt instruments approximated their fair value based on rates currently available to the Company.

Preferred Stock

In August 2022, the Company closed on the issuance and sale of its Series A Convertible Preferred Stock (the “Series A Preferred Stock”). The Company issued 115,000 shares of Series A Preferred Stock, par value $0.0001 per share, at a price of $1,000 per share, for an initial investment amount of $115.0 million. Pursuant to the Certification of Designation, cumulative preferred dividends accrue quarterly on the Series A Preferred Stock at a rate of (i) 4.5% per annum until but excluding the seven year anniversary of the closing, and (ii) 7% per annum on and after the seven year anniversary of the closing. See “Note 9. Series A Preferred Stock—Series A Convertible Preferred Stock” for further details.

The Series A Preferred Stock and cumulative preferred dividends, net of preferred issuance costs, is presented as Mezzanine Equity of $111.1 million as of September 30, 2022 in the Company’s condensed consolidated balance sheets. The Series A Preferred Stock is classified as Mezzanine Equity because it is redeemable at the option of its holders (upon a deemed liquidation event as defined in “Note 9. Series A Preferred Stock—Series A Convertible Preferred Stock—Deemed Liquidation Event Redemption”) and has a condition for redemption that is not solely within the control of the issuer.

Recent Accounting Pronouncements

Recently issued accounting pronouncements - Adopted

In August 2020, the Financial Standards Accounting Board (“FASB”) issued accounting standards update (“ASU”) 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This update also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. The update also requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The guidance is effective for interim and annual periods beginning after December 15, 2021. The Company adopted this guidance in the first quarter of fiscal 2022.

Recently issued accounting pronouncements - Not yet adopted

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company evaluated the impact of this standard and determined it did not have a material impact on on our consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which creates an exception to the general recognition and measurement principle for contract assets and contract liabilities from contracts with customers acquired in a business combination. The new guidance will require companies to apply the definition of a performance obligation under accounting standard codification (“ASC”) Topic 606 to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers that are acquired in a business combination. Under current GAAP, an acquirer in a business combination is generally required to recognize and measure the assets it acquires and the liabilities it assumes at fair value on the acquisition date. The new guidance will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. These amendments are effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is evaluating the impact of this standard on our consolidated financial statements.

2. Acquisitions

The Company performs quantitative and qualitative analyses to determine the significance of each acquisition to the financial statements the Company. Based on these analyses the below acquisitions were deemed to be insignificant on an individual and cumulative basis.

2022 Acquisitions

Acquisitions completed during the nine months ended September 30, 2022 include the following:

•BA Insight - On February 22, 2022, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of BA Insight Inc., (“BA Insight”), a cloud-based enterprise knowledge management solution. Revenues recorded since the acquisition date through September 30, 2022 were approximately $5.2 million. Revenues recorded for BA Insight for the quarter ended September 30, 2022 were approximately $2.4 million.

•Objectif Lune - On January 07, 2022, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Objectif Lune Inc., a Quebec proprietary company (“Objectif Lune”), cloud-based document workflow product. Revenues recorded since the acquisition date through September 30, 2022 were approximately $15.5 million. Revenues recorded for Objectif Lune for the quarter ended September 30, 2022 were approximately $5.1 million.

2021 Acquisition

The acquisition completed during the year ended December 31, 2021 were:

•Panviva - On June 24, 2021, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Panviva Pty Ltd, an Australian proprietary company (“Panviva”), a cloud-based enterprise knowledge management solution.

•BlueVenn - On February 28, 2021 the Company entered into an agreement to purchase the shares comprising the entire issued share capital of BlueVenn Group Limited, a company limited by shares organized and existing under the laws of England and Wales (“BlueVenn”), a cloud-based customer data platform.

•Second Street - On January 19, 2021, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Second Street Media, Inc., a Missouri corporation (“Second Street”), an audience engagement platform.

Consideration

The following table summarizes the consideration transferred for the acquisitions described above (in thousands):


	BA Insight		Objectif Lune		Panviva		BlueVenn		Second Street
Cash	$	33,355	$	29,750	$	19,931	$	53,535	$	25,436
Holdback (1)	645		5,250		3,517		2,429		5,000
Contingent consideration (2)	—		—		—		2,535		1,650



Working capital and other adjustments	1,587		338		379		(537)		(1,365)
Total consideration	$	35,587	$	35,338	$	23,827	$	57,962	$	30,721

(1)Represents the cash holdbacks subject to indemnification claims that are payable 12 months following closing for Objectif Lune, Panviva and Second Street, 15 months following closing for BA Insight and 18 months following closing for BlueVenn.

(2)Represents the acquisition date fair value of anticipated earnout payments, which are based on the estimated probability of attainment of the underlying future performance-based conditions at the time of acquisition. The maximum potential payout for the BlueVenn and Second Street earn-outs were $21.7 million and $3.0 million, respectively. As of March 31, 2022, the earnout payments for BlueVenn and Second Street were finalized resulting in no payments made.

Fair Value of Assets Acquired and Liabilities Assumed

The Company recorded the purchase of the acquisitions described above using the acquisition method of accounting, and has recognized the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The purchase accounting for the 2022 acquisitions of BA Insight and Objectif Lune are preliminary as the Company has not finalized the overall impact of these acquisitions. Management has recorded the purchase price allocations based upon acquired company information that is currently available. Management expects to complete the purchase accounting for BA Insight and Objectif Lune no later than the first quarter of 2023.

The following condensed table presents the preliminary and finalized acquisition-date fair value of the assets acquired and liabilities assumed for the acquisitions during the year ended December 31, 2021 and through the nine months ended September 30, 2022, (in thousands):


	Preliminary				Final
	BA Insight		Objectif Lune		Panviva		BlueVenn		Second Street
Year Acquired	2022		2022		2021		2021		2021

Cash	$	4	$	745	$	132	$	1,115	$	—
Accounts receivable	2,466		5,251		2,122		1,289		1,105
Other current assets	4,080		7,197		4,985		2,002		89

Operating lease right-of-use asset	110		1,905		197		1,357		489
Property and equipment	3		248		26		611		156
Customer relationships	10,500		17,717		9,757		18,888		14,600
Trade name	150		362		76		238		200
Technology	2,000		5,512		2,194		4,337		3,400
Favorable Leases	—		291		—		—		—
Goodwill	25,993		23,283		16,604		44,892		16,586
Other assets	25		744		33		24		13
Total assets acquired	45,331		63,255		36,126		74,753		36,638
Accounts payable	(236)		(2,001)		(1,257)		(2,772)		(230)
Accrued expense and other	(4,193)		(9,437)		(5,053)		(2,429)		(378)
Deferred tax liabilities	(388)		(5,726)		(2,395)		(3,640)		(4,320)
Deferred revenue	(4,817)		(8,848)		(3,397)		(6,593)		(500)
Operating lease liabilities	(110)		(1,905)		(197)		(1,357)		(489)

Total liabilities assumed	(9,744)		(27,917)		(12,299)		(16,791)		(5,917)
Total consideration	$	35,587	$	35,338	$	23,827	$	57,962	$	30,721

The Company uses third party valuation consultants to determine the fair values of assets acquired and liabilities assumed. Tangible assets are valued at their respective carrying amounts, which approximates their estimated fair value. The valuation of identifiable intangible assets reflects management’s estimates based on, among other factors, the use of established valuation methods. Customer relationships are valued using the multi-period excess earnings method. Developed technology and trade names are valued using the relief-from-royalty method.

The following table summarizes the weighted-average useful lives, by major finite-lived intangible asset class, for intangibles acquired during the nine months ended September 30, 2022 and the year ended December 31, 2021 (in years):


	Useful Life
	September 30, 2022	December 31, 2021
Customer relationships	7.0	7.0
Trade name	2.0	2.0
Developed technology	6.2	5.0
Favorable Leases	6.3	0
Total weighted-average useful life	6.8	6.6

During the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill based on changes to management's estimates and assumptions.

The goodwill of $127.4 million for the above acquisitions is primarily attributable to the synergies expected to arise after the acquisition and the value of the acquired workforce. Goodwill that is deductible for tax purposes at the time of the acquisitions was $2.0 million.

Total transaction related expenses incurred with respect to acquisition activity during the three months ended September 30, 2022 and September 30, 2021 was a gain of $0.3 million and an expense of $0.1 million, respectively. During the nine months ended September 30, 2022 and September 30, 2021, total transaction related expenses were $4.6 million and $6.2 million,

respectively. Transaction related expenses, excluding transformation costs, include expenses such as banker fees, legal and professional fees, insurance costs, and deal bonuses. Transaction costs are included in acquisition-related expenses in our condensed consolidated statement of operations.

Other Acquisitions and Divestitures

From time to time we may purchase or sell customer relationships that meet certain criteria. We had no purchase or sale of customer relationships during the three and nine months ended September 30, 2022 and September 30, 2021.

3. Fair Value Measurements

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. GAAP sets forth a three–tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three tiers are Level 1, defined as observable inputs, such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, which therefore requires an entity to develop its own assumptions.

As of September 30, 2022 and December 31, 2021, the Company had no accrued earnout business acquisition contingent consideration liabilities for which fair values are measured as Level 3 instruments. These contingent consideration liabilities were recorded at fair value on the acquisition date and are remeasured periodically based on the then assessed fair value and adjusted if necessary. The increases or decreases in the fair value of contingent consideration payable can result from changes in anticipated revenue levels, changes in assumed discount periods and rates and changes in foreign exchange rates. As the fair value measure is based on significant inputs that are not observable in the market, they are categorized as Level 3. Any adjustment related to subsequent changes in the fair value of contingent consideration is recorded in acquisition-related expense or other income (expense) in the Company's condensed consolidated statement of operations based on management's assessment of the nature of the liability. Earnout consideration liabilities are reported in “Due to sellers in businesses” in the Company's condensed consolidated balance sheets. As of March 31, 2022, the earnout payments for BlueVenn and Second Street were finalized resulting in no payments made.

In connection with entering into, and expanding, the Company's current credit facility, as discussed further in “Note 6. Debt—Credit Facility”, the Company entered into interest rate swaps for the full 7 year term of the Company's term loans, effectively fixing our interest rate at 5.4% for the full value $540 million of the original principal term loans. The fair value of the Company's swaps are measured at the end of each interim reporting period based on the then assessed fair value and adjusted if necessary. As the fair value measure is based on the market approach, they are categorized as Level 2. As of September 30, 2022 the fair value of the interest rate swap is included in the “Interest rate swap assets” section compared to December 31, 2021 in which the fair value of the interest rate swaps included in the liabilities section on the Company's condensed consolidated balance sheets.

Liabilities measured at fair value on a recurring basis are summarized below (in thousands):


	Fair Value Measurements at September 30, 2022
	(unaudited)
	Level 1		Level 2		Level 3		Total
Assets:
Interest rate swap assets	$	—	$	43,947	$	—	$	43,947


	Fair Value Measurements at December 31, 2021
	Level 1		Level 2		Level 3		Total


Liabilities:
Interest rate swap liabilities	$	—	$	8,409	$	—	$	8,409

Debt

The Company believes the carrying value of its long-term debt at September 30, 2022 approximates its fair value based on the variable interest rate feature or based upon interest rates currently available to the Company. The estimated fair value of the Company's debt, before debt discount, at September 30, 2022 and December 31, 2021 are $523.8 million and $527.9 million, respectively.

4. Goodwill and Other Intangible Assets

Changes in the Company’s goodwill balance for the nine months ended September 30, 2022 are summarized in the table below:


($ in thousands)	Goodwill
Balance at December 31, 2021	$	457,472
Acquired in business combinations	48,768

Adjustment related to prior year business combinations	1,466
Adjustment related to finalization of current year business combinations	508
Foreign currency translation adjustment and other	(28,572)
Balance at September 30, 2022	$	479,642

Goodwill is evaluated for impairment annually in October or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. The events and circumstances considered by the Company include the business climate, legal factors, operating performance indicators and competition. Determining the fair value of goodwill is subjective in nature and often involves the use of estimates and assumptions including, without limitation, use of estimates of future prices and volumes for our products, capital needs, economic trends and other factors which are inherently difficult to forecast. If actual results, or the plans and estimates used in future impairment analyses are lower than the original estimates used to assess the recoverability of these assets, we could incur impairment charges in a future period.

Net intangible assets include the estimated acquisition-date fair values of customer relationships, marketing-related assets, developed technology, and non-compete agreements that the Company recorded as part of its business acquisitions.

The following is a summary of the Company’s intangible assets, net (in thousands):


	Estimated Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
September 30, 2022:
Customer relationships	1-10	$	359,858	$	147,631	$	212,227
Trade name	1.5-10	9,535		6,298		3,237
Developed technology	4-9	90,186		51,848		38,338

Favorable Leases	6.3	270		32		238
Total intangible assets		$	459,849	$	205,809	$	254,040


	Estimated Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
December 31, 2021:
Customer relationships	1-10	$	358,943	$	126,329	$	232,614
Trade name	1.5-10	9,714		5,752		3,962
Developed technology	4-9	88,548		45,204		43,344
Non-compete agreements	3	1,148		1,148		—
Total intangible assets		$	458,353	$	178,433	$	279,920

The Company periodically reviews the estimated useful lives of its identifiable intangible assets, taking into consideration any events or circumstances that might result in either a diminished fair value or revised useful life.

Management recorded no impairments of intangible assets or goodwill during the three and nine months ended September 30, 2022 or the year ended December 31, 2021.

Total amortization expense was $12.8 million and $13.2 million during the three months ended September 30, 2022 and September 30, 2021, respectively, and $40.1 million and $37.9 million during the nine months ended September 30, 2022 and September 30, 2021, respectively.

As of September 30, 2022, the estimated annual amortization expense for the next five years and thereafter is as follows (in thousands):


	Amortization Expense
Year ending December 31:
Remainder of 2022	$	12,409
2023	48,769
2024	46,381
2025	43,178
2026	40,299
2027 and thereafter	63,004
Total	$	254,040

5. Income Taxes

The Company’s income tax benefit for the three and nine months ended September 30, 2022 and September 30, 2021 reflects its estimate of the effective tax rates expected to be applicable for the full years, adjusted for any discrete events that are recorded in the period in which they occur. The estimates are re-evaluated each quarter based on the estimated tax expense for the full year.

The tax benefit from income taxes of $1.1 million and $1.7 million for the three and nine months ended September 30, 2022 is primarily related to foreign income taxes associated with our combined non-U.S. operations and the deferred tax benefit attributable to the release of valuation allowance related to the acquisition of deferred tax liabilities associated with the Company’s business combination occurring during the nine months ended September 30, 2022, as discussed in “Note 2. Acquisitions.” These tax benefits are offset by changes in deferred tax liabilities associated with amortization of United States tax deductible goodwill and state taxes in certain states in which the Company does not file on a consolidated basis or have net operating loss carryforwards and the impact, recorded as discrete for the three months ended March 31, 2022, of the deferred tax provision attributable to the tax gain associated with the transfer of goodwill between foreign and domestic jurisdictions.

The tax benefit for incomes taxes of $3.3 million and benefit from income taxes of $6.2 million for the three and nine months ended September 30, 2021 is primarily related to the deferred tax benefit attributable to the release of valuation allowance related to the acquisition of deferred tax liabilities associated with the Second Street business combination, as discussed in “Note 2. Acquisitions”, and foreign income taxes associated with our combined non-U.S. operations. These tax benefits are offset by changes in deferred tax liabilities associated with amortization of United States tax deductible goodwill, state taxes in certain states in which the Company does not file on a consolidated basis or have net operating loss carryforwards. The release of valuation allowance is attributable to ASC 805-740-30-3 and acquisitions of domestic entities with deferred tax liabilities that, upon acquisition, allowed us to recognize certain deferred tax assets of approximately $4.3 million during the three months ended March 31, 2021 that had previously been offset by a valuation allowance.

The Company has historically incurred operating losses in the United States and, given its cumulative losses and limited history of profits, has recorded a valuation allowance against its United States net deferred tax assets, exclusive of tax deductible goodwill, at September 30, 2022 and September 30, 2021, respectively.

The Company has reflected any uncertain tax positions primarily within its long-term taxes payable and a portion within deferred tax assets. The Company and its subsidiaries file tax returns in the U.S. federal jurisdiction and in several state and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years ending before December 31, 2018 and is no longer subject to state and local or foreign income tax examinations by tax authorities for years ending before December 31, 2017, other than where cross-border transactions extend the statute of limitations. The Company is not currently under audit for federal, state or any foreign jurisdictions. U.S. operating losses generated in years prior to 2018 remain open to adjustment until the statute of limitations closes for the tax year in which the net operating losses are utilized.

6. Debt

Long-term debt consisted of the following at September 30, 2022 and December 31, 2021 (in thousands):



	September 30, 2022		December 31, 2021
Senior secured loans (includes unamortized discount of $8,034 and $9,520 based on an imputed interest rate of 5.8% and 5.8%, at September 30, 2022 and December 31, 2021, respectively)	$	515,766	$	518,330





Less current maturities	(3,131)		(3,167)
Total long-term debt	$	512,635	$	515,163

Credit Facility

On August 6, 2019, the Company entered into a credit agreement (the “Credit Facility”) which provides for (i) a fully-drawn $350 million, 7 year, senior secured term loan B facility (the “Term Loan”) and (ii) a new $60 million, 5 year, revolving credit facility (the “Revolver”) that was fully available as of September 30, 2022. The Credit Facility replaced the Company's previous credit agreement. All outstanding balances under our previous credit facility were paid off using proceeds from our new Credit Facility.

On November 26, 2019 (the “Closing Date”), the Company entered into a First Incremental Assumption Agreement (the “Incremental Assumption Agreement”) which provides for a term loan facility to be established under the Credit Facility in an aggregate principal amount of $190.0 million (the “2019 Incremental Term Loan”) which is in addition to the existing $350.0 million term loans outstanding under the Credit Facility and the $60.0 million revolving credit facility under the Credit Facility.

Payment terms

The Term Loans (including the 2019 Incremental Term Loan) are repayable on a quarterly basis beginning on December 31, 2019 by an amount equal to 0.25% (1.00% per annum) of the aggregate principal amount of such loan. Any amount remaining unpaid is due and payable in full on August 6, 2026 (the “Term Loan Maturity Date”).

At the option of the Company, the Term Loans (including the 2019 Incremental Term Loan) accrue interest at a per annum rate based on (i) the Base Rate plus a margin of 2.75% or (ii) the rate (not less than 0.00%) for Eurodollar deposits quoted on the LIBOR01 or LIBOR02 pages on the Reuters Screen, or as otherwise determined in accordance with the Credit Facility (based on a period equal to 1, 2, 3 or 6 months or, if available and agreed to by all relevant Lenders and the Agent, 12 months or such period of less than 1 month) plus a margin of 3.75%. The Base Rate for any day is a rate per annum equal to the greatest of (i) the prime rate in effect on such day, (ii) the federal funds effective rate (not less than 0.00%) in effect on such day plus ½ of 1.00%, and (ii) the Eurodollar rate for a one month interest period beginning on such day plus 1.00%.

Accrued interest on the loans will be paid quarterly or, with respect to loans that are accruing interest based on the Eurodollar rate, at the end of the applicable interest rate period.

Interest rate swaps

On August 6, 2019, the Company entered into an interest rate hedge instrument for the full 7 year term, effectively fixing our interest rate at 5.4% for the Term Loan. In addition, on November 26, 2019, the Company entered into interest rate swap agreements to hedge the interest rate risk associated with the Company’s floating rate obligations under the 2019 Incremental Term Loan. These interest rate swaps fix the Company's interest rate (including the hedge premium) at 5.4% for the term of the Credit Facility. The interest rate associated with our new $60 million, 5 year, Revolver remains floating.

The interest rate swap has been designated as a cash flow hedge and is valued using a market approach, which is a Level 2 valuation technique. At September 30, 2022, the fair value of the interest rate swap was a $43.9 million asset as a result of an increase in short term interest rates since entering into the swap agreements. The increase in the fair value of the interest rate swap asset during the three months ended September 30, 2022 is the result of an increase in short term interest rates during the respective periods. In the next twelve months, the Company estimates that $11.5 million will be reclassified from Accumulated other comprehensive income (loss) to Interest expense, net on our condensed consolidated statement of

operations. Increases/decreases in cash paid for interest as a result of the Company’s interest rate swaps are included cash flows from operations.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Unrealized Gain recognized in Other comprehensive income on derivative financial instruments	$	17,988	$	2,112	$	52,357	$	14,391
Gain (loss) on interest rate swap (included in Interest expense on our consolidated statement of operations)	$	757	$	(2,090)	$	(2,374)	$	(6,158)

Revolver

Loans under the Revolver are available up to $60 million. The Revolver provides a sub-facility whereby the Company may request letters of credit (the “Letters of Credit”) in an aggregate amount not to exceed, at any one time outstanding, $10.0 million for the Company. The aggregate amount of outstanding Letters of Credit are reserved against the credit availability under the Maximum Revolver Amount. The Company incurs a 0.50% per annum unused line fee on the unborrowed balance of the Revolver which is paid quarterly.

Loans under the Revolver may be borrowed, repaid and reborrowed until August 6, 2024 (the “Maturity Date”), at which time all amounts borrowed under the Revolver must be repaid. As of September 30, 2022, the Company had no borrowings outstanding under the Revolver or related sub-facility.

Covenants

The Credit Facility contains customary affirmative and negative covenants. The negative covenants limit the ability of the Loan Parties to, among other things (in each case subject to customary exceptions for a credit facility of this size and type):

•Incur additional indebtedness or guarantee indebtedness of others;

•Create liens on their assets;

•Make investments, including certain acquisitions;

•Enter into mergers or consolidations;

•Dispose of assets;

•Pay dividends and make other distributions on the Company’s capital stock, and redeem and repurchase the Company’s capital stock;

•Enter into transactions with affiliates; and

•Prepay indebtedness or make changes to certain agreements.

The Credit Facility has no financial covenants as long as less than 35% of the Revolver is drawn as of the last day of any fiscal quarter. If 35% of the Revolver is drawn as of the last day of a given fiscal quarter the Company will be required to maintain a Total Leverage Ratio (the ratio of funded indebtedness as of such date less the amount of unrestricted cash and cash equivalents of the Company and its guarantors in an amount not to exceed $50.0 million, to adjusted EBITDA (calculated on a pro forma basis including giving effect to any acquisition)), measured on a quarter-end basis for each four consecutive fiscal quarters then ended, of not greater than 6.00 to 1.00.

In addition, the Credit Facility contains customary events of default subject to customary cure periods for certain defaults that include, among others, non-payment defaults, inaccuracy of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness, change in control, bankruptcy and insolvency defaults and material judgment defaults. The occurrence of an event of default could result in the acceleration of Term Loans and Revolver and a right by the agent and lenders to exercise remedies. At the election of the lenders, a default interest rate shall apply on all obligations during an event of default, at a rate per annum equal to 2.00% above the applicable interest rate. The Term Loan and Revolver are secured by substantially all of the Company's assets. As of September 30, 2022 the Company was in compliance with all covenants under the Credit Facility.

Cash interest costs averaged 5.4% and 5.4% for the nine months ended September 30, 2022 and 2021, respectively. In addition, as of September 30, 2022 and December 31, 2021 the Company had $8.0 million and $9.5 million, respectively, of unamortized deferred financing costs associated with the Credit Facility. These financing costs will be amortized to non-cash interest expense over the remaining term of the Credit Facility.

7. Net Loss Per Share

We compute loss per share of our Common Stock and Series A Preferred Stock using the two-class method. The two-class method requires income available to common stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. We consider our Series A Preferred Stock to be a participating security, as its holders are entitled to fully participate in any dividends or other distributions declared or paid on our Common Stock on an as-converted basis.

The following table sets forth the computations of loss per share (in thousands, except share and per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

Numerator:
Net Loss	$	(6,513)	$	(11,015)	$	(45,737)	$	(50,741)

Preferred stock dividends and accretion	(546)		—		(546)		—
Net loss attributable to common stockholders	$	(7,059)	$	(11,015)	$	(46,283)	$	(50,741)
Denominator:
Weighted–average common shares outstanding, basic and diluted	31,655,206		30,428,675		31,401,463		30,167,171
Net loss per common share, basic and diluted	$	(0.22)	$	(0.36)	$	(1.47)	$	(1.68)

Due to the net losses for the three and nine months ended September 30, 2022 and September 30, 2021, respectively, basic and diluted loss per share were the same. The Company adopted ASU 2020-06 on January 1, 2022 as detailed in “Note 1. Basis of Presentation and Summary of Significant Accounting Policies—Recent Accounting Pronouncements—Recently issued accounting pronouncements - Adopted.” As such, the Company is required to use the application of the if-converted method for calculating diluted earnings per share on our Series A Preferred Stock. The Company applies the treasury stock method for calculating diluted earnings per share on our stock options, restricted stock awards, restricted stock units and performance restricted stock units.

The following table sets forth the anti–dilutive common share equivalents as of September 30, 2022 and September 30, 2021:


	September 30,
	2022	2021

Stock options	155,895	242,984
Restricted stock awards(1)	—	1,000
Restricted stock units	1,442,886	2,034,186
Performance restricted stock units	93,750	63,537
Series A Preferred Stock on an as-converted basis(2)	6,602,643	—
Total anti–dilutive common share equivalents	8,295,174	2,341,707

(1) All outstanding restricted stock awards became fully vested as of December 31, 2021.

(2) Per ASU 2020-06, the Company is applying the if-converted method to calculated diluted earnings per share. As of September 30, 2022, the Series A Preferred Stock plus accumulated dividends totaled $115.5 million. The Series A Preferred Stock has a conversion price of $17.50 per share, as detailed in “Note 9. Series A Preferred Stock”

8. Commitments and Contingencies

Purchase Commitments

The Company has purchase commitments related to hosting services, third-party technology used in the Company's solutions and for other services the Company purchases as part of normal operations. In certain cases these arrangements require a minimum annual purchase commitment.

Litigation

In the normal course of business, the Company may become involved in various lawsuits and legal proceedings. At this time, the Company is not involved in any current or pending legal proceedings, and does not anticipate any legal proceedings, that may have a material adverse effect on the Company's condensed consolidated balances sheets or condensed consolidated statement of operations.

In addition, when we acquire companies, we require that the sellers provide industry standard indemnification for breaches of representations and warranties contained in the acquisition agreement and we will withhold payment of a portion of the purchase price for a period of time in order to satisfy any claims that we may make for indemnification. In certain transactions, we agree with the sellers to purchase a representation and warranty insurance policy that will pay such claims for indemnification. From time to time we may have one or more claims for indemnification pending. Similarly, we may have one or more ongoing negotiations related to the amount of an earnout. Gain contingencies related to indemnification claims are not recognized in our condensed consolidated financial statements until realized.

9. Series A Preferred Stock

On July 14, 2022, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Ulysses Aggregator, LP (the “Purchaser”), an affiliate of HGGC, LLC, to issue and sell at closing 115,000 shares of Series A Preferred Stock of the Company, par value $0.0001 per share, at a price of $1,000 per share (the “Initial Liquidation Preference”) for an aggregate purchase price of $115.0 million (the “Investment”). The Company will use the proceeds of the Investment (a) for general corporate purposes and (b) for transaction-related fees and expenses.

On August 23, 2022 (the “Closing Date”), the closing of the Investment (the “Closing”) occurred, and the Series A Preferred Stock was issued to the Purchaser. In connection with the issuance of the Series A Preferred Stock, the Company incurred direct and incremental expenses comprised of transaction fees, and financial advisory and legal expenses (the “Series A Preferred Stock Issuance Costs”), which reduced the carrying value of the Series A Preferred Stock. As of September 30, 2022, the Series A Preferred Stock Issuance Costs totaled $4.5 million. Cumulative preferred dividends accrue quarterly on the Series A Preferred Stock at a rate of 4.5% per year within the first seven years after the Closing Date regardless of whether declared or assets are legally available for the payment. Such dividends shall accrue and compound quarterly in arrears from the date of issuance of the shares. The dividend rate will increase to 7.0% on the seven-year anniversary of the Closing Date. The Series A Preferred Stock had accrued unpaid dividends of $0.5 million as of September 30, 2022.

Contemporaneous with the Closing Date, the Company and the Purchaser entered into a Registration Rights Agreement (the “Registration Rights Agreement”) and the Company filed a Certificate of Designation (the “Certificate of Designation”) setting out the powers, designations, preferences, and other rights of the Series A Preferred Stock with the Secretary of State of the State of Delaware in connection with the Closing. Pursuant to the Registration Rights Agreement, the Purchaser has certain customary registration rights with respect to any shares of Series A Preferred Stock or the common stock of the Company issuable upon conversion of the Series A Preferred Stock, including rights with respect to the filing of a shelf registration statement, underwritten offering rights and piggy back rights.

Dividend Provisions

The Series A Preferred Stock rank senior to the Company’s common stock with respect to payment of dividends and rights on the distribution of assets on any liquidation, dissolution or winding up of the affairs of the Company. The Series A Preferred Stock has an Initial Liquidation Preference of $1,000 per share, representing an aggregate Liquidation Preference (as defined below) of $1,000 upon issuance. Holders of the Series A Preferred Stock are entitled to the dividend at the rate of 4.5% per annum, within first seven years after the Closing Date regardless of whether declared or assets are legally available for the payment. Such dividends shall accrue and compound quarterly in arrears from the date of issuance of the shares. The dividend rate will increase to 7.0% on the seven-year anniversary of the Closing Date. The dividend can be paid, in the Company’s sole discretion, in cash or dividend in kind by adding to the Liquidation Preference of each share of Series A Preferred Stock outstanding; provided that, until the stockholder approvals contemplated by Nasdaq Global Market Listing Standard Rules 5635(a), (b) and (d) are obtained, as applicable, the Company may not pay in kind if doing so would cause the common shares issuable upon conversion of the Preferred Stock to exceed 19.9% of the total outstanding common stock as of the Closing Date. The Series A Preferred Stock is also entitled to fully participate in any dividends paid to the holders of common stock in cash, in stock or otherwise, on an as-converted basis.

Liquidation Rights

In the event of any Liquidation, holders of the Series A Preferred Stock are entitled to receive an amount per share equal to the greater of (1) the Initial Liquidation Preference per share plus any accrued or declared but unpaid dividends on such shares (the “Liquidation Preference”) or (2) the amount payable if the Series A Preferred Stock were converted into common stock. The Series A Preferred Stock will have distribution and liquidation rights senior to all other equity interests of the Company. As of September 30, 2022, the Liquidation Preference of the Series A Preferred Stock was $115.5 million.

Optional Redemption

On or after the 7th anniversary of the original issue date of the Series A Preferred Stock, the Company has the right to redeem any outstanding shares of the Series A Preferred Stock for a cash purchase price equal to 105% of the Liquidation Preference plus accrued and unpaid dividends as of the date of redemption.

Deemed Liquidation Event Redemption

Upon a fundamental change, holders of the Series A Preferred Stock have the right to require the Company to repurchase any or all of its Series A Preferred Stock for cash equal to the greater of (1) 105% of the Liquidation Preference plus the present value of the dividend payments the holders would have been entitled to through the fifth anniversary of the issue date and (2) the amount that such Preferred Stock would have been entitled to receive as if converted into common shares immediately prior to the fundamental change.

A fundamental change (“Deemed Liquidation Event”) is defined as either the direct or indirect sale, lease, transfer, conveyance or other disposition of all or substantially all the properties or assets of the Company and its subsidiaries to any third party or the consummation of any transaction, the result of which is that any third party or group of third parties become the beneficial owner of more than 50% of the voting power of the Company.

Voting Rights

The Series A Preferred Stock will vote together with the Common Shares on all matters and not as a separate class (except as specifically provided in the Certificate of Designation or as otherwise required by law) on an as-if-converted basis.

The holders of the Series A Preferred Stock will have the right to elect one member of the Board of Directors for so long as holders of the Series A Preferred Stock own in the aggregate at least 5% of the shares of common stock on a fully diluted basis.

In addition, the holders of the Series A Preferred Stock will have the right to elect one non-voting observer to the Board of Directors for so long as they hold at least 10% of the shares of Convertible Preferred Stock outstanding as of the date of the issue date.

Conversion Feature

The Series A Preferred Stock may be converted, at any time in whole or in part at the option of the holder into a number of shares of common stock equal to the quotient obtained by dividing the sum of the Liquidation Preference plus all accrued and unpaid dividends by the conversion price of $17.50 (the “Conversion Price”). The Conversion Price is subject to adjustment in the following events:

•Stock splits and combinations

•Tender offers or exchange offers

•Distribution of rights, options, or warrants at a price per share that is less than the average of the last reported sale prices per share of Common Stock for the ten consecutive trading days

•Spin-offs and other distributed property

•Issuance of equity-linked securities at a price per share less than the conversion price

Anti-Dilution Provisions

The Series A Preferred Stock has customary anti-dilution provisions for stock splits, stock dividends, mergers, sales of significant assets, and reorganization events and recapitalization transactions or similar events, and weighted average anti-dilution protection, subject to customary exceptions for issuances pursuant to current or future equity-based incentive plans or arrangements (including upon the exercise of employee stock options).

10. Stockholders' Equity

Registration Statements

2022 S-3

On October 21, 2022 we filed a resale registration statement on Form S-3 (File No. 333-267973) (the “2022 S-3”), on behalf of the Purchaser and pursuant to the Registration Rights Agreement, which became effective on November 1, 2022 and covers (i) the issued Series A Preferred Stock and (ii) the number of shares of the Company’s common stock issuable upon conversion of such Series A Preferred Stock, which amount includes and assumes that dividends on the Series A Preferred Stock are paid by increasing the Liquidation Preference of the Series A Preferred Stock for a period of sixteen dividend payment periods from the initial issuance date.

2020 S-3

On August 10, 2020, we filed a registration statement on Form S-3 (File No. 333-243728) (the “2020 S-3”), which became effective automatically upon its filing and covers an unlimited amount of securities. The 2020 S-3, will remain effective through August 2023.

Accumulated Other Comprehensive Income (Loss)

Comprehensive income (loss) consists of two elements, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) items are recorded in the stockholders’ equity section of our condensed consolidated balance sheets and are excluded from net loss. Our other comprehensive income (loss) consists primarily of foreign currency translation adjustments for subsidiaries with functional currencies other than the U.S. dollar, unrealized translation gains (losses) on intercompany loans with foreign subsidiaries, and unrealized gains (losses) on interest rate swaps.

The following table shows the components of accumulated other comprehensive income (loss), net of income taxes, (“AOCI”) in the stockholders’ equity section of our condensed consolidated balance sheets at the dates indicated (in thousands):


	September 30, 2022		December 31, 2021
Foreign currency translation adjustment	$	(37,929)	$	(5,657)
Unrealized translation gain on intercompany loans with foreign subsidiaries	(11,658)		2,552
Unrealized gain (loss) on interest rate swaps	43,947		(8,409)
Total accumulated other comprehensive loss	$	(5,640)	$	(11,514)

The unrealized translation gains (losses) on intercompany loans with foreign subsidiaries as of September 30, 2022 is net of income tax expense of $2.3 million. The tax provision to unrealized translation gains (losses) on intercompany loans for the three and nine months ended September 30, 2022 was $1.9 million and $0.4 million, respectively. The tax expense related to unrealized translation gains on intercompany loans for the three and nine months ended September 30, 2021 was $0.5 million and $0.2 million, respectively. The income tax expense/benefit allocated to each component of other comprehensive income (loss) for all other periods and components is not material. The Company reclassifies taxes from AOCI to earnings as the items to which the tax effects relate are similarly reclassified.

The functional currency of our foreign subsidiaries are primarily the local currencies. Results of operations for foreign subsidiaries are translated into United States dollars (“USD”) using the average exchange rates on a monthly basis during the year. The assets and liabilities of those subsidiaries are translated into USD using the exchange rates in effect at the balance sheet date. The related translation adjustments are recorded in a separate component of stockholders' equity in accumulated other comprehensive income (loss).

The Company has intercompany loans that were used to fund the acquisitions of foreign subsidiaries. Due to the long-term nature of the loans, the unrealized translation gains (losses) resulting from re-measurement are recognized as a component of accumulated other comprehensive income (loss).

Stock-Based Compensation

The Company recognizes stock-based compensation expense from all awards in the following expense categories included in our condensed consolidated statements of income were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Cost of revenue	$	510	$	539	$	1,487	$	1,544
Research and development	701		671		2,107		2,327
Sales and marketing	612		1,636		3,584		4,392
General and administrative	5,704		9,201		26,845		35,158
Total	$	7,527	$	12,047	$	34,023	$	43,421

2014 Equity Incentive Plan

Beginning in 2019, the Company began granting restricted stock units (“RSUs”) and performance-based restricted stock units (“PRSUs”) under its 2014 Equity Incentive Plan (the “2014 EIP”), in lieu of restricted stock awards, primarily for stock plan administrative purposes.

Performance-Based Restricted Stock Units (“PRSU”)

In 2022 and 2021, fifty percent of the awards granted to our Chief Executive Officer were PRSUs. The 2022 and 2021 PRSU agreements provide that the quantity of units subject to vesting may range from 0% to 300% of the units granted per the table below based on the Company's absolute total shareholder return (“TSR”) at the end of the eighteen month performance periods. At the end of the performance period, the 2021 PRSU resulted in no units granted.

The following table summarizes PRSU and RSU activity during the nine months ended September 30, 2022 :


	Number of Units	Weighted-Average Grant Date Fair Value
Unvested restricted units outstanding as of December 31, 2021	1,443,284	$	45.77
Granted	1,457,763	22.15
Vested	(720,221)	40.49
Forfeited(1)	(644,190)	35.28
Unvested restricted units outstanding as of September 30, 2022	1,536,636	$	30.25

(1) Includes forfeited awards related to the 2021 PRSUs. At June 30, 2022, or the end of the performance period for the 2021 PRSUs, none of the awards vested.

The PRSU and RSU activity table above includes PRSU units granted that are based on a 100% target payout. Compensation expense is recognized over the required service period of the grant. The fair value of the RSUs is determined based on the grant date fair value of the award. The fair value of the PRSUs is determined using the Monte Carlo simulation model and is not subject to fluctuation due to achievement of the underlying market-based target.

Significant assumptions used in the Monte Carlo simulation model for the PRSUs granted during the nine months ended September 30, 2022 and year ended December 31, 2021 are as follows:


	September 30, 2022	December 31, 2021
Expected volatility	49.5%	53.6%
Risk-free interest rate	0.7%	0.1%
Remaining performance period (in years)	1.46	1.35
Dividend yield	—	—

Stock Option Activity

Stock option activity during the nine months ended September 30, 2022 was as follows:


	Number of Options Outstanding	Weighted– Average Exercise Price
Outstanding at December 31, 2021	227,605	$	9.15

Options exercised	(43,460)	4.38
Options forfeited	(28,226)	5.81
Options expired	(24)	1.81
Outstanding at September 30, 2022	155,895	$	11.09

11. Revenue Recognition

Revenue Recognition Policy

Revenue is recognized when control of the promised goods or services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services over the term of the agreement, generally when made available to the customers. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of sales credits and allowances. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.

Revenue is recognized based on the following five step model in accordance with ASC 606, Revenue from Contracts with Customers:

•Identification of the contract with a customer

•Identification of the performance obligations in the contract

•Determination of the transaction price

•Allocation of the transaction price to the performance obligations in the contract

•Recognition of revenue when, or as, the Company satisfies a performance obligation

Performance obligations under our contracts consist of subscription and support, perpetual licenses, and professional services revenues within a single operating segment.

Subscription and Support Revenue

The Company's software solutions are available for use as hosted application arrangements under subscription fee agreements without licensing perpetual rights to the software. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company's solution is made available to the customer. As our customers have access to use our solutions over the term of the contract agreement we believe this method of revenue recognition provides a faithful depiction of the transfer of services provided. Our subscription contracts are generally 1 to 3 years in length. Amounts that have been invoiced are recorded in accounts receivable and deferred revenue or subscription and support revenue, depending on whether the revenue recognition criteria have been met. Additional fees for monthly usage above the levels included in the standard subscription fee are recognized as subscription and support revenue at the end of each month and is invoiced concurrently. Subscription and support revenue includes revenue related to the Company’s digital engagement application which provides short code connectivity for its two-way short message service (“SMS”) programs and campaigns. As discussed further in the “Principal vs. Agent Considerations” section below, the Company recognizes revenue related to these messaging-related subscription contracts on a gross basis.

Perpetual License Revenue

The Company also records revenue from the sales of proprietary software products under perpetual licenses. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. The Company’s products do not require significant customization.

Professional Services Revenue

Professional services provided with subscription and support licenses and perpetual licenses consist of implementation fees, data extraction, configuration, and training. The Company’s implementation and configuration services do not involve significant customization of the software and are not considered essential to the functionality. Revenue from professional services are recognized over time as such services are performed. Revenue for fixed price services are generally recognized over time applying input methods to estimate progress to completion. Revenue for consumption-based services are generally recognized as the services are performed.

Significant Judgments

Performance Obligations and Standalone Selling Price

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of accounting. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. The Company has contracts with customers that often include multiple performance obligations, usually including professional services sold with either individual or multiple subscriptions or perpetual licenses. For these contracts, the Company records individual performance obligations separately if they are distinct by allocating the contract's total transaction price to each performance obligation in an amount based on the relative standalone selling price (“SSP”), of each distinct good or service in the contract.

Judgment is required to determine the SSP for each distinct performance obligation. A residual approach is only applied in limited circumstances when a particular performance obligation has highly variable and uncertain SSP and is bundled with other performance obligations that have observable SSP. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, historical standalone sales, customer demographics, geographic locations, and the number and types of users within our contracts.

Principal vs. Agent Considerations

The Company evaluates whether it is the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis) for vendor reseller agreements and messaging-related subscription agreements. Where the Company is the principal, it first obtains control of the inputs to the specific good or service and directs their use to create the combined output. The Company's control is evidenced by its involvement in the integration of the good or service on its platform before it is transferred to its customers, and is further supported by the Company being primarily responsible to its customers and having a level of discretion in establishing pricing. While none of the factors individually are considered presumptive or determinative, in reaching conclusions on gross versus net revenue recognition, the Company places the most weight on the analysis of whether or not it is the primary obligor in the arrangement.

Generally, the Company reports revenue from vendor reseller agreements on a gross basis, meaning the amounts billed to customers are recorded as revenue, and expenses incurred are recorded as cost of revenue. As the Company is primarily

obligated in its messaging-related subscription contracts, has latitude in establishing prices associated with its messaging program management services, is responsible for fulfillment of the transaction, and has credit risk, revenue is recorded on a gross basis with related telecom messaging costs incurred from third parties recorded as cost of revenue. Revenue provided from agreements in which the Company is an agent are immaterial.

Contract Balances

The timing of revenue recognition, billings and cash collections can result in billed accounts receivable, unbilled receivables, and deferred revenue. Billings scheduled to occur after the performance obligation has been satisfied and revenue recognition has occurred result in unbilled receivables, which are expected to be billed during the succeeding twelve-month period and are recorded in Unbilled receivables in our condensed consolidated balance sheets. A contract liability results when we receive prepayments or deposits from customers in advance for implementation, maintenance and other services, as well as subscription fees. Customer prepayments are generally applied against invoices issued to customers when services are performed and billed. We recognize contract liabilities as revenue upon satisfaction of the underlying performance obligations. Contract liabilities that are expected to be recognized as revenue during the succeeding twelve-month period are recorded in Deferred revenue and the remaining portion is recorded in “Deferred revenue noncurrent” on the accompanying condensed consolidated balance sheets at the end of each reporting period.

Deferred revenue primarily consists of amounts that have been billed to or received from customers in advance of revenue recognition and prepayments received from customers in advance for maintenance and other services, as well as initial subscription fees. We recognize deferred revenue as revenue when the services are performed, and the corresponding revenue recognition criteria are met. Customer prepayments are generally applied against invoices issued to customers when services are performed and billed. Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer.

Unbilled Receivables

Unbilled receivables represent amounts for which the Company has recognized revenue, pursuant to its revenue recognition policy, for software licenses already delivered and professional services already performed, but invoiced in arrears and for which the Company believes it has an unconditional right to payment. As of September 30, 2022 and December 31, 2021, unbilled receivables were $6.0 million and $4.8 million, respectively.

Deferred Commissions

Sales commissions earned by our sales force, and related payroll taxes, are considered incremental and recoverable costs of obtaining a contract with a customer. Deferred commissions and other costs for new customer contracts are capitalized upon contract signing and amortized on a systematic basis that is consistent with the transfer of goods and services over the expected life of the customer relationships, which has been determined to be approximately 6 years. The expected life of our customer relationships is based on historical data and management estimates, including estimated renewal terms and the useful life of the associated underlying technology. Commissions paid on renewal contracts are not commensurate with commissions paid on new customer contracts, as such, deferred commissions related to renewals are capitalized and amortized over the estimated average contractual renewal term of 18 months. We utilized the 'portfolio approach' practical expedient permitted under ASC 606-10-10-4, which allows entities to apply the guidance to a portfolio of contracts with similar characteristics as the effects on the financial statements of this approach would not differ materially from applying the guidance to individual contracts. The portion of capitalized costs expected to be amortized during the succeeding twelve-month period is recorded in current assets as deferred commissions, current, and the remainder is recorded in long-term assets as deferred commissions, net of current portion. Amortization expense is included in sales and marketing expenses in the accompanying condensed consolidated statements of operations. Deferred commissions are reviewed for impairment whenever events or circumstances

indicate their carrying value may not be recoverable consistent with the Company's long-lived assets policy. No indicators of impairment were identified during the nine months ended September 30, 2022.

The following table presents the activity impacting deferred commissions for the nine months ended September 30, 2022 :


($ in thousands)	Deferred Commissions
Balance at December 31, 2021	$	24,632


Capitalized deferred commissions	8,625
Amortization of deferred commissions	(8,845)
Balance at September 30, 2022	$	24,412

Amortization of deferred commissions in excess of commissions capitalized for the three and nine months ended September 30, 2022 were $1.5 million and $0.2 million, respectively.

Deferred Revenue

Deferred revenue represents either customer advance payments or billings for which the aforementioned revenue recognition criteria have not yet been met.

Deferred revenue is mainly unearned revenue related to subscription services and support services. During the nine months ended September 30, 2022, we recognized $89.1 million and $2.7 million of subscription services and professional services revenue, respectively, that was included in the deferred revenue balances at the beginning of the period. In addition, during the nine months ended September 30, 2022 we recognized $9.2 million in revenue that was included in the acquired deferred revenue balance of our 2022 acquisitions as disclosed in “Note 2. Acquisitions.”

Remaining Performance Obligations

As of September 30, 2022, approximately $263.6 million of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 70% of these remaining performance obligations over the next 12 months, with the balance recognized thereafter.

Disaggregated Revenue

The Company disaggregates revenue from contracts with customers by geography and revenue generating activity, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Revenue by geography is based on the ship-to address of the customer, which is intended to approximate where the customers' users are located. The ship-to country is generally the same as the billing country. The Company has operations primarily in the United States, United Kingdom and Canada. Information about these operations is presented below (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues:
Subscription and support:
United States	$	54,054	$	50,866	$	158,394	$	154,683
United Kingdom	9,939		11,886		31,649		33,938
Canada	4,625		3,355		13,520		10,317
Other International	6,477		6,157		20,176		16,384
Total subscription and support revenue	75,095		72,264		223,739		215,322
Perpetual license:
United States	1,110		628		2,581		1,219
United Kingdom	51		—		342		11
Canada	10		1		187		53
Other International	513		55		2,210		168
Total perpetual license revenue	1,684		684		5,320		1,451

Professional services:
United States	1,673		2,014		5,121		6,208
United Kingdom	442		753		1,901		2,219
Canada	189		117		647		309
Other International	466		221		1,764		777
Total professional service revenue	2,770		3,105		9,433		9,513
Total revenue	$	79,549	$	76,053	$	238,492	$	226,286

12. Related Party Transactions

The Company does not have any material related party transactions to report for the three and nine months ended September 30, 2022.

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2021, filed on February 24, 2022. In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements generally relate to future events or our future financial or operating performance. Forward-looking statements may be identified by the use of forward-looking words such as “anticipate,” “believe,” “may,” “will,” “continue,” “seek,” “estimate,” “intend,” “hope,” “predict,” “could,” “should,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions, although not all forward-looking statements contain these words. 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 plans regarding future acquisitions and our ability to consummate and integrate acquisitions;

•our ability to expand our go to market operations, including our marketing and sales organization, and successfully increase sales of our products;

•our ability to obtain financing in the future on acceptable terms or at all;

•our expectations with respect to revenue, cost of revenue and operating expenses in future periods;

•our expectations with regard to revenue from perpetual licenses and professional services;

•our ability to adapt to the impacts on the global economy associated with the ongoing COVID-19 pandemic;

•our ability to attract and retain customers;

•our ability to successfully enter new markets and manage our international expansion;

•our ability to comply with privacy laws and regulations;

•our ability to deliver high-quality customer service;

•our plans regarding, and our ability to effectively manage, our growth;

•maintaining our senior management team and key personnel;

•the performance of our resellers;

•our ability to adapt to changing market conditions and competition;

•our ability to adapt to technological change and continue to innovate;

•global economic and financial market conditions and uncertainties;

•the growth of demand for cloud-based, digital transformation applications;

•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 expectations with regard to trends, such as seasonality, which affect our business;

•our plans with respect to foreign currency exchange risk and inflation;

•impairments to goodwill and other intangible assets;

•our beliefs regarding how our applications benefit customers and what our competitive strengths are;

•the operation, reliability and security of our third-party data centers;

•the risk that we did not consider another contingency included in this list;

•our expectations as to the payment of dividends; and

•other risk factors included under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 24, 2022, as updated by this Quarterly Report on Form 10-Q and periodically updated as necessary in our future quarterly reports on Form 10-Q and other filings that we make with the SEC.

Table of Contents

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors, including those described in the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 24, 2022. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

Overview

We sell our software applications primarily through a direct sales organization comprised of inside sales and field sales personnel. In addition to our direct sales organization, we have an indirect sales organization, which sells to distributors and value-added resellers. We employ a land-and-expand go-to-market strategy. After we demonstrate the value of an initial application to a customer, our sales and account management teams work to expand the adoption of that initial application across the customer, as well as cross-sell additional applications to address other digital transformation needs of the customer. Our customer success organization supports our direct sales efforts by managing the post-sale customer lifecycle.

Our subscription agreements are typically sold either on a per-seat basis or on a minimum contracted volume basis with overage fees billed in arrears, depending on the application being sold. We service customers ranging from large global corporations and government agencies to small- and medium-sized businesses. We have more than 10,000 customers with over 1,000,000 users across a broad range of industries, including financial services, retail, technology, manufacturing, legal, education, consumer goods, media, telecommunications, government, non-profit, food and beverage, healthcare and life sciences.

Through a series of acquisitions and integrations, we have established a library of diverse, cloud-based software applications under the Upland brand that support the business functions listed above and address specific digital transformation needs. Our revenue has grown from $98.0 million in 2017 to $302.0 million in 2021, representing a compound annual growth rate of 33%. During the nine months ended September 30, 2022 foreign revenue as a percent of total revenue increased to 30% compared to 28% during the nine months ended September 30, 2021. See “Note 11. Revenue Recognition” in the notes to our unaudited condensed consolidated financial statements for more information regarding our revenue as it relates to domestic and foreign operations.

To support continued growth, we intend to pursue acquisitions within our core enterprise solution suites of complementary technologies and businesses. This will expand our product library, customer base, and market access resulting in increased benefits of scale. Consistent with our growth strategy, we have made 31 acquisitions from February 2012 through September 30, 2022.

COVID-19 Impact

We cannot predict the extent to which the COVID-19 outbreak will continue to impact our business or operating results, which is highly dependent on inherently uncertain future developments, including the severity of COVID-19 and the actions taken by governments and private businesses in relation to COVID-19 containment. As our platform is offered as a subscription-based service, the effect of the outbreak may not be fully reflected in our operating results until future periods, if at all. The persistence of COVID-19 and the preventative measures implemented to help limit the spread of the illness, have impacted, and will continue to impact, our ability to operate our business and may materially and adversely impact our business, financial condition, and results of operations.

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The health and well-being of our employees, customers, partners and communities continues to be our main priority. As such, we support and continue the remote working arrangements for our employees.

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Results of Operations

Consolidated Statements of Operations Data

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


	Three Months Ended September 30,								Nine Months Ended September 30,
	2022				2021				2022				2021
	Amount		Percent of Revenue		Amount		Percent of Revenue		Amount		Percent of Revenue		Amount		Percent of Revenue

	(dollars in thousands, except share and per share data)
Revenue:
Subscription and support	$	75,095	94	%	$	72,264	95	%	$	223,739	94	%	$	215,322	95	%
Perpetual license	1,684		2	%	684		1	%	5,320		2	%	1,451		1	%
Total product revenue	76,779		96	%	72,948		96	%	229,059		96	%	216,773		96	%
Professional services	2,770		4	%	3,105		4	%	9,433		4	%	9,513		4	%
Total revenue	79,549		100	%	76,053		100	%	238,492		100	%	226,286		100	%
Cost of revenue:
Subscription and support (1)(3)	23,553		30	%	22,968		30	%	69,747		29	%	68,811		30	%
Professional services and other (1)	2,173		2	%	1,848		3	%	7,287		3	%	5,444		3	%
Total cost of revenue	25,726		32	%	24,816		33	%	77,034		32	%	74,255		33	%
Gross profit	53,823		68	%	51,237		67	%	161,458		68	%	152,031		67	%
Operating expenses:
Sales and marketing (1)	14,361		18	%	14,364		19	%	45,285		19	%	41,094		18	%
Research and development (1)	11,645		15	%	10,441		14	%	35,388		15	%	32,494		14	%

General and administrative (1)(2)	14,668		18	%	17,725		23	%	56,110		24	%	61,286		27	%
Depreciation and amortization	10,117		13	%	10,764		14	%	31,970		13	%	30,785		14	%
Acquisition-related expenses	3,586		4	%	3,685		5	%	18,924		8	%	18,805		9	%
Total operating expenses	54,377		68	%	56,979		75	%	187,677		79	%	184,464		82	%
Loss from operations	(554)		—	%	(5,742)		(8)	%	(26,219)		(11)	%	(32,433)		(15)	%
Other Expense:
Interest expense, net	(7,354)		(9)	%	(7,971)		(10)	%	(22,870)		(10)	%	(23,700)		(10)	%

Other income (expense), net	339		—	%	(650)		(1)	%	1,698		1	%	(812)		(1)	%
Total other expense	(7,015)		(9)	%	(8,621)		(11)	%	(21,172)		(9)	%	(24,512)		(11)	%
Loss before provision for income taxes	(7,569)		(9)	%	(14,363)		(19)	%	(47,391)		(20)	%	(56,945)		(26)	%
Benefit from income taxes	1,056		1	%	3,348		5	%	1,654		1	%	6,204		4	%
Net loss	(6,513)		(8)	%	(11,015)		(14)	%	(45,737)		(19)	%	(50,741)		(22)	%


Preferred stock dividends and accretion	(546)		(1)	%	—		—	%	(546)		—	%	—		—	%
Net loss attributable to common shareholders	$	(7,059)	(9)	%	$	(11,015)	(14)	%	$	(46,283)	(19)	%	$	(50,741)	(22)	%
Net loss per common share:


Net loss per common share, basic and diluted	$	(0.22)			$	(0.36)			$	(1.47)			$	(1.68)
Weighted-average common shares outstanding, basic and diluted	31,655,206				30,428,675				31,401,463				30,167,171

(1) Includes stock-based compensation detailed under Share-based Compensation in “Item 1. Financial Statements—Note 10. Stockholders' Equity”.

(2) Includes General and administrative stock-based compensation of $5.7 million and $9.2 million for the three months September 30, 2022 and September 30, 2021, respectively, and $26.8 million and $35.2 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. General and administrative expense excluding stock-based compensation as a percentage of total revenues was 11% and 11% for the three months ended September 30, 2022 and September 30, 2021, respectively, and 12% and 12% for the nine months ended September 30, 2022 and September 30, 2021, respectively.


(3) Includes depreciation and amortization of $3.0 million and $3.0 million for the three months ended September 30, 2022 and September 30, 2021, respectively, and $9.4 million and $8.6 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.

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Comparison of the Three and Nine Months Ended September 30, 2022 and 2021

Revenue


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022		2021		% Change		2022		2021		% Change

	(dollars in thousands)
Revenue:
Subscription and support	$	75,095	$	72,264	4	%	$	223,739	$	215,322	4	%
Perpetual license	1,684		684		146	%	5,320		1,451		267	%
Total product revenue	76,779		72,948		5	%	229,059		216,773		6	%
Professional services	2,770		3,105		(11)	%	9,433		9,513		(1)	%
Total revenue	$	79,549	$	76,053	5	%	$	238,492	$	226,286	5	%

Percentage of revenue:
Subscription and support	94%		95%				94%		95%
Perpetual license	2%		1%				2%		1%
Total product revenue	96%		96%				96%		96%
Professional services	4%		4%				4%		4%
Total revenue	100%		100%				100%		100%


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(dollars in thousands)
Reconciliation of Total revenue to Non-GAAP Core Organic Revenue:
Total revenue	$	79,549	$	76,053	$	238,492	$	226,286
Less:
Subscription and support revenue from acquisitions not fully in the prior year comparative period (1)	5,819		—		36,946		16,937
Perpetual license revenue	1,684		685		5,320		1,452
Professional services revenue	2,770		3,105		9,434		9,513
Subscription and support revenue from Sunset Assets (2)	107		325		450		1,067
Overage Charges (3)	2,769		3,575		8,345		12,388
Political Revenue (4)	—		—		—		980
Non-GAAP Core Organic Revenue (5)	$	66,400	$	68,363	$	177,997	$	183,949

(1) After the reduction of $1.2 million and $4.8 million purchase accounting deferred revenue discount for the three and nine months ended September 30, 2022, respectively.
(2) Subscription and support revenue from Sunset Assets is revenue related to the divestiture and sunset of certain minor non-strategic customer contracts (collectively referred to as “Sunset Assets”).
(3) Overage Charges are amounts paid to the Company by a customer (in addition to such customer’s contractual minimum payment commitments) as a result of such customer’s number of users or level of usage of services including text and e-mail messaging and third party pass-through costs exceeding the levels stipulated in such customer’s license or related purchase agreements with the Company.
(4) Political Revenue is CXM usage revenue from US presidential campaigns.
(5) Non-GAAP Core Organic Revenue excludes revenues from acquisitions closed during or subsequent to the prior year comparable period, Perpetual license revenues, Professional services revenues, Revenue from Sunset Assets, Overage Charges and Political Revenue.

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(dollars in thousands)
Reconciliation of Subscription and support revenue to Non-GAAP Core Organic Revenue:
Subscription and support revenue	$	75,095	$	72,264	$	223,739	$	215,322
Less:
Subscription and support revenue from acquisitions not fully in the prior year comparative period (1)	5,819		—		36,946		16,937
Subscription and support revenue from Sunset Assets (2)	107		325		450		1,067
Overage Charges (3)	2,769		3,575		8,345		12,388
Political Revenue (4)	—		—		—		980
Non-GAAP Core Organic Revenue (5)	$	66,400	$	68,363	$	177,997	$	183,949

(1) After the reduction of $1.2 million and $4.8 million purchase accounting deferred revenue discount for the three and nine months ended September 30, 2022, respectively.
(2) Subscription and support revenue from Sunset Assets is revenue related to the divestiture and sunset of certain minor non-strategic customer contracts (collectively referred to as “Sunset Assets”).
(3) Overage Charges are amounts paid to the Company by a customer (in addition to such customer’s contractual minimum payment commitments) as a result of such customer’s number of users or level of usage of services including text and e-mail messaging and third party pass-through costs exceeding the levels stipulated in such customer’s license or related purchase agreements with the Company.
(4) Political Revenue is CXM usage revenue from US presidential campaigns.
(5) Non-GAAP Core Organic Revenue excludes revenues from acquisitions closed during or subsequent to the prior year comparable period, Revenue from Sunset Assets, Overage Charges and Political Revenue.

For the Three Months Ended September 30, 2022

Total revenue was $79.5 million in the three months ended September 30, 2022, compared to $76.1 million in the three months ended September 30, 2021, an increase of $3.5 million, or 5%. Total revenue growth includes a negative impact of 3% from changes in foreign currency exchange rates (“FX”). Our organic business excludes acquisitions closed during or subsequent to the prior year comparable period and business operations related to Sunset Assets (the “Organic Business”). The acquisitions not fully in the comparable period contributed $7.5 million to the increase in the three months ended September 30, 2022. Total revenue related to Perpetual license and Professional services related to our Organic Business declined by $1.0 million. Total revenue from Sunset Assets declined by $0.2 million in the quarter as a result of decreased sales and marketing focus on those Sunset Assets. Total revenue related to Overage Charges declined by $0.8 million as a result of variable demand in the quarter. Therefore, net of these non-core revenues, our Non-GAAP Core Organic Revenue decreased by $2.0 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. After removing the negative FX impact on our revenue, net of these non-core revenues, our Non-GAAP Core Organic Revenue decreased by $0.5 million in the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Subscription and support revenue was $75.1 million in the three months ended September 30, 2022, compared to $72.3 million in the three months ended September 30, 2021, an increase of $2.8 million, or 4%. Subscription and support revenue growth includes a negative impact of 3% from changes in FX. The acquisitions not fully in the comparable period contributed $5.8 million to the increase in subscription and support revenue in the three months ended September 30, 2022. Subscription and support revenue related to our Sunset Assets decreased $0.2 million in the quarter as a result of decreased sales and marketing focus on those Sunset Assets. Subscription and support revenue related to Overage Charges declined by $0.8 million as a result of variable demand in the quarter. Therefore, net of these non-core revenues, our Non-GAAP Core Organic Revenue decreased by $2.0 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. After removing the negative FX impact on our revenue, net of these non-core revenues, our Non-GAAP Core Organic Revenue decreased by $0.5 million in the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

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Perpetual license revenue was $1.7 million in the three months ended September 30, 2022, compared to $0.7 million in the three months ended September 30, 2021. The acquisitions not fully in the comparable period contributed $0.9 million to the increase in perpetual license revenue in the three months ended September 30, 2022 primarily from the acquisition of Objectif Lune. Therefore, perpetual license revenue for our Organic Business for the three months ended September 30, 2022 increased by $0.1 million compared to the three months ended September 30, 2021.

Professional services revenue was $2.8 million in the three months ended September 30, 2022 compared to $3.1 million in the three months ended September 30, 2021. The acquisitions not fully in the comparable period contributed $0.8 million to the increase in professional services revenue in the three months ended September 30, 2022. Therefore, professional services revenue for our Organic Business decreased by $1.1 million in the three months ended September 30, 2022 compared to the three months ended September 30, 2021 primarily related to our discipline around not accepting unprofitable professional services projects.

For the Nine Months Ended September 30, 2022

Total revenue was $238.5 million in the nine months ended September 30, 2022, compared to $226.3 million in the nine months ended September 30, 2021, an increase of $12.2 million, or 5%. Total revenue growth includes a negative impact of 2% from changes in FX. The acquisitions not fully in the comparable period contributed $25.8 million to the increase in the nine months ended September 30, 2022. Total revenue related to Perpetual license and Professional services related to our Organic Business declined by $1.9 million. Total revenue related to Sunset Assets decreased by $0.7 million as a result of decreased sales and marketing focus on those Sunset Assets. Total revenues related to Overage Charges declined by $4.0 million as a result of variable demand during the first nine months of 2022. The nine months ended September 30, 2021 included $1.0 million in Political Revenue, which did not repeat in the first nine months of 2022 and will not repeat for the remainder of 2022. Therefore, net of these non-core revenues, our Non-GAAP Core Organic Revenue decreased by $6.0 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. After removing the negative FX impact on our revenue, net of these non-core revenues, our Non-GAAP Core Organic Revenue decreased by $4.0 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Subscription and support revenue was $223.7 million in the nine months ended September 30, 2022, compared to $215.3 million in the nine months ended September 30, 2021, an increase of $8.4 million, or 4%. Subscription and support revenue growth includes a negative impact of 1% from changes in FX. The acquisitions not fully in the comparable period contributed $20.0 million to the increase in subscription and support revenue in the nine months ended September 30, 2022. Subscription and support revenue related to our Sunset Assets decreased $0.6 million as a result of decreased sales and marketing focus on those Sunset Assets. Subscription and support revenues related to Overage Charges declined by $4.0 million as a result of variable demand in the nine months ended September 30, 2022. The nine months ended September 30, 2021 included $1.0 million of Political Revenues which did not repeat in the first nine months of 2022 and will not repeat for the remainder of 2022. Therefore, net of these non-core revenues, our Non-GAAP Core Organic Revenue decreased by $6.0 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. After removing the negative FX impact on our revenue, net of these non-core revenues, our Non-GAAP Core Organic Revenue decreased by $4.0 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Perpetual license revenue was $5.3 million in the nine months ended September 30, 2022, compared to $1.5 million in the nine months ended September 30, 2021, an increase of $3.8 million, or 267%. Perpetual license revenue related to our Sunset Assets decreased by $0.1 million as a result of decreased sales and marketing focus on those Sunset Assets. The acquisitions not fully in the comparable period contributed $3.9 million to the increase in perpetual license revenue in the nine months ended September 30, 2022. Therefore, perpetual license revenue from our Organic Business for the nine months ended September 30, 2022 was flat compared to the nine months ended September 30, 2021.

Professional services revenue was $9.4 million in the nine months ended September 30, 2022, compared to $9.5 million in the nine months ended September 30, 2021, a decrease of $0.1 million, or 1%. The acquisitions not fully in the comparable period contributed $1.9 million to the increase in professional services revenue in the nine months ended September 30, 2022. Therefore, professional services revenue from our Organic Business decreased by $2.0 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 primarily related to our discipline around not accepting unprofitable professional services projects.

Cost of Revenue and Gross Profit Percentage

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	Three Months Ended September 30,						Nine Months Ended September 30,
	2022		2021		% Change		2022		2021		% Change

	(dollars in thousands)
Cost of revenue:
Subscription and support (1)	$	23,553	$	22,968	3	%	$	69,747	$	68,811	1	%
Professional services and other	2,173		1,848		18	%	7,287		5,444		34	%
Total cost of revenue	25,726		24,816		4	%	77,034		74,255		4	%
Gross profit	$	53,823	$	51,237			$	161,458	$	152,031

Percentage of total revenue:
Subscription and support (1)	30%		30%				29%		30%
Professional services and other	2%		3%				3%		3%
Total cost of revenue	32%		33%				32%		33%
Gross profit	68%		67%				68%		67%

(1) Includes depreciation, amortization and stock compensation expense as follows:
Depreciation	$	2	$	5			$	7	$	27
Amortization	$	3,021	$	2,982			$	9,356	$	8,608
Stock Compensation	$	510	$	539			$	1,487	$	1,544

For the Three Months Ended September 30, 2022

Cost of subscription and support revenue was $23.6 million in the three months ended September 30, 2022, compared to $23.0 million in the three months ended September 30, 2021, an increase of $0.6 million, or 3%. The acquisitions not fully in the comparable period contributed $0.9 million to cost of subscription and support revenue, primarily related to costs associated with the delivery of the newly acquired products. Therefore, cost of subscription and support revenue for our Organic Business decreased by $0.3 million, primarily related to a decrease in telecom messaging costs.

Cost of professional services and other revenue was $2.2 million in the three months ended September 30, 2022, compared to $1.8 million in the three months ended September 30, 2021, an increase of $0.4 million, or 18%. The acquisitions not fully in the comparable period contributed $0.7 million in the cost of professional services revenue. Therefore, the cost of professional services for our Organic Business decreased by $0.3 million.

For the Nine Months Ended September 30, 2022

Cost of subscription and support revenue was $69.7 million in the nine months ended September 30, 2022, compared to $68.8 million in the nine months ended September 30, 2021, an increase of $0.9 million, or 1%. The acquisitions not fully in the comparable period contributed $4.5 million to the increase to cost of subscription and support revenue, primarily related to costs associated with the delivery of the BA Insight, Objectif Lune, Panviva and BlueVenn products. Cost of subscription and support revenue related to our Sunset Assets decreased $0.2 million primarily related to decreased hosting and infrastructure costs. Therefore, cost of subscription and support revenue for the organic portion of our Organic Business decreased by $3.4 million, primarily related to decreases in personnel and related costs and telecom messaging costs.

Cost of professional services revenue was $7.3 million in the nine months ended September 30, 2022, compared to $5.4 million in the nine months ended September 30, 2021, an increase of $1.9 million, or 34%. The acquisitions not fully in the comparable period contributed $2.2 million to the increase to cost of professional services revenue, primarily related to an increase in personnel and related costs. Therefore, cost of professional services revenue for our Organic Business decreased by $0.3 million.

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Operating Expenses

Sales and Marketing Expense


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022		2021		% Change		2022		2021		% Change

	(dollars in thousands)
Sales and marketing (1)	$	14,361	$	14,364	—	%	$	45,285	$	41,094	10	%
Percentage of total revenue	18%		19%				19%		18%

(1) Includes stock compensation expense as follows:
Stock Compensation	$	612	$	1,636			$	3,584	$	4,392

For the Three Months Ended September 30, 2022

Sales and marketing expense was flat of $14.4 million in the three months ended September 30, 2022, compared to $14.4 million in the three months ended September 30, 2021. The acquisitions not fully in the comparable period contributed $1.2 million to the increase in sales and marketing expense, primarily consisting of personnel and related costs. Therefore, sales and marketing expense for our Organic Business decreased $1.2 million primarily attributable to decreases in personnel and related costs.

For the Nine Months Ended September 30, 2022

Sales and marketing expense was $45.3 million in the nine months ended September 30, 2022, compared to $41.1 million in the nine months ended September 30, 2021, an increase of $4.2 million, or 10%. The acquisitions not fully in the comparable period contributed $5.4 million to the increase in sales and marketing expense, primarily consisting of personnel and related costs. Therefore, sales and marketing expense for our Organic Business decreased by $1.1 million, primarily attributable to decreases in personnel and related costs.

Research and Development Expense


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022		2021		% Change		2022		2021		% Change

	(dollars in thousands)
Research and development (1)	$	11,645	$	10,441	12	%	$	35,388	$	32,494	9	%




Percentage of total revenue	15%		14%				15%		14%



(1) Includes stock compensation expense as follows:
Stock Compensation	$	701	$	671			$	2,107	$	2,327

For the Three Months Ended September 30, 2022

Research and development expense was $11.6 million in the three months ended September 30, 2022, compared to $10.4 million in the three months ended September 30, 2021, an increase of $1.2 million, or 12%. The acquisitions not fully in the comparable period contributed $1.6 million to the increase in research and development expense primarily consisting of personnel and related costs. Therefore, research and development expense related to our Organic Business decreased by $0.4 million primarily related to personnel and related costs.

For the Nine Months Ended September 30, 2022

Research and development expense was $35.4 million in the nine months ended September 30, 2022, compared to $32.5 million in the nine months ended September 30, 2021, an increase of $2.9 million, or 9%. The acquisitions not fully in the comparable period contributed $5.5 million to the increase in research and development expense primarily consisting of personnel and related costs. Research and development expense related to our Sunset Assets decreased by $0.2 million

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primarily due to reductions in personnel costs. Therefore, research and development costs for our Organic Business decreased by $2.4 million primarily related to personnel and related costs.

General and Administrative Expense


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022		2021		% Change		2022		2021		% Change

	(dollars in thousands)
General and administrative (1)	$	14,668	$	17,725	(17)	%	$	56,110	$	61,286	(8)	%
Percentage of total revenue	18%		23%				24%		27%

(1) Includes stock compensation expense as follows:
Stock Compensation	$	5,704	$	9,201			$	26,845	$	35,158

For the Three Months Ended September 30, 2022

General and administrative expense was $14.7 million in the three months ended September 30, 2022, compared to $17.7 million in the three months ended September 30, 2021, a decrease of $3.0 million, or 17%. An increase in general administrative expense of $0.6 million was due to the acquisitions not fully in the comparable period. In addition, general and administrative expense decreased by $3.6 million, which was driven primarily by lower non-cash stock compensation expense.

For the Nine Months Ended September 30, 2022

General and administrative expense was $56.1 million in the nine months ended September 30, 2022, compared to $61.3 million in the nine months ended September 30, 2021, a decrease of $5.2 million, or 8%. An increase in general administrative expense of $2.3 million was due to the acquisitions not fully in the comparable period, which consisted primarily of personnel and related costs and administrative expenses. Therefore, general and administrative expense decreased by $7.5 million, which was driven primarily by overall decrease in non-cash stock compensation expense and personnel and related costs.

Depreciation and Amortization Expense


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022		2021		% Change		2022		2021		% Change

	(dollars in thousands)
Depreciation and amortization:
Depreciation	$	363	$	545	(33)	%	$	1,191	$	1,447	(18)	%
Amortization	9,754		10,219		(5)	%	30,779		29,338		5	%
Total depreciation and amortization	$	10,117	$	10,764	(6)	%	$	31,970	$	30,785	4	%


Percentage of total revenue:
Depreciation	1%		1%				—%		1%
Amortization	12%		13%				13%		13%
Total depreciation and amortization	13%		14%				13%		14%

For the Three Months Ended September 30, 2022

Depreciation and amortization expense was $10.1 million in the three months ended September 30, 2022, compared to $10.8 million in the three months ended September 30, 2021, a decrease of $0.7 million, or 6%. The acquisitions not fully in the comparable period increased depreciation and amortization expense by $1.1 million, primarily related to acquired intangible assets such as customer relationships, developed technology and tradenames. Depreciation and amortization expense related to our Sunset Assets decreased by $0.1 million. Therefore, depreciation and amortization expense from our Organic Business decreased by $1.7 million from assets becoming fully depreciated and amortized.

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For the Nine Months Ended September 30, 2022

Depreciation and amortization expense was $32.0 million in the nine months ended September 30, 2022, compared to $30.8 million in the nine months ended September 30, 2021, an increase of $1.2 million, or 4%. The acquisitions not fully in the comparable period increased depreciation and amortization expense by $4.2 million, primarily related to acquired intangible assets such as customer relationships, developed technology and tradenames. Depreciation and amortization expense related to our Sunset Assets decreased by $0.1 million. Therefore, depreciation and amortization expense for our Organic Business decreased by $2.9 million from assets becoming fully depreciated and amortized.

Acquisition-related Expenses


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022		2021		% Change		2022		2021		% Change

	(dollars in thousands)
Acquisition-related expenses	$	3,586	$	3,685	(3)	%	$	18,924	$	18,805	1	%
Percentage of total revenue	4%		5%				8%		9%

Acquisition-related expenses are typically one-time expenses incurred for up to four quarters after each acquisition, with the majority of these costs being incurred within 6 to 9 months, to transform the acquired business into the Company's unified operating platform. These expenses can vary based on the size, timing and location of each acquisition. These acquisition-related expenses include transaction related expenses such as banker fees, legal and professional fees, insurance costs, and deal bonuses. These acquisition-related expenses also include transformational expenses such as severance, compensation for transitional personnel, office lease terminations, vendor cancellations, and adjustments to the fair value of earnouts due to sellers. Generally, without new acquisition activity, acquisition related expenses decline in subsequent sequential quarters and are no longer incurred after the first anniversary of the last closed acquisition.

For the Three Months Ended September 30, 2022

Acquisition-related expense was $3.6 million in the three months ended September 30, 2022, compared to $3.7 million in the three months ended September 30, 2021, a decrease of $0.1 million, or 3%. During the three months ended September 30, 2022, transaction related expense was a gain of $0.3 million compared to and an expense of $0.1 million for the three months ended September 30, 2021. Transformational expenses were $3.9 million and $3.6 million during the three months ended September 30, 2022 and 2021, respectively. The transformational expenses in both the current and year ago periods were primarily related to temporary transitional personnel and related costs along with accelerated rent related expenses incurred in conjunction with the closures of offices of our acquired companies as we consolidate and integrate these acquisitions. We had no new acquisitions during the three months ended September 30, 2022 and 2021, respectively. Transformation expenses in the three months ended September 30, 2022 include expenses related to acquisitions closed in 2022. In addition, Acquisition-related expense for the three months ended September 30, 2021 includes a gain of $0.8 million related to a decrease in the fair value of earnout liabilities due to sellers related to the BlueVenn and Second Street acquisitions.

For the Nine Months Ended September 30, 2022

Acquisition related expense was $18.9 million the nine months ended September 30, 2022, compared to $18.8 million in the nine months ended September 30, 2021 an increase of $0.1 million, or 1%. During the nine months ended September 30, 2022 and September 30, 2021 transaction related expenses were $4.6 million and $6.2 million, respectively, and transformational expenses were $14.3 million and $12.6 million, respectively. The transformational expenses in both the current and year ago periods were primarily related to temporary transitional personnel and related costs along with accelerated rent related expenses incurred in conjunction with the closures of offices of our acquired companies as we consolidate and integrate these acquisitions. These accelerated rent related expenses decreased $4.0 million to $0.9 million during the nine months ended September 30, 2022 from $4.9 million during the same period in 2021. Transformation expenses in 2021 include expenses related to the three acquisitions closed in 2021 as well as the one acquisition closed in 2020 compared to transformation expenses in 2022 related to the two acquisitions closed in 2022 and three acquisitions closed in 2021. In addition, Acquisition-related expense for the nine months ended September 30, 2021 includes a gain of $3.5 million related to a decrease in the fair value of earnout liabilities due to sellers related to the BlueVenn and Second Street acquisitions.

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Other Income (Expense)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022		2021		% Change		2022		2021		% Change

	(dollars in thousands)
Other expense:
Interest expense, net	$	(7,354)	$	(7,971)	(8)	%	$	(22,870)	$	(23,700)	(4)	%

Other income (expense), net	339		(650)		(152)	%	1,698		(812)		(309)	%
Total other expense	$	(7,015)	$	(8,621)	(19)	%	$	(21,172)	$	(24,512)	(14)	%

Percentage of total revenue:
Interest expense, net	(9)%		(10)%				(10)%		(10)%

Other income (expense), net	—%		(1)%				1%		(1)%
Total other expense	(9)%		(11)%				(9)%		(11)%

For the Three Months Ended September 30, 2022

Interest expense, net was $7.4 million in the three months ended September 30, 2022 compared to $8.0 million in the three months ended September 30, 2021 a decrease in interest expense of $0.6 million or 8%, due to an increase in interest income on our idle cash and a decrease in outstanding borrowings on our Credit Facility.

Other income was $0.3 million in the three months ended September 30, 2022, compared to other expense of $0.7 million in the three months ended September 30, 2021. Other income recognized during the three months ended September 30, 2022 was related primarily to currency exchange gains.

For the Nine Months Ended September 30, 2022

Interest expense was $22.9 million in the nine months ended September 30, 2022, compared to $23.7 million in the nine months ended September 30, 2021, a decrease in interest expense of $0.8 million, or 4%, due to an increase in interest income on our idle cash and a decrease in outstanding borrowings on our Credit Facility.

Other income was $1.7 million in the nine months ended September 30, 2022, compared to other expense of $0.8 million in the nine months ended September 30, 2021. Other income recognized during the nine months ended September 30, 2022 were related primarily to currency exchange gains.

Benefit from Income Taxes


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022		2021		% Change		2022		2021		% Change

	(dollars in thousands)
Benefit from income taxes	$	1,056	$	3,348	(68)	%	$	1,654	$	6,204	(73)	%
Percentage of total revenue	1%		5%				1%		4%

For the Three Months Ended September 30, 2022

Benefit from income taxes was $1.1 million in the three months ended September 30, 2022, compared to a benefit for income taxes of $3.3 million in the three months ended September 30, 2021, resulting in a decrease in benefit from income taxes of $2.2 million. The benefit from income taxes for the three months ended September 30, 2022 related primarily to foreign income taxes associated with our combined non-U.S. operations and the deferred tax benefit attributable to the release of valuation allowance related to the acquisition of deferred tax liabilities associated with business combinations occurring during the nine months ended September 30, 2022. These tax benefits are offset by changes in deferred tax liabilities associated with amortization of United States tax deductible goodwill and state taxes in certain states in which the Company does not file on a consolidated basis or have net operating loss. The benefit from income taxes for the three months ended September 30, 2021

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related primarily to deferred tax benefits attributable to the release of valuation allowance related to acquired deferred tax liabilities associated with business combinations, the deferred tax benefit attributable to the reduction in deferred tax liabilities associated with the transfer of intangibles between foreign and domestic jurisdictions, and income tax benefits associated with our combined non-U.S. operations.

For the Nine Months Ended September 30, 2022

The benefit from income taxes was $1.7 million in the nine months ended September 30, 2022, compared to a benefit from income taxes of $6.2 million in the nine months ended September 30, 2021, resulting in a decrease of benefit from income taxes of $4.6 million. This decrease was due primarily to decreased benefits recognized during the current period attributable to the release of valuation allowances associated with acquisitions of domestic entities with deferred tax liabilities that, upon acquisition, allow us to recognize certain deferred tax assets that had previously been offset by a valuation allowances.

Key Metrics

In addition to the GAAP financial measures described in “Results of Operations,” we regularly review the following key metrics to evaluate and identify trends in our business, measure our performance, prepare financial projections and make strategic decisions.

Adjusted EBITDA

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

The following table represents a reconciliation of net loss from continuing operations, the most comparable GAAP measure, to Adjusted EBITDA for each of the periods indicated.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(dollars in thousands)
Reconciliation of net loss to Adjusted EBITDA:
Net loss	$	(6,513)	$	(11,015)	$	(45,737)	$	(50,741)
Add:

Depreciation and amortization expense	13,140		13,751		41,333		39,420
Interest expense, net	7,354		7,971		22,870		23,700

Other expense (income), net	(339)		650		(1,698)		812
Benefit from income taxes	(1,056)		(3,348)		(1,654)		(6,204)
Stock-based compensation expense	7,527		12,047		34,023		43,421
Acquisition-related expense	3,586		3,685		18,924		18,805

Non-recurring litigation costs	15		—		15		—
Purchase accounting deferred revenue discount	1,174		1,275		4,766		2,375
Adjusted EBITDA	$	24,888	$	25,016	$	72,842	$	71,588

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;

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•Adjusted EBITDA provides more consistency and comparability with our past financial performance, facilitates period-to-period comparisons of our operations and also facilitates comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.

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.

Liquidity and Capital Resources

To date, we have financed our operations primarily through the raising of capital including sales of our common stock or our convertible preferred stock, cash from operating activities, and borrowings under our credit facility. We believe that current cash and cash equivalents, cash flows from operating activities, availability under our existing credit facility, as discussed below, and the ability to offer and sell securities pursuant to our registration statement, as discussed below, will be sufficient to fund our operations for at least the next twelve months. In addition, we intend to utilize the sources of capital available to us under our Credit Facility and registration statement to support our continued growth via acquisitions within our core enterprise solution suites of complementary technologies and businesses.

As of September 30, 2022, we had cash and cash equivalents of $241.7 million, $60.0 million of available borrowings under our credit facility, as discussed below, and $523.8 million of borrowings outstanding under our credit facility. As of December 31, 2021, we had cash and cash equivalents of $189.2 million, $60.0 million of available borrowings under our Credit Facility, and $527.9 million of borrowings outstanding under our credit facility. The $52.6 million increase in cash and cash equivalents from December 31, 2021 to September 30, 2022 includes $110.5 million in cash proceeds related to our Series A Preferred Stock, net of issuance costs which closed in August 2022. This was partially offset by $62.4 million in cash paid for our two acquisitions closed in January and February 2022, net of $0.7 million in cash acquired. Non-cash acquisition date consideration to be paid in future periods related to these acquisitions includes $5.9 million in holdback payments that are due within 12 to 15 months of the closing dates of the underlying acquisitions.

Our cash and cash equivalents held by our foreign subsidiaries was $36.0 million as of September 30, 2022 and $24.8 million as of December 31, 2021. If these funds held by our foreign subsidiaries are needed for our domestic operations, a repatriation of these funds may require us to accrue and pay dividend withholding taxes in the foreign jurisdictions where applicable and accrue and pay U.S. taxes to the extent such dividend income exceeds our ability to utilize net operating losses. However, our intent is to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate them to fund our domestic operations. We do not provide for federal income taxes on the undistributed earnings of our foreign subsidiaries.

As of September 30, 2022 and December 31, 2021, we had a working capital surplus of $156.4 million and surplus of $106.5 million, respectively, which includes $98.7 million and $102.8 million of deferred revenue recorded as a current liability as of September 30, 2022 and December 31, 2021, respectively. This deferred revenue will be recognized as revenue in future periods in accordance with our revenue recognition policy.

Series A Preferred Stock

The Series A Preferred Stock as discussed in “Note 9. Series A Preferred Stock” provided us an additional $115.0 million in liquidity during the three months ended September 30, 2022, which we intend to use for (a) for general corporate purposes and (b) for transaction-related fees and expenses. As of September 30, 2022, the Series A Preferred Stock Issuance Costs totaled $4.5 million.

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The holders of Series A Convertible Preferred Stock are entitled to dividends (i) at the rate of 4.5% per annum until but excluding the seven year anniversary of the closing, and (ii) at the rate of 7.0% per annum on and after the seven year anniversary of the closing, and are also entitled to fully participate in any dividends or other distributions declared or paid on our common stock on an as-converted basis. Dividends will be payable quarterly in arrears, and may be paid, at our option, in cash or by paying dividends in kind. Our ability to pay cash dividends is subject to the restrictions under the Credit Facility (as defined below). The Series A Preferred Stock had accrued unpaid dividends of $0.5 million as of September 30, 2022.

The Series A Preferred Stock will rank senior to our common stock with respect to distribution rights and rights upon our liquidation, dissolution or winding up (“Liquidation”), on parity with any class or series of our capital stock expressly designated as ranking on parity with the Series A Preferred Stock with respect to distribution rights and rights upon Liquidation, junior to any class or series of our capital stock expressly designated as ranking senior to the Series A Preferred Stock with respect to distribution rights and rights upon Liquidation and junior in right of payment to our existing and future indebtedness, including the Credit Facility.

Credit Facility

On August 6, 2019, we entered into a credit agreement (the “Credit Facility”) which provides for (i) a fully-drawn $350 million, 7 year, senior secured term loan B facility (the “Term Loan”) and (ii) a $60 million, 5 year, revolving credit facility (the “Revolver”) that was fully available as of September 30, 2022.

On November 26, 2019, the Company entered into a First Incremental Assumption Agreement (the “Incremental Assumption Agreement”) which provides for a term loan facility to be established under the Credit Facility in an aggregate principal amount of $190 million (the “2019 Incremental Term Loan”) which is in addition to the existing $350 million term loans outstanding under the Credit Facility and the $60 million Revolver under the Credit Facility.

The Credit Facility has no financial covenants as long as less than 35% of the Revolver is drawn as of the last day of any fiscal quarter. The credit facility is secured by a security interest in substantially all of our assets and requires us to maintain certain financial covenants. The Credit Facility contains certain non-financial restrictive covenants that limit our ability to transfer or dispose of assets, merge with other companies or consummate certain changes of control, acquire other companies, pay dividends, incur additional indebtedness and liens, effect changes in management and enter into new businesses. As of September 30, 2022 we were in compliance with all covenants under the Credit Facility. See “Note 6. Debt—Credit Facility” for more information regarding our Credit Facility and outstanding debt as of September 30, 2022.

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the fair value of the interest rate swap assets during the nine months ended September 30, 2022 is the result of an increase in interest rates compared to December 31, 2021.

On October 21, 2022 we filed a resale registration statement on Form S-3 (File No. 333-267973), on behalf of Ulysses Aggregator, LP (the “Purchaser”) and pursuant to the Registration Rights Agreement between us and the Purchaser, which became effective on November 1, 2022 and covers (i) the issued Series A Preferred Stock and (ii) the number of shares of the Company’s common stock issuable upon conversion of such Series A Preferred Stock, which amount includes and assumes that dividends on the Series A Preferred Stock are paid by increasing the Liquidation Preference of the Series A Preferred Stock for a period of sixteen dividend payment periods from the initial issuance date.

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


	Nine Months Ended September 30,
	2022		2021

	(dollars in thousands)
Consolidated Statements of Cash Flow Data:
Net cash provided by operating activities	$	24,138	$	28,646
Net cash used in investing activities	(63,074)		(93,382)
Net cash provided by (used in) financing activities	97,127		(5,096)
Effect of exchange rate fluctuations on cash	(5,629)		(613)
Change in cash and cash equivalents	52,562		(70,445)
Cash and cash equivalents, beginning of period	189,158		250,029
Cash and cash equivalents, end of period	$	241,720	$	179,584

Cash Flows from Operating Activities

Cash provided by operating activities is significantly influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business. Included in net cash provided by operations are one-time acquisition related expenses incurred for up to four quarters after each acquisition to transact and transform the acquired business into the Company's unified operating platform. Additionally, operating cash flows includes the impact of earn-outs payments in excess of original purchase accounting estimates. Our working capital consists primarily of cash, receivables from customers, prepaid assets, unbilled professional services, deferred commissions, accounts payable, accrued compensation and other accrued expenses, acquisition related earnout and holdback liabilities, lease liabilities, and deferred revenues. The volume of professional services rendered, the volume and timing of customer bookings and contract renewals, and the related timing of collections on those bookings and renewals, as well as the timing of spending commitments and payments of our accounts payable, accrued expenses, accrued payroll and related benefits, all affect these account balances.

Cash provided by operating activities was $24.1 million for the nine months ended September 30, 2022 compared to cash provided by operating activities of $28.6 million for the nine months ended September 30, 2021, a decrease of $4.5 million. Working capital sources of cash for the nine months ended September 30, 2022 included a $18.2 million decrease in accounts receivable related to the timing of collections. Working capital uses of cash for the nine months ended September 30, 2022 included a decrease of $1.5 million in accounts payable related to timing of payments, a decrease of $13.3 million in deferred revenue, a $5.1 million increase in prepaid expenses and other current assets and a $11.3 million decrease in accrued expenses.

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

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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 library of cloud-based software applications and infrastructure and support additional personnel.

For the nine months ended September 30, 2022, cash used in investing activities consisted of $62.4 million associated with the Company’s 2022 acquisitions, and the purchases of property and equipment of $0.7 million. Cash used in investing activities decreased $30.3 million for the nine months ended September 30, 2022 compared to the same period in 2021 primarily as a result of the two acquisitions closed during the period compared to the three acquisitions in the comparable prior year period.

Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced applications and professional service offerings, and acquisitions of complementary technologies, products and businesses.

Cash Flows from Financing Activities

Our primary financing activities have consisted of capital raised to fund our acquisitions, proceeds from debt obligations incurred to finance our acquisitions, repayments of our debt obligations, and share based employee payroll tax payment activity.

Cash provided by financing activities increased $102.2 million for the nine months ended September 30, 2022 compared to the same period in 2021. The increase in cash provided by financing activities relates primarily to $110.5 million in cash proceeds related to our Series A Preferred Stock, net of issuance costs, partially offset by a $7.4 million increase in additional consideration paid to sellers (i.e. holdbacks) and a $0.8 million increase in net share employee payroll tax settlement payments compared to the same period in 2021.

Critical Accounting Policies and the Use of Estimates

We prepare our condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of our condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

The following critical accounting policies reflect significant judgments and estimates used in the preparation of our condensed consolidated financial statements:

• revenue recognition and deferred revenue;

• income taxes;

• deferred sales commissions and sales commission expense;

• business combinations and the recoverability of goodwill and long-lived assets; and

• stock-based compensation.

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of November 3, 2022, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

Other Key Accounting Policies

Our unaudited interim financial statements and other financial information for the three and nine months ended September 30, 2022, as presented herein and in “Item 1. Financial Statements” to this Quarterly Report on Form 10-Q, reflect no material changes in our critical accounting policies and estimates as set forth in our Annual Report on Form 10-K for the year ended

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December 31, 2021 filed with the SEC on February 24, 2022 (the “Annual Report”). Please refer to our Annual Report for a detailed description of our critical accounting policies that involve significant management judgment.

We evaluate our estimates, judgments and assumptions on an ongoing basis, and while we believe that our estimates, judgments and assumptions are reasonable, they are based upon information available at the time. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.

Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements and the impact of these pronouncements on our condensed consolidated financial statements, refer to “Note 1. Basis of Presentation and Summary of Significant Accounting Policies—Recent Accounting Pronouncements” to our condensed consolidated financial statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange and inflation risks, as well as risks relating to changes in the general economic conditions in the countries where we conduct business. The statement of operations impact is mitigated by having an offsetting liability in deferred revenue to partially or completely offset against the outstanding receivable if an account should become uncollectible. Our cash balances are kept in customary operating accounts, a portion of which are insured by the Federal Deposit Insurance Corporation, and uninsured money market accounts. The majority of our cash balances in money market accounts are with the lender under our Credit Facility. To date, we have not used derivative instruments to mitigate the impact of our market risk exposures. We also have not used, nor do we intend to use, derivatives for trading or speculative purposes.

Interest Rate Risk

Our exposure to market risk for changes in interest rates primarily relates to our cash equivalents and any variable rate indebtedness. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This objective is accomplished currently by making diversified investments, consisting only of money market mutual funds and certificates of deposit. In conjunction with our $350 million, 7 year, term loan, and subsequent entry into an additional $190 million in incremental term loans under the Credit Facility, we entered into interest rate swap agreement for the full seven-year term, effectively fixing our interest rate at 5.4%. However, the interest rate associated with our $60 million, 5 year, revolving credit facility remains floating. As of September 30, 2022, we had an outstanding balance of $523.8 million under our Credit Facility. As there was no debt outstanding under our revolving credit facility as of September 30, 2022, a hypothetical change of 100 basis points would result in no change to total interest expense.

Foreign Currency Exchange Risk

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 Australian dollars, 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. As a result, we are exposed to foreign exchange rate fluctuations as the financial results of our international operations and our revenue and operating results could be adversely affected. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business could have resulted in a change in revenue of $5.7 million for the nine months ended September 30, 2022. To date, we have not engaged in any currency hedging strategies. 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. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in foreign currency exchange rates.

The non-financial assets and liabilities of our foreign subsidiaries are translated into United States dollars using the exchange rates in effect at the balance sheet date. The related translation adjustments are recorded in a separate component of stockholders' equity in accumulated other comprehensive income (loss). In addition, we have intercompany loans that are used to fund the acquisition of foreign subsidiaries. Due to the long-term nature of these loans, the foreign currency gains (losses) resulting from remeasurement are recognized as a component of accumulated other comprehensive income (loss).

Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations in the last three fiscal years. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2022, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of such date. Our management has concluded that the condensed consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with GAAP.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting (as defined in Rules 13a- 15(f) and 15d- 15(f) of the Exchange Act) during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, the risk.

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PART II – OTHER INFORMATION

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2021 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. Except as set forth below, there have been no material changes during 2022 to the risk factors that were included in the Company's Annual Report on Form 10-K filed with the SEC on February 24, 2022.

If our goodwill or intangible assets become impaired, then we could be required to record a significant charge to earnings.

GAAP requires us to test for goodwill impairment at least annually. In addition, we review our goodwill and intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or intangible assets may not be recoverable include declines in stock price, market capitalization or cash flows, and slower growth rates in our industry. Depending on the results of our review, we could be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or intangible assets were determined, negatively impacting our results of operations.

We may be adversely affected by the effects of inflation.

Inflation has the potential to adversely affect our liquidity, business, financial condition and results of operations by increasing our overall cost structure, particularly if we are unable to achieve commensurate increases in the prices we charge our customers. The existence of inflation in the economy has resulted in, and may continue to result in, higher interest rates and capital costs, shipping costs, supply shortages, increased costs of labor, weakening exchange rates and other similar effects. As a result of inflation, we have experienced and may continue to experience, cost increases. Although we may take measures to mitigate the impact of this inflation, if these measures are not effective, our business, financial condition, results of operations and liquidity could be materially adversely affected. Even if such measures are effective, there could be a difference between the timing of when these beneficial actions impact our results of operations and when the cost of inflation is incurred.

Pursuant to the terms of the Purchase Agreement, we have issued shares of our Series A Preferred Stock that ranks senior to our common stock in priority of distribution rights and rights upon our liquidation, dissolution or winding up and has additional corporate governance rights.

As of September 30, 2022, we had 115,000 shares of newly designated Series A Preferred Stock outstanding. The holders of the Series A Preferred Stock are entitled to dividends payable quarterly in arrears, which may be paid, at our option, in cash or by increasing the Liquidation Preference (as defined below) of each share of Series A Preferred Stock by the amount of the applicable dividend. The holders of Series A Preferred Stock (each, a “Holder” and collectively, the “Holders”) will be entitled to dividends (i) at the rate of 4.5% per annum until but excluding the seven year anniversary of the Closing, and (ii) at the rate of 7% per annum on and after the seven year anniversary of the Closing. Our ability to pay cash dividends is subject to the restrictions under our existing credit agreement. The Series A Preferred Stock has no mandatory conversion feature and is a perpetual security. Although we have the ability to redeem the shares of Series A Preferred Stock beginning on the date that is seven years from the Closing date, we may be unable to do so at that time, and we will be forced to pay the higher dividend rate of 7% per annum until the time that the holders of Series A Preferred Stock convert their shares into shares of common stock or we obtain sufficient capital to redeem the Series A Preferred Stock.

The Series A Preferred Stock ranks senior to our common stock with respect to distribution rights and rights upon our liquidation, dissolution or winding up, on parity with any class or series of our capital stock expressly designated as ranking on parity with the Series A Preferred Stock with respect to distribution rights and rights upon our upon liquidation, dissolution or winding up, junior to any class or series of our capital stock expressly designated as ranking senior to the Series A Preferred Stock with respect to distribution rights and rights upon our upon liquidation, dissolution or winding up and junior in right of payment to our existing and future indebtedness. Further, upon our liquidation, dissolution or winding up, holders of our Series A Preferred Stock will receive a distribution of our available assets before common stockholders in an amount equal to (i) the Initial Liquidation Preference, plus (ii) any accrued and unpaid dividends on such share of Series A Preferred Stock to, but excluding, the date of payment of such amounts (the “Liquidation Preference”).

The holders of Series A Preferred Stock generally are entitled to vote with the holders of our common stock on all matters submitted for a vote of holders of our common stock (voting together with the holders of our common stock as one class) on an as-converted basis. In addition, so long as the Purchaser and its affiliates beneficially own in the aggregate at least 5% of the shares of our common stock on a fully diluted basis including the shares of common stock issuable upon conversion of shares of Series A Preferred Stock, the holders of a majority of the outstanding shares of Series A Preferred Stock, voting as a single class, are entitled to nominate and elect one individual to serve on our board of directors. In addition, the holders of a majority of the outstanding shares of Series A Preferred Stock, voting as a separate class, will have the right to elect, for so long as the Purchaser and its affiliates own in the aggregate at least 10% of the shares of Series A Preferred Stock (or common

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stock into which it is convertible) outstanding as of the Closing, one non-voting observer to our board of directors. Such governance rights may grant the holders of our Series A Preferred Stock additional control rights, which may impact our ability to run our business, and may adversely affect the trading price of our common stock. Upon issuance of the Series A Preferred Stock, holders of our common stock will experience dilution of both economic and voting rights, and, because we may pay dividends in kind by increasing the liquidation value of each share of Series A Preferred Stock, holders of common stock will be further diluted at each regular dividend payment date.

The fundamental change redemption feature of our Series A Preferred Stock may make it more difficult for a party to take over our company or discourage a party from taking over our company.

Upon a “Fundamental Change” (involving a change of control as further described in the certificate of designation governing our Series A Preferred Stock), each holder of Series A Preferred Stock shall have the right to require us to redeem all or any part of the holder’s Series A Preferred Stock for an amount equal to greater of (i) the sum of 105% of the Liquidation Preference and a customary make-whole amount, and (ii) the amount that such Holder would have received had such Holder, immediately prior to such “Fundamental Change,” converted the Holder’s Series A Preferred Stock into common stock, without regard to the Issuance Limitation. The mandatory redemption option conferred to holders of our Series A Preferred Stock upon certain events constituting a Fundamental Change (involving a change of control) under the Series A Preferred Stock, may have the effect of discouraging a third party from making an acquisition proposal for our company or of delaying, deferring or preventing certain change of control transactions of our company under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-current market price or that stockholders may otherwise believe is in their best interests.

Item 6. Exhibits

See the Exhibit Index immediately following this page, which is incorporated herein by reference.

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EXHIBIT INDEX

Exhibit Number

Exhibit Description

31.1*

Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101*

Inline XBRL (Extensible Business Reporting Language). The following materials from this Quarterly Report on Form 10-Q for the periods ended September 30, 2022, formatted in Inline XBRL: (i) condensed consolidated balance sheets of Upland Software, Inc., (ii) condensed consolidated statements of operations of Upland Software, Inc., (iii) condensed consolidated statements of comprehensive income/(loss) of Upland Software, Inc., (iv) condensed consolidated statement of stockholders’ equity of Upland Software, Inc., (v) condensed consolidated statements of cash flows of Upland Software, Inc. and (vi) notes to unaudited condensed consolidated financial statements of Upland Software, Inc. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.

104*

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.

** Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			UPLAND SOFTWARE, INC.
Dated: November 3, 2022			/s/ Michael D. Hill
			Michael D. Hill
			Chief Financial Officer