[PART I. FINANCIAL INFORMATION](index=3&type=section&id=Part%20I.%20FINANCIAL%20INFORMATION) This section presents Upland Software, Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis for the three months ended March 31, 2023 [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) Presents Upland Software's unaudited condensed consolidated financial statements for Q1 2023 and 2022, including balance sheets, income statements, and cash flows, with detailed accounting notes [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Provides a snapshot of Upland Software's financial position at March 31, 2023, and December 31, 2022, detailing assets, liabilities, and equity | Metric (in thousands) | March 31, 2023 | December 31, 2022 | Change (vs. Dec 31, 2022) | | :-------------------- | :------------- | :---------------- | :------------------------ | | Total Assets | $965,466 | $1,113,459 | $(147,993) | | Total Liabilities | $685,027 | $692,298 | $(7,271) | | Total Stockholders' Equity | $166,833 | $308,870 | $(142,037) | | Cash and cash equivalents | $257,720 | $248,653 | $9,067 | | Goodwill | $349,990 | $477,043 | $(127,053) | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Details Upland Software's financial performance for the three months ended March 31, 2023, and 2022, including revenue, gross profit, and net loss | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | | :-------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Total Revenue | $77,056 | $78,716 | $(1,660) | | Gross Profit | $51,520 | $53,961 | $(2,441) | | Loss from Operations | $(137,431) | $(14,777) | $(122,654) | | Net Loss | $(140,045) | $(22,831) | $(117,214) | | Net Loss per Common Share, Basic and Diluted | $(4.38) | $(0.73) | $(3.65) | - Goodwill impairment of **$128,755 thousand** was recorded in Q1 2023, significantly contributing to the increased loss from operations and net loss[12](index=12&type=chunk) [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20%28Loss%29) Presents Upland Software's comprehensive income (loss) for Q1 2023 and 2022, including net loss and other comprehensive income components | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | | :-------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Net Loss | $(140,045) | $(22,831) | $(117,214) | | Other comprehensive income (loss): | | | | | Foreign currency translation adjustment | $15 | $(1,047) | $1,062 | | Unrealized translation gain (loss) on intercompany loans | $1,235 | $(1,293) | $2,528 | | Unrealized gain (loss) on interest rate swaps | $(8,154) | $26,213 | $(34,367) | | Total Other comprehensive income (loss) | $(6,904) | $23,873 | $(30,777) | | Comprehensive income (loss) | $(146,949) | $1,042 | $(147,991) | [Condensed Consolidated Statements of Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Equity) Outlines changes in Upland Software's stockholders' equity for Q1 2023 and 2022, reflecting net loss and other comprehensive income impacts | Metric (in thousands) | March 31, 2023 | December 31, 2022 | Change (vs. Dec 31, 2022) | | :-------------------- | :------------- | :---------------- | :------------------------ | | Total Stockholders' Equity | $166,833 | $308,870 | $(142,037) | | Accumulated Deficit | $(449,043) | $(308,998) | $(140,045) | | Accumulated Other Comprehensive Income | $4,206 | $11,110 | $(6,904) | - The significant decrease in total stockholders' equity is primarily driven by the **net loss of $140,045 thousand** and an **unrealized loss on interest rate swaps of $8,154 thousand** during the three months ended March 31, 2023[19](index=19&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Summarizes Upland Software's cash inflows and outflows from operating, investing, and financing activities for Q1 2023 and 2022 | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | | :-------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Net cash provided by operating activities | $15,825 | $8,222 | $7,603 | | Net cash used in investing activities | $(215) | $(62,509) | $62,294 | | Net cash used in financing activities | $(6,781) | $(4,211) | $(2,570) | | Change in cash and cash equivalents | $9,067 | $(58,715) | $67,782 | | Cash and cash equivalents, end of period | $257,720 | $130,443 | $127,277 | - Operating cash flow significantly increased year-over-year, while investing activities saw a substantial reduction in cash used due to no acquisitions in Q1 2023 compared to two in Q1 2022[21](index=21&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Provides detailed explanations of Upland Software's accounting policies, significant estimates, and specific financial statement line items [1. Organization and Nature of Operations](index=10&type=section&id=1.%20Organization%20and%20Nature%20of%20Operations) Describes Upland Software's business model, cloud-based software offerings, and strategic focus on acquisitions for growth - Upland Software, Inc. provides cloud-based software for digital transformation across various business functions, including Marketing, Sales, Contact Center, Knowledge Management, Project Management, IT, Business Operations, HR, and Legal[23](index=23&type=chunk) - The Company plans to pursue acquisitions of complementary technologies and businesses to expand product offerings, customer base, and market access, aiming for increased benefits of scale[24](index=24&type=chunk) [2. Basis of Presentation and Summary of Significant Accounting Policies](index=10&type=section&id=2.%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies) Details the accounting principles, significant estimates, and recent accounting standard adoptions guiding Upland Software's financial reporting - The financial statements are prepared in conformity with GAAP and SEC rules for interim financial reporting, with results for Q1 2023 not necessarily indicative of the full year[25](index=25&type=chunk)[26](index=26&type=chunk) - Significant estimates include revenue recognition, deferred commissions, stock-based compensation, goodwill impairment, and fair value of interest rate swaps[28](index=28&type=chunk) - The Company adopted ASU 2020-04, replacing LIBOR with SOFR for its credit agreement and interest rate swaps, accounting for the modification as not substantial and preserving cash flow hedge designation[47](index=47&type=chunk)[48](index=48&type=chunk) - No individual customer accounted for more than **10% of total revenues** or accounts receivable[32](index=32&type=chunk) - Interest rate swaps, designated as cash flow hedges, effectively convert **$540 million** of term loans from variable to a fixed **5.4% interest rate**. The fair value of these swaps was **$33.0 million** as of March 31, 2023, down from **$41.2 million** at December 31, 2022[33](index=33&type=chunk) [3. Acquisitions](index=15&type=section&id=3.%20Acquisitions) Outlines Upland Software's acquisition activities, including details of recent purchases and their impact on goodwill and assets - Upland Software had no acquisitions during the three months ended March 31, 2023[52](index=52&type=chunk) - In 2022, the Company completed two acquisitions: BA Insight (February 22, 2022) and Objectif Lune (January 7, 2022), with total consideration of **$35.6 million** each[53](index=53&type=chunk)[54](index=54&type=chunk) | Acquired Assets (in thousands) | BA Insight | Objectif Lune | | :----------------------------- | :--------- | :------------ | | Cash | $4 | $745 | | Accounts receivable | $2,466 | $5,677 | | Customer relationships | $10,500 | $17,717 | | Technology | $2,000 | $5,512 | | Goodwill | $25,495 | $23,797 | | Total assets acquired | $44,833 | $64,181 | | Total liabilities assumed | $(9,246) | $(28,537) | | Total consideration | $35,587 | $35,644 | - The goodwill from these acquisitions, totaling **$49.3 million**, is primarily attributed to expected synergies and the value of the acquired workforce[57](index=57&type=chunk) [4. Fair Value Measurements](index=17&type=section&id=4.%20Fair%20Value%20Measurements) Explains Upland Software's fair value measurement hierarchy and the valuation of financial instruments like cash equivalents and interest rate swaps - Fair value measurements are categorized into a three-tier hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[60](index=60&type=chunk) | Fair Value Measurements (in thousands) | March 31, 2023 | December 31, 2022 | | :------------------------------------- | :------------- | :---------------- | | Cash equivalents - money market funds (Level 1) | $202,707 | $172,849 | | Interest rate swap asset (Level 2) | $33,014 | $41,168 | | Total Assets Measured at Fair Value | $235,721 | $214,017 | - The fair value of the interest rate swap asset decreased from **$41.2 million** to **$33.0 million**, categorized as Level 2[62](index=62&type=chunk)[63](index=63&type=chunk) [5. Goodwill and Other Intangible Assets](index=18&type=section&id=5.%20Goodwill%20and%20Other%20Intangible%20Assets) Details changes in Upland Software's goodwill and other intangible assets, including the impact of impairment charges and amortization | Goodwill (in thousands) | Amount | | :---------------------- | :----- | | Balance at December 31, 2022 | $477,043 | | Impairment of goodwill | $(128,755) | | Foreign currency translation adjustment and other | $1,287 | | Balance at March 31, 2023 | $349,990 | - A quantitative goodwill impairment of **$128.8 million** was recorded as of March 31, 2023, due to a decline in the Company's stock price impacting its market capitalization[65](index=65&type=chunk) | Intangible Assets, Net (in thousands) | March 31, 2023 | December 31, 2022 | | :------------------------------------ | :------------- | :---------------- | | Customer relationships | $196,160 | $209,167 | | Trade name | $2,846 | $3,109 | | Developed technology | $33,143 | $36,345 | | Favorable Leases | $219 | $230 | | Total intangible assets, net | $232,368 | $248,851 | - Total amortization expense for intangible assets was **$18.2 million** for the three months ended March 31, 2023, an increase from **$13.8 million** in the prior year period[69](index=69&type=chunk) [6. Income Taxes](index=19&type=section&id=6.%20Income%20Taxes) Discusses Upland Software's income tax benefit, deferred tax assets, and the application of valuation allowances - The Company recognized an income tax benefit of **$1.4 million** for the three months ended March 31, 2023, primarily due to the deferred tax impact of the goodwill impairment[72](index=72&type=chunk) - A valuation allowance is recorded against U.S. net deferred tax assets (exclusive of tax deductible goodwill) due to historical operating losses and limited profit history[74](index=74&type=chunk) [7. Debt](index=20&type=section&id=7.%20Debt) Provides an overview of Upland Software's long-term debt, credit facility terms, and compliance with debt covenants | Long-term Debt (in thousands) | March 31, 2023 | December 31, 2022 | | :---------------------------- | :------------- | :---------------- | | Senior secured loans | $514,076 | $514,983 | | Less current maturities | $(3,109) | $(3,136) | | Total long-term debt | $510,967 | $511,847 | - On February 21, 2023, the Credit Facility was amended to replace LIBOR with SOFR as the interest rate benchmark, with other material terms remaining unchanged[77](index=77&type=chunk) - The Company has a **$350 million** Term Loan, a **$190 million** Incremental Term Loan, and a **$60 million** Revolving Credit Facility. Interest rate swaps fix the interest rate at **5.4%** for the Term Loans, while the Revolver's rate remains floating[78](index=78&type=chunk)[79](index=79&type=chunk)[83](index=83&type=chunk) - As of March 31, 2023, the Company had no borrowings outstanding under the Revolver and was in compliance with all covenants under the Credit Facility[88](index=88&type=chunk)[90](index=90&type=chunk) [8. Net Loss Per Share](index=22&type=section&id=8.%20Net%20Loss%20Per%20Share) Presents Upland Software's net loss per common share, including the calculation and impact of anti-dilutive equivalents | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :----- | :-------------------------------- | :-------------------------------- | | Net Loss Attributable to Common Stockholders | $(141,360) thousand | $(22,831) thousand | | Weighted-Average Common Shares Outstanding | 32,259,110 | 31,163,273 | | Net Loss Per Common Share, Basic and Diluted | $(4.38) | $(0.73) | - Due to net losses, basic and diluted loss per share were the same for both periods. The Series A Preferred Stock is considered a participating security[92](index=92&type=chunk)[93](index=93&type=chunk) | Anti-Dilutive Common Share Equivalents | March 31, 2023 | March 31, 2022 | | :------------------------------------- | :------------- | :------------- | | Stock options | 152,683 | 191,212 | | Restricted stock units | 2,507,689 | 2,318,089 | | Performance restricted stock units | 193,750 | 155,187 | | Series A Preferred Stock (as-converted) | 6,752,038 | — | | Total anti-dilutive common share equivalents | 9,606,160 | 2,664,488 | [9. Commitments and Contingencies](index=22&type=section&id=9.%20Commitments%20and%20Contingencies) Outlines Upland Software's contractual obligations and potential legal exposures, noting no material adverse proceedings - The Company has purchase commitments for hosting services, third-party technology, and other operational services, some requiring minimum annual commitments[95](index=95&type=chunk) - Upland is not involved in any current or pending legal proceedings that are anticipated to have a material adverse effect on its financial statements[96](index=96&type=chunk) [10. Series A Preferred Stock](index=23&type=section&id=10.%20Series%20A%20Preferred%20Stock) Details the terms, dividends, liquidation preference, and conversion rights of Upland Software's Series A Convertible Preferred Stock - In August 2022, Upland issued **115,000 shares** of Series A Convertible Preferred Stock for **$115.0 million**, with cumulative preferred dividends accruing quarterly at **4.5% per annum** (increasing to **7.0%** after seven years)[98](index=98&type=chunk)[99](index=99&type=chunk) - As of March 31, 2023, the Series A Preferred Stock had accrued unpaid dividends of **$3.2 million** and a Liquidation Preference of **$118.2 million**[99](index=99&type=chunk)[102](index=102&type=chunk) - The Series A Preferred Stock ranks senior to Common Stock for dividends and liquidation rights, and holders have the right to elect one Board member and one non-voting observer under certain conditions[101](index=101&type=chunk)[106](index=106&type=chunk)[107](index=107&type=chunk) - Holders can convert Series A Preferred Stock into Common Stock at a conversion price of **$17.50**, subject to anti-dilution adjustments[108](index=108&type=chunk) [11. Stockholders' Equity](index=26&type=section&id=11.%20Stockholders'%20Equity) Examines the components of Upland Software's stockholders' equity, including accumulated other comprehensive income and stock-based compensation | Accumulated Other Comprehensive Income (in thousands) | March 31, 2023 | December 31, 2022 | | :---------------------------------------------------- | :------------- | :---------------- | | Foreign currency translation adjustment | $(22,617) | $(22,632) | | Unrealized translation loss on intercompany loans | $(6,191) | $(7,426) | | Unrealized gain on interest rate swaps | $33,014 | $41,168 | | Total accumulated other comprehensive income | $4,206 | $11,110 | - Total stock-based compensation expense decreased to **$6.5 million** in Q1 2023 from **$11.6 million** in Q1 2022, primarily due to a reduction in General and Administrative expenses[115](index=115&type=chunk) | Stock-Based Compensation Expense (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :---------------------------------------------- | :-------------------------------- | :-------------------------------- | | Cost of revenue | $302 | $402 | | Research and development | $655 | $748 | | Sales and marketing | $576 | $1,474 | | General and administrative | $4,929 | $8,995 | | Total | $6,462 | $11,619 | [12. Revenue Recognition](index=28&type=section&id=12.%20Revenue%20Recognition) Explains Upland Software's revenue recognition policies across subscription, license, and professional services, including remaining performance obligations - Revenue is recognized when control of promised goods or services is transferred to customers, based on a five-step model, across subscription and support, perpetual licenses, and professional services[121](index=121&type=chunk)[122](index=122&type=chunk) - Subscription and support revenue is recognized ratably over the contract term (typically 1-3 years). Perpetual license revenue is recognized upfront when software is available. Professional services revenue is recognized over time as services are performed[123](index=123&type=chunk)[125](index=125&type=chunk)[126](index=126&type=chunk) - As of March 31, 2023, approximately **$275.1 million** of revenue is expected from remaining performance obligations, with **69%** anticipated within the next 12 months[139](index=139&type=chunk) | Revenue by Geography (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :---------------------------------- | :-------------------------------- | :-------------------------------- | | **Subscription and support:** | | | | United States | $52,242 | $51,344 | | United Kingdom | $9,675 | $11,590 | | Canada | $3,491 | $3,468 | | Other International | $7,506 | $7,225 | | **Perpetual license:** | | | | United States | $656 | $737 | | United Kingdom | $223 | $129 | | Canada | $42 | $76 | | Other International | $650 | $836 | | **Professional services:** | | | | United States | $1,597 | $1,695 | | United Kingdom | $258 | $790 | | Canada | $229 | $204 | | Other International | $487 | $622 | | **Total revenue** | **$77,056** | **$78,716** | [13. Related Party Transactions](index=31&type=section&id=13.%20Related%20Party%20Transactions) Confirms the absence of material related party transactions for Upland Software during the reported periods - The Company reported no material related party transactions for the three months ended March 31, 2023, and March 31, 2022[142](index=142&type=chunk) [14. Subsequent Events](index=32&type=section&id=14.%20Subsequent%20Events) Reports on significant events occurring after the reporting period, including the adoption of a Tax Benefit Preservation Plan - On May 2, 2023, the Board of Directors declared a dividend of one preferred stock purchase right for each outstanding share of Common Stock, payable on May 12, 2023[143](index=143&type=chunk) - This Tax Benefit Preservation Plan aims to protect the Company's ability to use its net operating loss carryforwards (NOLs) and other tax attributes by deterring any person from acquiring **4.9% or more** of outstanding stock without Board approval, thereby reducing the likelihood of an 'ownership change' under Section 382 of the Internal Revenue Code[144](index=144&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=33&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Provides management's perspective on Upland Software's financial performance, liquidity, and critical accounting policies for Q1 2023 versus Q1 2022 [Forward Looking Statements](index=33&type=section&id=Forward%20Looking%20Statements) Highlights the inherent risks and uncertainties associated with Upland Software's forward-looking statements regarding future performance and strategy - The report contains forward-looking statements regarding financial performance, acquisitions, market expansion, profitability, and macroeconomic factors, which are subject to risks and uncertainties[146](index=146&type=chunk)[147](index=147&type=chunk)[148](index=148&type=chunk) [Overview](index=34&type=section&id=Overview) Introduces Upland Software's market position, customer base, historical revenue growth, and strategic approach to acquisitions - Upland Software serves over **10,000 customers** and **1,000,000 users** across diverse industries with cloud-based software applications for digital transformation[150](index=150&type=chunk) - The Company's revenue grew from **$149.9 million** in 2018 to **$317.3 million** in 2022, a **21% CAGR**. Foreign revenue decreased to **29% of total revenue** in Q1 2023 from **32%** in Q1 2022[151](index=151&type=chunk) - Upland has completed **31 acquisitions** from February 2012 through March 31, 2023, as part of its growth strategy to expand product library, customer base, and market access[152](index=152&type=chunk) [Recent Developments](index=34&type=section&id=Recent%20Developments) Summarizes key recent events, including the Board's authorization of a preferred stock purchase right to protect tax assets - On May 2, 2023, the Board of Directors authorized a dividend of one preferred stock purchase right per common share to protect the Company's net operating loss carryforwards (NOLs) from an 'ownership change' under Section 382 of the Internal Revenue Code[153](index=153&type=chunk) [Acquisitions](index=34&type=section&id=Acquisitions) Details Upland Software's acquisition activities in Q1 2022 and their impact on current financial results - During Q1 2022, Upland completed two acquisitions: BA Insight (February 22, 2022) and Objectif Lune (January 7, 2022). These acquisitions are fully reflected in Q1 2023 results but not fully in Q1 2022[154](index=154&type=chunk) [Results of Operations](index=35&type=section&id=Results%20of%20Operations) Analyzes Upland Software's financial performance for Q1 2023 compared to Q1 2022, focusing on revenue, costs, and profitability [Consolidated Statements of Operations Data](index=35&type=section&id=Consolidated%20Statements%20of%20Operations%20Data) Presents a comparative summary of Upland Software's key operational metrics for Q1 2023 and Q1 2022 | Metric (in thousands) | Q1 2023 Amount | Q1 2023 % of Revenue | Q1 2022 Amount | Q1 2022 % of Revenue | | :-------------------- | :------------- | :------------------- | :------------- | :------------------- | | Total Revenue | $77,056 | 100% | $78,716 | 100% | | Gross Profit | $51,520 | 67% | $53,961 | 69% | | Loss from Operations | $(137,431) | (178)% | $(14,777) | (18)% | | Net Loss | $(140,045) | (182)% | $(22,831) | (29)% | | Impairment of goodwill | $128,755 | 167% | — | —% | [Comparison of the Three Months Ended March 31, 2023 and 2022](index=36&type=section&id=Comparison%20of%20the%20Three%20Months%20Ended%20March%2031%2C%202023%20and%202022) Provides a detailed year-over-year analysis of Upland Software's financial performance for the first quarter [Revenue](index=36&type=section&id=Revenue) Analyzes Upland Software's revenue trends across subscription, license, and professional services for Q1 2023 versus Q1 2022 | Revenue (in thousands) | Q1 2023 | Q1 2022 | % Change | | :--------------------- | :------ | :------ | :------- | | Subscription and support | $72,914 | $73,627 | (1)% | | Perpetual license | $1,571 | $1,778 | (12)% | | Professional services | $2,571 | $3,311 | (22)% | | Total revenue | $77,056 | $78,716 | (2)% | - Total revenue decreased by **$1.6 million (2%)** year-over-year, driven by declines across all revenue streams[157](index=157&type=chunk) - Subscription and support revenue decreased by **$0.7 million**, primarily due to a **$2.7 million** decrease from 'Sunset Assets' (non-strategic product offerings), partially offset by a **$1.7 million** increase from acquisitions not fully in the prior year and **$0.6 million** from overage charges[158](index=158&type=chunk)[159](index=159&type=chunk) - Professional services revenue decreased by **$0.7 million**, attributed to de-emphasizing low-margin projects and a decline from Sunset Assets[161](index=161&type=chunk) [Cost of revenue](index=37&type=section&id=Cost%20of%20revenue) Examines changes in Upland Software's cost of revenue for subscription and professional services in Q1 2023 compared to Q1 2022 | Cost of Revenue (in thousands) | Q1 2023 | Q1 2022 | % Change | | :----------------------------- | :------ | :------ | :------- | | Subscription and support | $23,485 | $22,069 | 6% | | Professional services and other | $2,051 | $2,686 | (24)% | | Total cost of revenue | $25,536 | $24,755 | 3% | | Gross profit | $51,520 | $53,961 | | - Cost of subscription and support revenue increased by **$1.4 million (6%)**, mainly due to higher personnel, carrier pass-through, hosting costs, and amortization, partially offset by decreased stock compensation and a **$1.2 million** decrease from Sunset Assets[162](index=162&type=chunk) - Cost of professional services and other revenue decreased by **$0.6 million (24%)**, primarily due to reduced focus on Sunset Assets and lower personnel-related costs[163](index=163&type=chunk) [Operating Expenses](index=38&type=section&id=Operating%20Expenses) Reviews Upland Software's operating expenses, including sales and marketing, R&D, G&A, and amortization, for Q1 2023 versus Q1 2022 [Sales and Marketing Expense](index=38&type=section&id=Sales%20and%20Marketing%20Expense) Analyzes the decrease in Upland Software's sales and marketing expenses, primarily due to reduced stock compensation and Sunset Assets | Sales and Marketing Expense (in thousands) | Q1 2023 | Q1 2022 | % Change | | :----------------------------------------- | :------ | :------ | :------- | | Sales and marketing expense | $14,289 | $15,593 | (8)% | | Stock Compensation | $576 | $1,474 | | - Sales and marketing expense decreased by **$1.3 million (8%)**, primarily due to a **$0.9 million** reduction in non-cash stock compensation and a **$1.0 million** decrease related to Sunset Assets, partially offset by increased personnel costs from growth investments[165](index=165&type=chunk) [Research and Development Expense](index=38&type=section&id=Research%20and%20Development%20Expense) Examines the increase in Upland Software's R&D expenses, driven by growth investments despite reductions from Sunset Assets | Research and Development Expense (in thousands) | Q1 2023 | Q1 2022 | % Change | | :---------------------------------------------- | :------ | :------ | :------- | | Research and development expense | $12,530 | $12,067 | 4% | | Stock Compensation | $655 | $748 | | - Research and development expense increased by **$0.4 million (4%)**, driven by higher personnel costs for growth investments, despite a **$0.9 million** decrease related to Sunset Assets[166](index=166&type=chunk) [General and Administrative Expense](index=38&type=section&id=General%20and%20Administrative%20Expense) Reviews the decrease in Upland Software's G&A expenses, mainly due to lower stock compensation, partially offset by increased personnel costs | General and Administrative Expense (in thousands) | Q1 2023 | Q1 2022 | % Change | | :------------------------------------------------ | :------ | :------ | :------- | | General and administrative expense | $17,189 | $19,614 | (12)% | | Stock Compensation | $4,929 | $8,995 | | - General and administrative expense decreased by **$2.4 million (12%)**, primarily due to a **$4.1 million** reduction in non-cash stock compensation, partially offset by a **$1.9 million** increase in personnel and outside professional expenses[167](index=167&type=chunk) [Depreciation and Amortization Expense](index=39&type=section&id=Depreciation%20and%20Amortization%20Expense) Analyzes the increase in Upland Software's depreciation and amortization expenses, primarily due to Sunset Assets and prior acquisitions | Depreciation and Amortization (in thousands) | Q1 2023 | Q1 2022 | % Change | | :------------------------------------------- | :------ | :------ | :------- | | Depreciation | $328 | $435 | (25)% | | Amortization | $14,766 | $10,616 | 39% | | Total depreciation and amortization | $15,094 | $11,051 | 37% | - Total depreciation and amortization expense increased by **$4.0 million (37%)**, mainly due to a **$4.6 million** increase related to Sunset Assets and **$0.2 million** from prior acquisitions, partially offset by assets becoming fully depreciated/amortized[168](index=168&type=chunk) [Acquisition-related Expenses](index=39&type=section&id=Acquisition-related%20Expenses) Examines the significant decrease in Upland Software's acquisition-related expenses due to the absence of new acquisitions in Q1 2023 | Acquisition-related Expenses (in thousands) | Q1 2023 | Q1 2022 | % Change | | :------------------------------------------ | :------ | :------ | :------- | | Acquisition-related expenses | $1,094 | $10,413 | (89)% | - Acquisition-related expenses decreased significantly by **$9.3 million (89%)**, from **$10.4 million** in Q1 2022 to **$1.1 million** in Q1 2023, due to no new acquisitions in Q1 2023 and declining transformational costs from prior acquisitions[170](index=170&type=chunk) [Impairment of goodwill](index=39&type=section&id=Impairment%20of%20goodwill) Details the $128.8 million goodwill impairment recognized by Upland Software in Q1 2023, triggered by a decline in stock price | Impairment of Goodwill (in thousands) | Q1 2023 | Q1 2022 | % Change | | :------------------------------------ | :------ | :------ | :------- | | Impairment of goodwill | $128,755 | — | NA | - A goodwill impairment of **$128.8 million** was recognized in Q1 2023, triggered by a decline in the Company's stock price and market capitalization[172](index=172&type=chunk) [Other Income (Expense)](index=40&type=section&id=Other%20Income%20%28Expense%29) Analyzes changes in Upland Software's net interest expense and other income (expense), including foreign currency exchange gains | Other Income (Expense) (in thousands) | Q1 2023 | Q1 2022 | % Change | | :------------------------------------ | :------ | :------ | :------- | | Interest expense, net | $(5,461) | $(7,762) | (30)% | | Other income (expense), net | $1,425 | $(418) | (441)% | | Total other expense | $(4,036) | $(8,180) | (51)% | - Net interest expense decreased by **$2.3 million (30%)** due to higher interest income on cash balances and lower outstanding debt[173](index=173&type=chunk) - Other income (expense), net shifted from an expense of **$0.4 million** in Q1 2022 to an income of **$1.4 million** in Q1 2023, primarily due to foreign currency exchange gains[174](index=174&type=chunk) [Benefit from Income Taxes](index=40&type=section&id=Benefit%20from%20Income%20Taxes) Examines the significant increase in Upland Software's income tax benefit, primarily due to the goodwill impairment's deferred tax impact | Benefit from Income Taxes (in thousands) | Q1 2023 | Q1 2022 | % Change | | :--------------------------------------- | :------ | :------ | :------- | | Benefit from income taxes | $1,422 | $126 | 1,029% | - The income tax benefit increased significantly by **$1.3 million**, primarily driven by the deferred tax impact of the goodwill impairment recorded in Q1 2023[175](index=175&type=chunk) [Inflation](index=41&type=section&id=Inflation) Discusses the potential adverse impact of inflationary pressures on Upland Software's ability to manage costs and maintain profitability - Inflationary pressures could challenge the Company's ability to offset higher costs through price increases, potentially harming its business, financial condition, and results of operations[176](index=176&type=chunk) [Non-GAAP Financial Measures](index=41&type=section&id=Non-GAAP%20Financial%20Measures) Explains Upland Software's use of non-GAAP financial measures, specifically Adjusted EBITDA, for evaluating operational performance [Adjusted EBITDA](index=41&type=section&id=Adjusted%20EBITDA) Provides the reconciliation of Upland Software's net loss to Adjusted EBITDA and analyzes its year-over-year change - Adjusted EBITDA is a non-GAAP measure used to evaluate operational effectiveness and efficiency, defined as net loss adjusted for depreciation, amortization, interest, taxes, stock-based compensation, acquisition-related expenses, purchase accounting deferred revenue discount, and goodwill impairment[178](index=178&type=chunk) | Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Q1 2023 | Q1 2022 | | :--------------------------------------------------------- | :------ | :------ | | Net loss | $(140,045) | $(22,831) | | Add: Depreciation and amortization expense | $18,500 | $14,262 | | Add: Interest expense, net | $5,461 | $7,762 | | Add: Other expense (income), net | $(1,425) | $418 | | Add: Benefit from income taxes | $(1,422) | $(126) | | Add: Stock-based compensation expense | $6,462 | $11,619 | | Add: Acquisition-related expense | $1,086 | $10,413 | | Add: Purchase accounting deferred revenue discount | $228 | $1,929 | | Add: Impairment of goodwill | $128,755 | — | | Adjusted EBITDA | $17,600 | $23,446 | - Adjusted EBITDA decreased to **$17.6 million** in Q1 2023 from **$23.4 million** in Q1 2022, despite the significant goodwill impairment, due to other operational adjustments[180](index=180&type=chunk) [Liquidity and Capital Resources](index=42&type=section&id=Liquidity%20and%20Capital%20Resources) Assesses Upland Software's financial resources, including cash, operating cash flows, and credit facility, to fund operations and acquisitions - The Company believes its current cash, operating cash flows, and credit facility availability are sufficient to fund operations for at least the next twelve months and support future acquisitions[184](index=184&type=chunk) | Liquidity Metrics (in millions) | March 31, 2023 | December 31, 2022 | | :------------------------------ | :------------- | :---------------- | | Cash and cash equivalents | $257.7 | $248.7 | | Available borrowings (Credit Facility) | $60.0 | $60.0 | | Outstanding borrowings (Credit Facility) | $521.1 | $522.5 | | Working capital surplus | $180.2 | $170.1 | - Cash and cash equivalents increased by **$9.1 million** from December 31, 2022, to March 31, 2023, primarily due to seasonal customer cash receipts from Q4 2022 contract renewals[185](index=185&type=chunk) - Foreign subsidiaries held **$53.5 million** in cash as of March 31, 2023, which the Company intends to permanently reinvest outside the U.S[186](index=186&type=chunk) [Critical Accounting Policies and the Use of Estimates](index=44&type=section&id=Critical%20Accounting%20Policies%20and%20the%20Use%20of%20Estimates) Highlights Upland Software's accounting policies requiring significant management judgment and estimates in financial reporting - Critical accounting policies involve significant management judgments and estimates, including revenue recognition, income taxes, deferred sales commissions, business combinations, goodwill and other intangibles, and stock-based compensation[207](index=207&type=chunk)[208](index=208&type=chunk)[213](index=213&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=46&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section discusses Upland Software's exposure to market risks, including interest rate risk, foreign currency exchange risk, and inflation risk, and outlines how these risks are managed or mitigated - The Company is exposed to interest rate risk primarily from its variable rate indebtedness, but this is largely mitigated by interest rate swap agreements that fix the rate at **5.4%** for **$540 million** of term loans[215](index=215&type=chunk) - Foreign currency exchange risk arises from international operations, with a hypothetical **10% change** in exchange rates potentially impacting Q1 2023 revenue by **$1.7 million**. The Company has not engaged in currency hedging strategies to date[216](index=216&type=chunk) - Inflation risk could impact the business if higher costs cannot be offset by price increases, potentially harming financial performance[176](index=176&type=chunk) [Item 4. Controls and Procedures](index=47&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of Upland Software's disclosure controls and procedures as of March 31, 2023, and states that there were no material changes in internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2023, ensuring timely and accurate reporting[220](index=220&type=chunk) - No material changes to internal control over financial reporting occurred during the quarter ended March 31, 2023[221](index=221&type=chunk) - Internal controls have inherent limitations, including human error and potential circumvention, which means absolute assurance of achieving financial reporting objectives cannot be provided[222](index=222&type=chunk) [PART II. OTHER INFORMATION](index=48&type=section&id=Part%20II.%20OTHER%20INFORMATION) Presents additional information not covered in the financial statements, including updated risk factors and exhibit listings [Item 1A. Risk Factors](index=48&type=section&id=Item%201A.%20Risk%20Factors) This section updates the risk factors from the Company's 2022 Annual Report, specifically addressing the adoption of a Tax Benefit Preservation Plan and its potential impact on the Company's ability to utilize net operating loss carryforwards (NOLs) and its anti-takeover effects - The Board adopted a Tax Benefit Preservation Plan on May 2, 2023, to protect the Company's **$147 million** in U.S. federal net operating losses (NOLs) and other tax attributes from being limited by an 'ownership change' under Section 382 of the U.S. Internal Revenue Code[226](index=226&type=chunk)[227](index=227&type=chunk) - The Plan aims to deter any person from acquiring **4.9% or more** of outstanding stock without Board approval, thereby reducing the risk of an ownership change that could substantially limit the use of Tax Assets and adversely affect cash flows and financial position[227](index=227&type=chunk) - While not its primary intent, the Plan may have an anti-takeover effect by potentially diluting an 'acquiring person' upon a triggering event, complicating or discouraging certain mergers or acquisitions[228](index=228&type=chunk) [Item 6. Exhibits](index=48&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including certifications, the Tax Benefit Preservation Plan, and Inline XBRL data - The Exhibit Index includes certifications from the CEO and CFO (Exhibits 31.1, 31.2, 32.1, 32.2), the Certificate of Designations of Series B Junior Participating Preferred Stock (Exhibit 3.1), and the Tax Benefit Preservation Plan (Exhibit 4.1)[232](index=232&type=chunk) - Inline XBRL (Extensible Business Reporting Language) formatted materials, including condensed consolidated financial statements and notes, are filed as Exhibit 101[232](index=232&type=chunk)

Upland Software, Inc. (NASDAQ:UPLD) Q1 2023 Earnings Conference Call May 4, 2023 5:00 PM ET Company Participants Jack McDonald - Chairman and CEO Mike Hill - CFO & Treasurer Conference Call Participants Jeff Van Rhee - Craig-Hallum Jake Roberge - William Blair Operator Thank you for standing by and welcome to the Upland Software First Quarter 2023 Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that ti ...

Part I [Business](index=7&type=section&id=Item%201.%20Business) Upland Software provides cloud-based software applications for digital transformation, primarily growing through acquisitions and operating on a recurring revenue model - Upland provides cloud-based software applications for digital transformation in areas like Marketing, Sales, Contact Center, Knowledge Management, Project Management, and IT[19](index=19&type=chunk) - The company's growth strategy focuses on acquiring complementary technologies and businesses, with **31 acquisitions** completed in the 11 years ending December 31, 2022[21](index=21&type=chunk) Revenue Growth and Mix (2021 vs 2022) | Metric | 2021 | 2022 | Growth | | :--- | :--- | :--- | :--- | | Total Revenue | $302.0M | $317.3M | 5% | | Subscription & Support Revenue | $287.6M | $297.9M | 4% | Revenue Breakdown by Type (FY2020-2022) | Revenue Type | % of Total Revenue (2022) | % of Total Revenue (2021) | % of Total Revenue (2020) | | :--- | :--- | :--- | :--- | | Subscription and support | 94% | 95% | 95% | | Perpetual license | 2% | 1% | 1% | | Professional services | 4% | 4% | 4% | - Upland's annual net dollar retention rate was **95%** as of December 31, 2022, driven by a dedicated customer success organization[25](index=25&type=chunk) - As of December 31, 2022, the company had **1,006 full-time employees**, with a majority located in the United States, Australia, Canada, India, Ireland, and the United Kingdom[41](index=41&type=chunk) [Risk Factors](index=14&type=section&id=Item%201A.%20Risk%20Factors) The company faces risks from its acquisition strategy, cybersecurity, financial covenants, and data privacy regulations - A primary risk is the company's reliance on acquisitions for growth, including challenges in identifying suitable candidates, consummating deals, and integrating acquired businesses successfully[45](index=45&type=chunk)[47](index=47&type=chunk) - The company faces risks from operating as a multinational corporation, including foreign currency fluctuations, varied political and labor conditions, and complex tax laws, with approximately **30% of total revenue in 2022** from customers outside the U.S[60](index=60&type=chunk) - Actual or perceived security vulnerabilities and cyberattacks pose a material risk, potentially leading to loss of confidential information, reputational damage, litigation, and regulatory fines[70](index=70&type=chunk) - The company's loan facility contains operating and financial covenants that may restrict business activities, including incurring additional debt, making investments, and paying dividends[95](index=95&type=chunk)[96](index=96&type=chunk) - The issuance of Series A Preferred Stock in 2022 introduces risks, as these shares rank senior to common stock in priority of distribution and have additional corporate governance rights, including the right to elect a director[133](index=133&type=chunk)[135](index=135&type=chunk) - The company's ability to use its net operating loss (NOL) carryforwards of approximately **$357.8 million** is subject to limitations under Section 382 of the Internal Revenue Code, which could result in the expiration of a significant portion of these tax assets before utilization[101](index=101&type=chunk)[102](index=102&type=chunk) - The company is subject to evolving data privacy laws like GDPR in Europe and CCPA/CPRA in California, with non-compliance potentially leading to significant monetary penalties and reputational damage[118](index=118&type=chunk)[119](index=119&type=chunk) [Unresolved Staff Comments](index=33&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the SEC - None[142](index=142&type=chunk) [Properties](index=33&type=section&id=Item%202.%20Properties) Upland's principal corporate office is in Austin, Texas, with additional leased facilities domestically and internationally - The main corporate office is in Austin, Texas, with a lease for **9,900 sq. ft.** expiring in June 2025[143](index=143&type=chunk) - The company leases additional office space in various US states and internationally, including Australia, Canada, Europe, and India[143](index=143&type=chunk) [Legal Proceedings](index=33&type=section&id=Item%203.%20Legal%20Proceedings) The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business - As of the report date, Upland is not involved in any legal proceedings expected to have a material adverse effect on the company[144](index=144&type=chunk) [Mine Safety Disclosures](index=33&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[145](index=145&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=34&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Upland's common stock trades on NASDAQ, with the company historically retaining earnings for growth rather than paying dividends - The company's common stock is traded on the NASDAQ Global Market under the symbol "**UPLD**"[147](index=147&type=chunk) - Upland has never declared or paid dividends on its common stock and does not expect to in the foreseeable future, with earnings planned for reinvestment into the business[149](index=149&type=chunk) - As of February 21, 2023, there were **29 stockholders of record**[148](index=148&type=chunk) [Reserved](index=35&type=section&id=Item%206.%20%5BReserved%5D) This item is reserved and contains no information [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=36&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses 2022's 5% revenue growth, key financial metrics, liquidity, and critical accounting policies, including a Q4 goodwill impairment charge - Total revenue grew **5%** from **$302.0 million** in 2021 to **$317.3 million** in 2022, including a **2% negative impact** from foreign currency exchange rates[194](index=194&type=chunk) - In Q4 2022, the company decided to sunset certain non-strategic product offerings and customer contracts, referred to as "Sunset Assets"[162](index=162&type=chunk) - A Goodwill impairment charge of **$12.5 million** was recorded in Q4 2022 due to a decline in the company's stock price and market capitalization[176](index=176&type=chunk)[208](index=208&type=chunk) Key Metrics (as of Dec 31) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Annualized recurring revenue (ARR) | $266.3M | $257.1M | $220.5M | | Annual net dollar retention rate | 95% | 94% | 94% | | Adjusted EBITDA | $97.1M | $96.7M | $99.9M | - Total liquidity increased from **$249.2 million** at year-end 2021 to **$308.7 million** at year-end 2022, primarily due to the **$115.0 million** Series A Preferred Stock issuance[227](index=227&type=chunk)[230](index=230&type=chunk) Cash Flow Summary (in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $29,979 | $41,738 | | Net cash used in investing activities | $(63,222) | $(93,532) | | Net cash provided by (used in) financing activities | $94,151 | $(8,180) | [Quantitative and Qualitative Disclosures About Market Risk](index=57&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) Upland is exposed to interest rate, foreign currency, and inflation risks, with interest rate risk on term loans mitigated by swap agreements - The company's primary market risks are interest rate, foreign exchange, and inflation[272](index=272&type=chunk) - Interest rate risk on the **$540 million** in term loans is hedged via interest rate swaps, effectively fixing the rate at **5.4%**, while the **$60 million** revolver remains at a floating rate but is undrawn[275](index=275&type=chunk) - The company is exposed to foreign currency exchange risk from its international operations but has not engaged in hedging; a hypothetical **10%** change in exchange rates would have impacted revenue by **$7.5 million** in 2022[276](index=276&type=chunk) [Financial Statements and Supplementary Data](index=59&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents audited financial statements and the auditor's unqualified opinion, highlighting critical audit matters like revenue recognition and goodwill impairment - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[284](index=284&type=chunk)[508](index=508&type=chunk) - Critical Audit Matters identified by the auditor include: revenue recognition for new products and services, measurement of the income tax provision, and the evaluation of goodwill for impairment[288](index=288&type=chunk) Consolidated Statement of Operations Highlights (in thousands) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Revenue | $317,303 | $302,016 | $291,778 | | Gross Profit | $213,562 | $202,563 | $193,332 | | Loss from Operations | $(40,228) | $(34,677) | $(23,813) | | Impairment of goodwill | $12,500 | $0 | $0 | | Net Loss | $(68,413) | $(58,212) | $(51,219) | | Net Loss per Share | $(2.23) | $(1.92) | $(1.92) | Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $248,653 | $189,158 | | Total Assets | $1,113,459 | $1,029,007 | | Goodwill | $477,043 | $457,472 | | Total Liabilities | $692,298 | $712,719 | | Total Stockholders' Equity | $308,870 | $316,288 | [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=104&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants regarding accounting principles or financial disclosure - None[496](index=496&type=chunk) [Controls and Procedures](index=104&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management and the auditor concluded the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[497](index=497&type=chunk) - Based on the COSO 2013 framework, management assessed internal control over financial reporting to be effective as of December 31, 2022[500](index=500&type=chunk) - There were no changes to internal control over financial reporting during the year ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, internal controls[502](index=502&type=chunk) [Other Information](index=104&type=section&id=Item%209B.%20Other%20Information) The company reports no other information for this item - None[503](index=503&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=106&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the company's 2023 Proxy Statement - The required information is incorporated by reference from the registrant's Proxy Statement for the 2023 Annual Meeting of Stockholders[517](index=517&type=chunk) [Executive Compensation](index=106&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the company's 2023 Proxy Statement - The required information is incorporated by reference from the registrant's Proxy Statement for the 2023 Annual Meeting of Stockholders[518](index=518&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=106&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information on security ownership and equity compensation plans is incorporated by reference from the company's 2023 Proxy Statement - The required information is incorporated by reference from the registrant's Proxy Statement for the 2023 Annual Meeting of Stockholders[519](index=519&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=106&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on certain relationships, related party transactions, and director independence is incorporated by reference from the company's 2023 Proxy Statement - The required information is incorporated by reference from the registrant's Proxy Statement for the 2023 Annual Meeting of Stockholders[520](index=520&type=chunk) [Principal Accountant Fees and Services](index=106&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information regarding principal accountant fees and services is incorporated by reference from the company's 2023 Proxy Statement - The required information is incorporated by reference from the registrant's Proxy Statement for the 2023 Annual Meeting of Stockholders[521](index=521&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=106&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the financial statements and provides an index of all exhibits filed with or incorporated by reference into the Form 10-K - This section provides a list of the financial statements included in Item 8 and an index of all exhibits filed with the report[522](index=522&type=chunk) [Form 10-K Summary](index=106&type=section&id=Item%2016.%20Form%2010-K%20Summary) This item is not applicable - Not applicable[523](index=523&type=chunk)

Upland Software Inc. (NASDAQ:UPLD) Q4 2022 Results Conference Call February 23, 2023 5:00 PM ET Company Participants Jack McDonald - Chairman and CEO Mike Hill - CFO & Treasurer Conference Call Participants Michael Rackers - Needham Robert Dee - Truist Jeff Van Rhee - Craig-Hallum Jake Roberge - William Blair Alex Sklar - Raymond James Operator Thank you for standing by and welcome to the Upland Software Fourth Quarter 2022 Earnings Call. At this time all participants are in a listen-only mode. Later we wil ...

Upland Software, Inc. (NASDAQ:UPLD) Q3 2022 Earnings Conference Call November 3, 2022 5:00 PM ET Company Participants Jack McDonald – Chairman and Chief Executive Officer Mike Hill – Chief Financial Officer Conference Call Participants Jeff Van Rhee – Craig-Hallum Jake Roberge – William Blair John Messina – Raymond James Operator Thank you for standing by, and welcome to the Upland Software Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a q ...

Table of Contents 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 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 001-36720 UPLAND SOFTWARE, INC. (Exact name of registrant as specified in its charter) (State or other jurisdiction of in ...

[Part I. FINANCIAL INFORMATION](index=3&type=section&id=Part%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements and accompanying notes for the reporting periods [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Key Balance Sheet Items | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $138,284 | $189,158 | | Accounts receivable | $35,120 | $50,499 | | Total current assets | $205,812 | $262,991 | | Total assets | $1,030,046 | $1,029,007 | | Total current liabilities | $170,538 | $156,444 | | Total liabilities | $718,116 | $712,719 | | Total stockholders' equity | $311,930 | $316,288 | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Key Operational Results | Metric (in thousands, except per share) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $80,227 | $76,264 | $158,943 | $150,233 | | Gross profit | $53,674 | $51,252 | $107,635 | $100,794 | | Loss from operations | $(10,888) | $(9,163) | $(25,665) | $(26,691) | | Net loss | $(16,393) | $(19,042) | $(39,224) | $(39,726) | | Net loss per common share, basic and diluted | $(0.52) | $(0.63) | $(1.25) | $(1.32) | [Condensed Consolidated Statements of Comprehensive Loss](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Loss) Comprehensive Loss Summary | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(16,393) | $(19,042) | $(39,224) | $(39,726) | | Other comprehensive income (loss) | $(14,703) | $(908) | $9,170 | $12,996 | | Comprehensive loss | $(31,096) | $(19,950) | $(30,054) | $(26,730) | [Condensed Consolidated Statements of Stockholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) Changes in Stockholders' Equity | Metric (in thousands) | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Common Stock | $3 | $3 | | Additional Paid-In Capital | $594,080 | $568,384 | | Accumulated Other Comprehensive Loss | $(2,344) | $(11,514) | | Accumulated Deficit | $(279,809) | $(240,585) | | Total Stockholders' Equity | $311,930 | $316,288 | - The number of common shares issued and outstanding increased from **31,096,548** as of December 31, 2021, to **31,632,628** as of June 30, 2022[9](index=9&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Summary of Cash Flows | Metric (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $22,260 | $23,308 | | Net cash used in investing activities | $(62,653) | $(92,924) | | Net cash used in financing activities | $(6,608) | $(3,381) | | Change in cash and cash equivalents | $(50,874) | $(73,490) | | Cash and cash equivalents, end of period | $138,284 | $176,539 | [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) [1. Basis of Presentation and Summary of Significant Accounting Policies](index=11&type=section&id=1.%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies) - The financial statements are prepared in conformity with GAAP and include Upland Software, Inc and its wholly-owned subsidiaries[26](index=26&type=chunk)[27](index=27&type=chunk)[29](index=29&type=chunk) - The Company assessed the impact of COVID-19 on estimates and assumptions and determined there was **no material impact** as of August 9, 2022[30](index=30&type=chunk) - No individual customer represented **more than 10% of total revenues** for the six months ended June 30, 2022, or more than 10% of accounts receivable as of June 30, 2022 or December 31, 2021[32](index=32&type=chunk) - Interest rate swap agreements effectively converted **$540 million of variable interest debt to a fixed rate of 5.4%**, with the fair value of these swaps being a **$26.0 million asset** as of June 30, 2022[33](index=33&type=chunk) - ASU 2020-06 (debt with conversion options) was adopted in Q1 2022 with **no material impact**, while ASU 2021-08 (business combinations) is being evaluated[38](index=38&type=chunk)[40](index=40&type=chunk) [2. Acquisitions](index=13&type=section&id=2.%20Acquisitions) - In 2022, Upland acquired BA Insight and Objectif Lune, which contributed approximately **$2.8 million** and **$10.5 million** in revenue respectively since their acquisition dates[42](index=42&type=chunk) - In 2021, Upland completed acquisitions of Panviva, BlueVenn, and Second Street, with earnout payments for BlueVenn and Second Street resulting in **no payments made**[42](index=42&type=chunk)[46](index=46&type=chunk)[47](index=47&type=chunk)[55](index=55&type=chunk) - **Goodwill of $126.6 million** from these acquisitions is primarily attributed to expected synergies and the value of the acquired workforce[50](index=50&type=chunk) Cash Consideration for Recent Acquisitions | Acquisition | Cash Consideration (in thousands) | | :--- | :--- | | BA Insight | $33,355 | | Objectif Lune | $29,750 | | Panviva | $19,931 | | BlueVenn | $53,535 | | Second Street | $25,436 | Transaction Related Expenses | Transaction Related Expenses (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total transaction related expenses | $400 | $2,000 | $4,900 | $6,100 | [3. Fair Value Measurements](index=16&type=section&id=3.%20Fair%20Value%20Measurements) - The fair value of the interest rate swap was a **$26.0 million asset** as of June 30, 2022, an increase from an $8.4 million liability at December 31, 2021, due to rising short-term interest rates[56](index=56&type=chunk)[57](index=57&type=chunk) - The carrying value of long-term debt (**$525.2 million** at June 30, 2022) approximates its fair value[58](index=58&type=chunk) [4. Goodwill and Other Intangible Assets](index=17&type=section&id=4.%20Goodwill%20and%20Other%20Intangible%20Assets) Goodwill and Intangible Asset Balances | Metric (in thousands) | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Goodwill | $492,481 | $457,472 | | Total intangible assets, net | $277,001 | $279,920 | Amortization Expense | Amortization Expense (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total amortization expense | $13,500 | $12,700 | $27,400 | $24,700 | Estimated Annual Amortization Expense | Estimated Annual Amortization Expense (in thousands) | | :--- | | Remainder of 2022 | $25,803 | | 2023 | $50,546 | | 2024 | $48,060 | | 2025 | $44,823 | | 2026 | $41,871 | | 2027 and thereafter | $65,898 | | Total | $277,001 | [5. Income Taxes](index=18&type=section&id=5.%20Income%20Taxes) - The Company recognized an income tax benefit of **$0.5 million** for Q2 2022 and **$0.6 million** for the six months ended June 30, 2022, primarily from foreign income taxes[63](index=63&type=chunk) - For the six months ended June 30, 2021, a tax benefit of **$2.9 million** was recognized, mainly from releasing a valuation allowance related to the Second Street acquisition[64](index=64&type=chunk) - A **valuation allowance** is recorded against U.S. net deferred tax assets due to historical operating losses[65](index=65&type=chunk) [6. Debt](index=19&type=section&id=6.%20Debt) - The Credit Facility includes a **$350 million Term Loan**, a **$190 million Incremental Term Loan**, and a **$60 million Revolving Credit Facility**, which was fully available as of June 30, 2022[69](index=69&type=chunk)[70](index=70&type=chunk)[79](index=79&type=chunk) - Interest rate swaps fix the interest rate for the Term Loans at **5.4%** for the full 7-year term[74](index=74&type=chunk) - The fair value of the interest rate swap was a **$26.0 million asset** at June 30, 2022, with an estimated **$6.4 million** expected to be reclassified to Interest expense in the next twelve months[75](index=75&type=chunk)[76](index=76&type=chunk) - The Company was in **compliance with all debt covenants** as of June 30, 2022[81](index=81&type=chunk) Long-Term Debt Summary | Metric (in thousands) | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Senior secured loans | $516,725 | $518,330 | | Less current maturities | $(3,167) | $(3,167) | | Total long-term debt | $513,558 | $515,163 | [7. Net Loss Per Share](index=21&type=section&id=7.%20Net%20Loss%20Per%20Share) - Due to net losses, **basic and diluted loss per share were the same** for all periods presented[83](index=83&type=chunk) Net Loss Per Share Calculation | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Loss per common share, basic and diluted | $(0.52) | $(0.63) | $(1.25) | $(1.32) | [8. Commitments and Contingencies](index=21&type=section&id=8.%20Commitments%20and%20Contingencies) - The Company has purchase commitments for hosting services, third-party technology, and other operational services[84](index=84&type=chunk) - No current or pending legal proceedings are anticipated to have a **material adverse effect** on the Company's financial statements[85](index=85&type=chunk) [9. Stockholders' Equity](index=22&type=section&id=9.%20Stockholders'%20Equity) - Accelerated stock-based compensation expense was **$4.4 million** for the three and six months ended June 30, 2022[94](index=94&type=chunk) - Unvested restricted units outstanding as of June 30, 2022, totaled **1,986,210 units**[97](index=97&type=chunk) Components of Accumulated Other Comprehensive Income (AOCI) | Component of AOCI (in thousands) | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Foreign currency translation adjustment | $(24,060) | $(5,657) | | Unrealized translation gain on intercompany loans | $(4,243) | $2,552 | | Unrealized gain (loss) on interest rate swaps | $25,959 | $(8,409) | | Total accumulated other comprehensive loss | $(2,344) | $(11,514) | Stock-Based Compensation Expense | Stock-Based Compensation Expense (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total | $14,877 | $13,550 | $26,496 | $31,374 | [10. Revenue Recognition](index=24&type=section&id=10.%20Revenue%20Recognition) - Revenue is recognized when control of goods or services is transferred to customers, following a five-step model in accordance with ASC 606[101](index=101&type=chunk)[102](index=102&type=chunk) - Subscription and support revenue is recognized **ratably over the contract term**, while perpetual license revenue is recognized **upfront**[104](index=104&type=chunk)[105](index=105&type=chunk) - Professional services revenue is recognized **over time** as services are performed[106](index=106&type=chunk) - As of June 30, 2022, approximately **$298.6 million of revenue** is expected to be recognized from remaining performance obligations, with **70% expected within the next 12 months**[119](index=119&type=chunk) Revenue by Geography | Revenue by Geography (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | United States | $55,482 | $53,350 | $109,258 | $108,602 | | United Kingdom | $10,952 | $13,460 | $23,459 | $23,529 | | Canada | $5,783 | $3,738 | $9,531 | $7,206 | | Other International | $8,010 | $5,716 | $16,695 | $10,896 | | Total revenue | $80,227 | $76,264 | $158,943 | $150,233 | [11. Related Party Transactions](index=28&type=section&id=11.%20Related%20Party%20Transactions) - The Company reported **no material related party transactions** for the three and six months ended June 30, 2022[123](index=123&type=chunk) [12. Subsequent Events](index=28&type=section&id=12.%20Subsequent%20Events) - On July 14, 2022, Upland entered into an agreement to issue and sell **115,000 shares of Series A Preferred Stock** for an aggregate purchase price of **$115.0 million**[124](index=124&type=chunk) - Holders of Series A Preferred Stock will receive dividends at **4.5% per annum** for the first seven years, increasing to **7% thereafter**[125](index=125&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=29&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the Company's financial condition, operational results, and key business metrics [Overview](index=30&type=section&id=Overview) - Upland provides cloud-based software applications for digital transformation across various business functions[130](index=130&type=chunk)[139](index=139&type=chunk) - The Company employs a **'land-and-expand' go-to-market strategy**, selling primarily through a direct sales organization[132](index=132&type=chunk) - Revenue grew from $98.0 million in 2017 to $302.0 million in 2021, a **compound annual growth rate of 33%**[134](index=134&type=chunk) - Upland has completed **31 acquisitions** from February 2012 through June 30, 2022, as part of its growth strategy[135](index=135&type=chunk) - The COVID-19 pandemic's impact is ongoing, but the Company has seen improved market stability and resumed acquisition activity in 2021 and early 2022[137](index=137&type=chunk)[138](index=138&type=chunk)[139](index=139&type=chunk) [Results of Operations](index=32&type=section&id=Results%20of%20Operations) [Revenue](index=33&type=section&id=Revenue) - Total revenue growth for Q2 2022 was negatively impacted by **3 percentage points** from foreign currency exchange rates (FX)[144](index=144&type=chunk)[148](index=148&type=chunk) - Acquisitions contributed **$10.0 million** to total revenue increase in Q2 2022 and **$18.4 million** in 6M 2022[144](index=144&type=chunk)[148](index=148&type=chunk) - Non-GAAP Core Organic Revenue **decreased by $3.0 million** for Q2 2022 and by **$3.9 million** for 6M 2022, primarily due to declines in several revenue categories[144](index=144&type=chunk)[145](index=145&type=chunk)[147](index=147&type=chunk)[148](index=148&type=chunk)[149](index=149&type=chunk)[150](index=150&type=chunk)[151](index=151&type=chunk) Revenue by Category | Revenue Category (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | % Change | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Subscription and support | $75,017 | $72,405 | 4% | $148,644 | $143,058 | 4% | | Perpetual license | $1,858 | $415 | 348% | $3,636 | $767 | 374% | | Professional services | $3,352 | $3,444 | (3)% | $6,663 | $6,408 | 4% | | Total revenue | $80,227 | $76,264 | 5% | $158,943 | $150,233 | 6% | [Cost of Revenue and Gross Profit Percentage](index=35&type=section&id=Cost%20of%20Revenue%20and%20Gross%20Profit%20Percentage) - Acquisitions contributed **$1.6 million** to subscription and support cost of revenue in Q2 2022 and **$3.7 million** in 6M 2022[154](index=154&type=chunk)[156](index=156&type=chunk) - Acquisitions contributed **$0.7 million** to professional services cost of revenue in Q2 2022 and **$1.6 million** in 6M 2022[155](index=155&type=chunk)[157](index=157&type=chunk) Cost of Revenue Summary | Cost of Revenue (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | % Change | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Subscription and support | $24,125 | $23,161 | 4% | $46,194 | $45,843 | 1% | | Professional services and other | $2,428 | $1,851 | 31% | $5,114 | $3,596 | 42% | | Total cost of revenue | $26,553 | $25,012 | 6% | $51,308 | $49,439 | 4% | | Gross profit percentage | 67% | 67% | - | 68% | 67% | - | [Operating Expenses](index=37&type=section&id=Operating%20Expenses) - Sales and marketing expense increased due to acquisitions (**$1.8M in Q2**, **$3.9M in 6M**) and ongoing go-to-market investments[159](index=159&type=chunk)[160](index=160&type=chunk) - Research and development expense increased due to acquisitions (**$2.0M in Q2**, **$3.9M in 6M**), offset by lower organic personnel costs[162](index=162&type=chunk)[164](index=164&type=chunk) - General and administrative expense increased in Q2 2022 due to higher non-cash stock compensation but decreased in 6M 2022 due to overall lower compensation costs[166](index=166&type=chunk)[167](index=167&type=chunk) - Depreciation and amortization expense increased due to acquired intangible assets from recent acquisitions (**$1.5M in Q2**, **$3.3M in 6M**)[169](index=169&type=chunk)[171](index=171&type=chunk) - Acquisition-related expenses decreased in Q2 2022 due to lower transaction costs but increased slightly in 6M 2022 due to higher integration expenses[173](index=173&type=chunk)[174](index=174&type=chunk) Operating Expense Summary | Operating Expense (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | % Change | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Sales and marketing | $15,331 | $14,298 | 7% | $30,924 | $26,730 | 16% | | Research and development | $11,676 | $11,113 | 5% | $23,743 | $22,053 | 8% | | General and administrative | $21,828 | $19,192 | 14% | $41,442 | $43,561 | (5)% | | Depreciation and amortization | $10,802 | $10,278 | 5% | $21,853 | $20,021 | 9% | | Acquisition-related expenses | $4,925 | $5,534 | (11)% | $15,338 | $15,120 | 1% | [Other Income (Expense)](index=40&type=section&id=Other%20Income%20(Expense)) - Other income (expense), net, shifted from an expense to an income in both the three and six months ended June 30, 2022, primarily due to **currency exchange gains**[176](index=176&type=chunk)[177](index=177&type=chunk) Other Income (Expense) Summary | Other Income (Expense) (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | % Change | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Interest expense, net | $(7,754) | $(7,942) | (2)% | $(15,516) | $(15,729) | (1)% | | Other income (expense), net | $1,777 | $(399) | (545)% | $1,359 | $(162) | (939)% | [Benefit from (Provision for) Income Taxes](index=40&type=section&id=Benefit%20from%20(Provision%20for)%20Income%20Taxes) - The Company recorded an income tax benefit in Q2 2022, primarily from foreign operations, a significant change from a provision in Q2 2021[179](index=179&type=chunk)[181](index=181&type=chunk) Income Tax Summary | Income Taxes (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | % Change | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Benefit from (provision for) income taxes | $472 | $(1,538) | (131)% | $598 | $2,856 | (79)% | [Key Metrics](index=41&type=section&id=Key%20Metrics) - **Adjusted EBITDA**, a non-GAAP measure, **increased by 3%** for both the three and six months ended June 30, 2022, compared to the prior year periods[185](index=185&type=chunk) Adjusted EBITDA | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Adjusted EBITDA | $24,508 | $23,728 | $47,954 | $46,572 | [Liquidity and Capital Resources](index=42&type=section&id=Liquidity%20and%20Capital%20Resources) - The Company believes current cash and available credit will be sufficient to fund operations and support continued growth through acquisitions for at least the next twelve months[189](index=189&type=chunk) - Cash and cash equivalents **decreased by $50.9 million** from December 31, 2021, to June 30, 2022, primarily due to **$62.4 million in cash paid for acquisitions**[190](index=190&type=chunk) - The recently announced Securities Purchase Agreement will provide an additional **$115.0 million in liquidity**[193](index=193&type=chunk) - Cash provided by operating activities **decreased by $1.0 million to $22.3 million** for the six months ended June 30, 2022[205](index=205&type=chunk) - Cash used in investing activities **decreased by $30.3 million to $62.7 million** for the six months ended June 30, 2022, due to fewer acquisitions[208](index=208&type=chunk) - Cash used in financing activities **increased by $3.2 million to $6.6 million** for the six months ended June 30, 2022[211](index=211&type=chunk) Key Liquidity Metrics | Metric (in thousands) | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $138,284 | $189,158 | | Available borrowings under credit facility | $60,000 | $60,000 | | Borrowings outstanding under credit facility | $525,200 | $527,900 | | Working capital surplus | $35,300 | $106,500 | [Critical Accounting Policies and the Use of Estimates](index=45&type=section&id=Critical%20Accounting%20Policies%20and%20the%20Use%20of%20Estimates) - Key accounting policies involving significant management judgment include revenue recognition, income taxes, business combinations, and stock-based compensation[215](index=215&type=chunk) - **No material changes** to critical accounting policies and estimates were reported for the six months ended June 30, 2022[214](index=214&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=47&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section discusses the Company's exposure to interest rate, foreign currency, and inflation risks - The Company's exposure to interest rate risk is mitigated by interest rate swaps that **fix the Term Loan rate at 5.4%**[218](index=218&type=chunk) - Foreign currency exchange risk arises from international operations; a hypothetical **10% change in exchange rates** could impact revenue by **$4.0 million** for the six months ended June 30, 2022[219](index=219&type=chunk) - Inflation has **not had a material effect** on the Company's business in the last three fiscal years, but future pressures could adversely affect financial results[221](index=221&type=chunk) [Item 4. Controls and Procedures](index=48&type=section&id=Item%204.%20Controls%20and%20Procedures) This section details the evaluation of the Company's disclosure controls and internal financial reporting controls - Management concluded that the Company's disclosure controls and procedures were **effective** as of June 30, 2022[224](index=224&type=chunk) - There were **no changes in internal control** over financial reporting during the quarter ended June 30, 2022, that materially affected, or are reasonably likely to materially affect, internal controls[225](index=225&type=chunk) [Part II. OTHER INFORMATION](index=49&type=section&id=Part%20II.%20OTHER%20INFORMATION) [Item 1A. Risk Factors](index=49&type=section&id=Item%201A.%20Risk%20Factors) This section updates risk factors related to inflation and the issuance of Series A Preferred Stock - **Inflation** has the potential to adversely affect the Company's liquidity and results of operations by increasing costs[230](index=230&type=chunk) - The newly issued **Series A Preferred Stock ranks senior to common stock**, carries corporate governance rights, and could lead to dilution of common stockholders' rights[231](index=231&type=chunk)[232](index=232&type=chunk)[233](index=233&type=chunk) - A redemption feature of the Series A Preferred Stock may **discourage or delay potential takeovers** of the Company[234](index=234&type=chunk) [Item 6. Exhibits](index=50&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed as part of the Quarterly Report on Form 10-Q - The exhibits include certifications from the CEO and CFO pursuant to the Sarbanes-Oxley Act of 2002 and Inline XBRL data[238](index=238&type=chunk) [SIGNATURES](index=52&type=section&id=SIGNATURES) This section contains the required signatures for the Quarterly Report on Form 10-Q - The report was signed on **August 9, 2022**, by Michael D. Hill, Chief Financial Officer of UPLAND SOFTWARE, INC[243](index=243&type=chunk)

Financial Data and Key Metrics Changes - Total revenue for Q2 2022 was $80.2 million, a 5% year-over-year increase, with an 8% growth without FX impact [21] - Recurring revenue from subscription and support increased 4% year-over-year to $75 million, with a 6% growth without FX impact [21] - Adjusted EBITDA for Q2 2022 was $24.5 million, maintaining a 31% margin, up from $23.7 million in Q2 2021 [23] - Free cash flow generated in Q2 was $13.9 million, contributing to a total of $22 million year-to-date [24] Business Line Data and Key Metrics Changes - Perpetual license revenue increased to $1.9 million in Q2 2022, up from $0.4 million in Q2 2021 [22] - Professional services revenue was $3.4 million for the quarter, reflecting a 3% year-over-year decline [22] - Strong expansion was noted in products such as Kapost, InGenius, Objectif Lune, and BA Insight [10][11] Market Data and Key Metrics Changes - The company expanded relationships with 403 existing customers, including 53 major expansions, and welcomed 123 new customers in Q2 [10] - The company experienced a strong quarter for selling Premier Success Plans, which provide high fidelity support to customers [11] Company Strategy and Development Direction - The company is committed to innovation, with product improvements announced for Altify and Objectif Lune [9] - A strategic equity investment of $115 million from HGGC was announced, aimed at strengthening the business and capitalizing on acquisition opportunities [14][16] - The company is actively pursuing additional acquisitions and sees a favorable market environment for such opportunities [14][54] Management's Comments on Operating Environment and Future Outlook - Management noted that the macro environment has not significantly impacted customer buying behaviors, with no deals pushed out [51] - The company remains conservative in its guidance, with expected revenue growth impacted by FX headwinds [28][44] - Management expressed confidence in the M&A pipeline, anticipating a favorable environment for acquisitions due to recent market turbulence [54] Other Important Information - The company has approximately $366 million in total tax NOL carry forwards, with an estimated $211 million available for utilization [27] - As of June 30, 2022, the company had outstanding net debt of approximately $387 million, which is expected to drop to around $277 million after the new investment closes [25] Q&A Session Summary Question: Could you elaborate on cross-selling and expansion success within existing customers? - Management highlighted strong expansion activity in Kapost, InGenius, Objectif Lune, and BA Insight, driven by investments in go-to-market strategies [34] Question: Are there specific products or regions facing macro impacts? - Management indicated no significant macro impacts affecting specific products or regions [35] Question: What benefits do you foresee from the HGGC partnership? - Management emphasized HGGC's expertise in M&A and go-to-market strategies, which will support Upland's growth and value creation [38][39] Question: Can you discuss the guidance and confidence in sequential growth? - Management stated that guidance is conservative, primarily affected by FX impacts, and expressed confidence in maintaining growth [44] Question: Any changes in investment focus regarding R&D and product development? - Management confirmed no major changes, maintaining a commitment to innovation and go-to-market investments [45] Question: What is the outlook for the M&A pipeline? - Management anticipates a favorable M&A environment due to market turbulence, with a strong pipeline but a patient approach to execution [54] Question: Is the cross-sell motion still a priority? - Management affirmed that expansion through customer success and product AEs remains a key focus [63] Question: Is there additional conservatism in the guidance due to the macroeconomic environment? - Management confirmed that a typical level of conservatism is embedded in the guidance [64] Question: What is the rationale for the recent equity raise? - Management highlighted the strategic partnership with HGGC and the validation of the business model as key reasons for the equity raise [66]

Upland Software, Inc. (NASDAQ:UPLD) Q1 2022 Earnings Conference Call May 4, 2022 5:00 PM ET Company Participants Jack McDonald – Chairman and Chief Executive Officer Rod Favaron – President Mike Hill – Chief Financial Officer Conference Call Participants Scott Berg – Needham & Company Luv Sodha – Jefferies Jake Roberge – William Blair Alex Sklar – Raymond James Operator Thank you for standing by and welcome to the Upland Software First Quarter 2022 Earnings Call. At this time, all participants are in listen ...

[Part I. FINANCIAL INFORMATION](index=3&type=section&id=Part%20I.%20FINANCIAL%20INFORMATION) This section presents Upland Software's comprehensive financial data and management's analysis for the reporting period [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents Upland Software's unaudited condensed consolidated financial statements for Q1 2022 and 2021, including balance sheets, statements of operations, comprehensive income, equity, cash flows, and detailed accounting notes [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This subsection provides a snapshot of the company's assets, liabilities, and equity at specific points in time | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------ | | Total Assets | $1,062,761 | $1,029,007 | | Total Liabilities | $734,177 | $712,719 | | Total Stockholders' Equity | $328,584 | $316,288 | | Cash and cash equivalents | $130,443 | $189,158 | - Total assets increased by **$33.75 million**, primarily driven by increases in intangible assets and goodwill, while cash and cash equivalents decreased by **$58.715 million**[9](index=9&type=chunk) [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This subsection details the company's revenues, expenses, and net loss over a specific period | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Total Revenue | $78,716 | $73,969 | | Gross Profit | $53,961 | $49,542 | | Loss from Operations | $(14,777) | $(17,528) | | Net Loss | $(22,831) | $(20,684) | | Net Loss per Common Share, Basic and Diluted | $(0.73) | $(0.69) | - Total revenue increased by **6.4%** year-over-year, while net loss widened by **10.4%** due to higher operating expenses, despite an improvement in loss from operations[12](index=12&type=chunk) [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) This subsection presents the total comprehensive income or loss, including net loss and other comprehensive income items | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net Loss | $(22,831) | $(20,684) | | Other Comprehensive Income | $23,873 | $13,904 | | Comprehensive Income (Loss) | $1,042 | $(6,780) | - The company reported comprehensive income of **$1.042 million** for Q1 2022, a significant improvement from a comprehensive loss of **$6.780 million** in Q1 2021, primarily driven by a substantial unrealized gain on interest rate swaps[15](index=15&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) This subsection outlines changes in the company's equity accounts over the reporting period | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------ | | Total Stockholders' Equity | $328,584 | $316,288 | | Additional Paid-In Capital | $579,638 | $568,384 | | Accumulated Other Comprehensive Income (Loss) | $12,359 | $(11,514) | | Accumulated Deficit | $(263,416) | $(240,585) | | Shares Outstanding | 31,320,765 | 31,096,548 | - Stockholders' equity increased by **$12.296 million**, largely due to a positive shift in accumulated other comprehensive income (loss) from a deficit to a gain, driven by unrealized gains on interest rate swaps[19](index=19&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This subsection details the cash inflows and outflows from operating, investing, and financing activities | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net Cash Provided by Operating Activities | $8,222 | $12,503 | | Net Cash Used in Investing Activities | $(62,509) | $(72,900) | | Net Cash Used in Financing Activities | $(4,211) | $(2,095) | | Change in Cash and Cash Equivalents | $(58,715) | $(63,357) | | Cash and Cash Equivalents, End of Period | $130,443 | $186,672 | - Net cash provided by operating activities decreased by **$4.281 million** year-over-year. Net cash used in investing activities decreased by **$10.391 million**, while net cash used in financing activities increased by **$2.116 million**[23](index=23&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This subsection provides detailed explanations and disclosures supporting the condensed consolidated financial statements [1. Basis of Presentation and Summary of Significant Accounting Policies](index=11&type=section&id=1.%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies) This section outlines the foundational principles and key accounting methods used in preparing the financial statements - The financial statements are prepared in conformity with GAAP and include Upland Software, Inc. and its wholly-owned subsidiaries. Management's estimates and assumptions, particularly for revenue recognition, deferred commissions, stock-based compensation, and fair value of interest rate swaps, are crucial. The company assessed no material impact from COVID-19 on its estimates as of May 4, 2022[25](index=25&type=chunk)[28](index=28&type=chunk)[29](index=29&type=chunk) - The company uses floating-to-fixed interest rate swap agreements to hedge interest rate risk on its **$540 million** term loans, effectively fixing the rate at **5.4%**. As of March 31, 2022, the fair value of these swaps was a **$17.8 million asset**, up from an **$8.4 million liability** at December 31, 2021[32](index=32&type=chunk) [2. Acquisitions](index=13&type=section&id=2.%20Acquisitions) This section details the company's acquisition activities, including consideration paid and their financial impact - Upland completed two acquisitions in Q1 2022: BA Insight (cloud-based enterprise knowledge management) and Objectif Lune (cloud-based document workflow product). These acquisitions contributed **$0.8 million** and **$4.8 million** in revenue, respectively, through March 31, 2022[41](index=41&type=chunk) 2022 Acquisitions Consideration (in thousands) | Acquisition | Cash | Holdback | Contingent Consideration | Working Capital & Other Adjustments | Total Consideration | | :------------ | :--- | :------- | :----------------------- | :---------------------------------- | :------------------ | | BA Insight | $33,355 | $645 | — | $1,616 | $35,616 | | Objectif Lune | $29,750 | $5,250 | — | — | $35,000 | - Goodwill from these acquisitions totaled **$48.768 million** in Q1 2022, primarily attributed to expected synergies and the acquired workforce. Total transaction-related expenses for acquisitions were **$4.5 million** in Q1 2022, up from **$4.0 million** in Q1 2021[45](index=45&type=chunk)[46](index=46&type=chunk)[53](index=53&type=chunk) [3. Fair Value Measurements](index=15&type=section&id=3.%20Fair%20Value%20Measurements) This section describes how the company measures the fair value of its financial instruments and assets - The fair value of the company's interest rate swaps, categorized as Level 2, increased to a **$17.8 million asset** as of March 31, 2022, from an **$8.4 million liability** at December 31, 2021, due to rising short-term interest rates[50](index=50&type=chunk)[51](index=51&type=chunk) - As of March 31, 2022, and December 31, 2021, there were no accrued earnout business acquisition contingent consideration liabilities measured as Level 3 instruments, as earnout payments for BlueVenn and Second Street were finalized with no payments made[49](index=49&type=chunk) [4. Goodwill and Other Intangible Assets](index=16&type=section&id=4.%20Goodwill%20and%20Other%20Intangible%20Assets) This section provides details on the company's goodwill and other intangible assets, including changes and amortization Goodwill Balance (in thousands) | Metric | Amount | | :-------------------------------- | :------- | | Balance at December 31, 2021 | $457,472 | | Acquired in business combinations | $48,768 | | Adjustment related to prior year business combinations | $1,467 | | Foreign currency translation adjustment | $(2,461) | | Balance at March 31, 2022 | $505,246 | Net Intangible Assets (in thousands) | Intangible Asset | March 31, 2022 Net Carrying Amount | December 31, 2021 Net Carrying Amount | | :----------------- | :--------------------------------- | :---------------------------------- | | Customer relationships | $248,450 | $232,614 | | Trade name | $4,155 | $3,962 | | Developed technology | $47,831 | $43,344 | | Total | $300,436 | $279,920 | - Total amortization expense for intangible assets was **$13.8 million** in Q1 2022, up from **$12.0 million** in Q1 2021. The estimated annual amortization expense for the remainder of 2022 is **$40.45 million**[54](index=54&type=chunk)[55](index=55&type=chunk) [5. Income Taxes](index=17&type=section&id=5.%20Income%20Taxes) This section discusses the company's income tax benefit or provision and related factors - The income tax benefit for Q1 2022 was **$0.1 million**, primarily from foreign income taxes, offset by changes in deferred tax liabilities related to U.S. tax-deductible goodwill amortization and state taxes[57](index=57&type=chunk) - The Q1 2021 tax benefit of **$4.4 million** was mainly due to the release of a valuation allowance from acquired deferred tax liabilities in the Second Street business combination[58](index=58&type=chunk) [6. Debt](index=17&type=section&id=6.%20Debt) This section provides information on the company's debt obligations, including terms, covenants, and interest rates Long-term Debt (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | Senior secured loans (net of discount) | $517,532 | $518,330 | | Less current maturities | $(3,166) | $(3,167) | | Total long-term debt | $514,366 | $515,163 | - The company's Credit Facility includes a **$350 million** Term Loan and a **$60 million** Revolver. An additional **$190 million** Incremental Term Loan was added in November 2019, bringing the total term loans to **$540 million**[62](index=62&type=chunk)[63](index=63&type=chunk)[171](index=171&type=chunk) - Interest rate swaps effectively fix the interest rate on the **$540 million** term loans at **5.4%** for the 7-year term. The Revolver's interest rate remains floating. As of March 31, 2022, the fair value of the interest rate swap was a **$17.8 million asset**[68](index=68&type=chunk)[69](index=69&type=chunk) - The company was in compliance with all covenants under the Credit Facility as of March 31, 2022. Cash interest costs averaged **5.4%** for both Q1 2022 and Q1 2021[75](index=75&type=chunk)[76](index=76&type=chunk) [7. Net Loss Per Share](index=19&type=section&id=7.%20Net%20Loss%20Per%20Share) This section presents the calculation of net loss per common share, both basic and diluted Net Loss Per Share (in thousands, except share and per share amounts) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net Loss | $(22,831) | $(20,684) | | Weighted-average common shares outstanding, basic and diluted | 31,163,273 | 29,970,050 | | Net loss per common share, basic and diluted | $(0.73) | $(0.69) | - Due to net losses, basic and diluted loss per share were identical for both periods. Anti-dilutive common share equivalents totaled **2,664,488** as of March 31, 2022[77](index=77&type=chunk) [8. Commitments and Contingencies](index=19&type=section&id=8.%20Commitments%20and%20Contingencies) This section discloses the company's contractual obligations and potential liabilities - The company has purchase commitments for hosting services and third-party technology. No material adverse legal proceedings are currently anticipated[78](index=78&type=chunk)[79](index=79&type=chunk) - Indemnification claims from acquisitions are managed through holdbacks or representation and warranty insurance policies, with gain contingencies not recognized until realized[80](index=80&type=chunk) [9. Stockholders' Equity](index=20&type=section&id=9.%20Stockholders'%20Equity) This section provides further details on the components of stockholders' equity, including accumulated other comprehensive income and stock-based compensation Accumulated Other Comprehensive Income (Loss) (in thousands) | Component | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | Foreign currency translation adjustment | $(6,704) | $(5,657) | | Unrealized translation gain on intercompany loans | $1,260 | $2,552 | | Unrealized gain (loss) on interest rate swaps | $17,803 | $(8,409) | | Total AOCI | $12,359 | $(11,514) | Stock-Based Compensation Expense (in thousands) | Expense Category | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :----------------------- | :-------------------------------- | :-------------------------------- | | Cost of revenue | $402 | $442 | | Research and development | $748 | $714 | | Sales and marketing | $1,474 | $1,137 | | General and administrative | $8,995 | $15,531 | | Total | $11,619 | $17,824 | - General and administrative stock-based compensation decreased significantly in Q1 2022, primarily due to a **$6.3 million** incremental expense in Q1 2021 related to the deemed modification of unvested grants for a former COO[86](index=86&type=chunk) [10. Revenue Recognition](index=22&type=section&id=10.%20Revenue%20Recognition) This section explains the company's policies and methods for recognizing revenue from various sources - Revenue is recognized when control of goods/services is transferred to customers, following a five-step model. Performance obligations include subscription and support, perpetual licenses, and professional services[93](index=93&type=chunk)[94](index=94&type=chunk) - Subscription and support revenue is recognized ratably over the contract term (typically 1-3 years). Perpetual license revenue is recognized upfront when software is made available. Professional services revenue is recognized over time as services are performed[95](index=95&type=chunk)[96](index=96&type=chunk)[97](index=97&type=chunk) Disaggregated Revenue by Geography (in thousands) | Revenue Type | Geography | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :----------------------- | :---------------- | :-------------------------------- | :-------------------------------- | | Subscription and support | United States | $51,344 | $52,955 | | | United Kingdom | $11,590 | $9,394 | | | Canada | $3,468 | $3,338 | | | Other International | $7,225 | $4,966 | | Perpetual license | United States | $737 | $253 | | | United Kingdom | $129 | $11 | | | Canada | $76 | $42 | | | Other International | $836 | $46 | | Professional services | United States | $1,695 | $2,044 | | | United Kingdom | $790 | $664 | | | Canada | $204 | $88 | | | Other International | $622 | $168 | | Total Revenue | | $78,716 | $73,969 | - As of March 31, 2022, approximately **$306.1 million** of revenue is expected to be recognized from remaining performance obligations, with about **70%** expected within the next 12 months[111](index=111&type=chunk) [11. Related Party Transactions](index=26&type=section&id=11.%20Related%20Party%20Transactions) This section discloses any transactions between the company and its related parties - The Company reported no material related party transactions for the three months ended March 31, 2022[115](index=115&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=27&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's analysis of Upland Software's financial performance and operational results for Q1 2022, covering revenue, expenses, key metrics, liquidity, and critical accounting policies, with a focus on acquisition impacts [Overview](index=28&type=section&id=Overview) This section provides a general description of Upland Software's business, strategy, and market position - Upland provides cloud-based software applications for digital transformation across marketing, sales, contact center, project management, information technology, business operations, and human resources/legal functions[121](index=121&type=chunk)[130](index=130&type=chunk) - The company employs a 'land-and-expand' go-to-market strategy, selling primarily through a direct sales organization and supporting over **10,000 customers** across various industries[123](index=123&type=chunk)[124](index=124&type=chunk) - Upland's revenue grew from **$98.0 million** in 2017 to **$302.0 million** in 2021, a **33% CAGR**. Foreign revenue increased to **32%** of total revenue in Q1 2022, up from **25%** in Q1 2021[125](index=125&type=chunk) - The company plans to continue growth through acquisitions, having completed **31 acquisitions** from February 2012 through March 31, 2022. Acquisition activity resumed in 2021 and Q1 2022 after a pause due to COVID-19[126](index=126&type=chunk)[128](index=128&type=chunk) [Results of Operations](index=30&type=section&id=Results%20of%20Operations) This section analyzes the company's financial performance, including revenue, cost of revenue, and operating expenses [Consolidated Statements of Operations Data](index=30&type=section&id=Consolidated%20Statements%20of%20Operations%20Data) This subsection presents a summary of the company's consolidated statements of operations, including key financial metrics | Metric | 3 Months Ended March 31, 2022 (Amount) | 3 Months Ended March 31, 2022 (% of Revenue) | 3 Months Ended March 31, 2021 (Amount) | 3 Months Ended March 31, 2021 (% of Revenue) | | :-------------------------------- | :------------------------------------- | :------------------------------------------- | :------------------------------------- | :------------------------------------------- | | Total Revenue | $78,716 | 100% | $73,969 | 100% | | Total Cost of Revenue | $24,755 | 31% | $24,427 | 33% | | Gross Profit | $53,961 | 69% | $49,542 | 67% | | Total Operating Expenses | $68,738 | 87% | $67,070 | 91% | | Loss from Operations | $(14,777) | (18)% | $(17,528) | (24)% | | Net Loss | $(22,831) | (29)% | $(20,684) | (28)% | [Comparison of the Three Months Ended March 31, 2022 and 2021](index=31&type=section&id=Comparison%20of%20the%20Three%20Months%20Ended%20March%2031,%202022%20and%202021) This section provides a detailed comparative analysis of the company's financial performance between the two periods [Revenue](index=31&type=section&id=Revenue) This subsection analyzes the company's revenue performance, including breakdowns by type and contributing factors Revenue Breakdown (in thousands) | Revenue Type | 2022 | 2021 | % Change | | :-------------------- | :----- | :----- | :------- | | Subscription and support | $73,627 | $70,653 | 4% | | Perpetual license | $1,778 | $352 | 405% | | Professional services | $3,311 | $2,964 | 12% | | Total Revenue | $78,716 | $73,969 | 6% | - Total revenue increased by **$4.7 million (6%)** to **$78.7 million** in Q1 2022. Acquisitions contributed **$10.1 million** to this increase, while 'Sunset Assets' and 'Overage Charges' declined by **$0.3 million** and **$2.1 million**, respectively. Core Organic Business revenue decreased by **$2.1 million**[135](index=135&type=chunk) - Subscription and support revenue increased by **$2.9 million (4%)**, with acquisitions contributing **$8.1 million**. Perpetual license revenue saw a significant **405% increase**, primarily from the Objectif Lune acquisition[136](index=136&type=chunk)[137](index=137&type=chunk) [Cost of Revenue and Gross Profit Percentage](index=32&type=section&id=Cost%20of%20Revenue%20and%20Gross%20Profit%20Percentage) This subsection examines the costs associated with generating revenue and the resulting gross profit margin Cost of Revenue and Gross Profit (in thousands) | Metric | 2022 | 2021 | % Change | | :-------------------------- | :----- | :----- | :------- | | Cost of subscription and support | $22,069 | $22,682 | (3)% | | Cost of professional services and other | $2,686 | $1,745 | 54% | | Total Cost of Revenue | $24,755 | $24,427 | 1% | | Gross Profit | $53,961 | $49,542 | 9% | | Gross Profit Percentage | 69% | 67% | +2pp | - Cost of subscription and support revenue decreased by **$0.6 million (3%)**, with a **$2.5 million** decrease in Organic Business costs, mainly due to lower telecom messaging costs after cyclical highs in 2021[141](index=141&type=chunk) - Cost of professional services and other revenue increased by **$1.0 million (54%)**, entirely attributable to acquisitions[142](index=142&type=chunk) [Operating Expenses](index=33&type=section&id=Operating%20Expenses) This subsection analyzes the company's operating expenses, including sales and marketing, research and development, and general and administrative costs Operating Expenses (in thousands) | Expense Category | 2022 | 2021 | % Change | | :----------------------- | :----- | :----- | :------- | | Sales and marketing | $15,593 | $12,432 | 25% | | Research and development | $12,067 | $10,940 | 10% | | General and administrative | $19,614 | $24,369 | (20)% | | Depreciation and amortization | $11,051 | $9,743 | 13% | - Sales and marketing expense increased by **$3.2 million (25%)**, with **$2.1 million** from acquisitions and **$1.1 million** from organic business due to increased sales commissions[145](index=145&type=chunk) - General and administrative expense decreased by **$4.8 million (20%)**, primarily due to a **$5.5 million** reduction in Organic Business expenses, driven by lower non-cash stock compensation (a **$6.3 million** incremental expense in Q1 2021 did not recur)[150](index=150&type=chunk) - Depreciation and amortization expense increased by **$1.4 million (13%)**, with acquisitions contributing **$1.9 million**, partially offset by **$0.5 million** from fully depreciated/amortized assets[152](index=152&type=chunk) [Acquisition-related Expenses](index=35&type=section&id=Acquisition-related%20Expenses) This subsection details the expenses incurred in connection with business acquisitions Acquisition-related Expenses (in thousands) | Expense Type | 2022 | 2021 | % Change | | :----------------------- | :----- | :----- | :------- | | Acquisition-related expenses | $10,413 | $9,586 | 9% | | Transaction related expenses | $4,500 | $4,000 | 12.5% | | Transformational expenses | $5,900 | $5,600 | 5.4% | - Acquisition-related expenses increased by **$0.8 million (9%)**, driven by both transaction-related and transformational expenses from recent acquisitions in 2022 and 2021[155](index=155&type=chunk) [Other Income (Expense)](index=35&type=section&id=Other%20Income%20(Expense)) This subsection covers non-operating income and expenses, such as interest and other miscellaneous items Other Income (Expense) (in thousands) | Metric | 2022 | 2021 | % Change | | :----------------------- | :----- | :----- | :------- | | Interest expense, net | $(7,762) | $(7,787) | —% | | Other income (expense), net | $(418) | $237 | (276)% | | Total other expense | $(8,180) | $(7,550) | 8% | - Other income (expense), net shifted from an income of **$0.2 million** in Q1 2021 to an expense of **$0.4 million** in Q1 2022, primarily due to currency exchange gains (losses)[157](index=157&type=chunk) [Benefit from (Provision for) Income Taxes](index=36&type=section&id=Benefit%20from%20(Provision%20for)%20Income%20Taxes) This subsection discusses the company's income tax benefit or provision and the factors influencing it Benefit from Income Taxes (in thousands) | Metric | 2022 | 2021 | % Change | | :----------------------- | :----- | :----- | :------- | | Benefit from income taxes | $126 | $4,394 | (97)% | - The income tax benefit decreased significantly by **$4.3 million (97%)** in Q1 2022. The Q1 2022 benefit was mainly from foreign income taxes, while Q1 2021 included a substantial benefit from the release of a valuation allowance related to business combinations[159](index=159&type=chunk) [Key Metrics](index=36&type=section&id=Key%20Metrics) This section presents and reconciles key non-GAAP financial measures used by management to evaluate performance Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Metric | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Net loss | $(22,831) | $(20,684) | | Depreciation and amortization expense | $14,262 | $12,468 | | Interest expense, net | $7,762 | $7,787 | | Other expense (income), net | $418 | $(237) | | Benefit from income taxes | $(126) | $(4,394) | | Stock-based compensation expense | $11,619 | $17,824 | | Acquisition-related expense | $10,413 | $9,586 | | Purchase accounting deferred revenue discount | $1,929 | $494 | | Adjusted EBITDA | $23,446 | $22,844 | - Adjusted EBITDA increased by **$0.602 million (2.6%)** to **$23.446 million** in Q1 2022, reflecting the company's operating performance excluding non-cash and acquisition-related items[164](index=164&type=chunk) [Liquidity and Capital Resources](index=38&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's ability to generate and manage cash to meet its financial obligations and fund operations - As of March 31, 2022, Upland had **$130.4 million** in cash and cash equivalents, **$60.0 million** available under its revolving credit facility, and **$526.5 million** in outstanding borrowings[167](index=167&type=chunk) - Cash and cash equivalents decreased by **$58.7 million** from December 31, 2021, primarily due to **$62.3 million** in cash paid for two acquisitions in Q1 2022[167](index=167&type=chunk) - Working capital surplus decreased from **$106.5 million** at December 31, 2021, to **$29.9 million** at March 31, 2022, which includes **$114.5 million** of deferred revenue as a current liability[169](index=169&type=chunk) [Cash Flows from Operating Activities](index=39&type=section&id=Cash%20Flows%20from%20Operating%20Activities) This subsection analyzes the cash generated or used by the company's primary business operations - Net cash provided by operating activities decreased by **$4.3 million** to **$8.2 million** in Q1 2022, primarily due to increased acquisition-related cash outflows[179](index=179&type=chunk) - Working capital sources included a **$9.2 million** decrease in accounts receivable and a **$1.1 million** increase in deferred revenue, while uses included a **$4.1 million** decrease in accounts payable and a **$4.8 million** decrease in accrued expenses[179](index=179&type=chunk) [Cash Flows from Investing Activities](index=40&type=section&id=Cash%20Flows%20from%20Investing%20Activities) This subsection details the cash used for or generated from investments in assets, such as acquisitions and capital expenditures - Cash used in investing activities decreased by **$10.4 million** to **$62.5 million** in Q1 2022, mainly due to lower acquisition purchase prices compared to the prior year[182](index=182&type=chunk) - Investing activities primarily consist of acquisitions of complementary technologies, products, and businesses, and are expected to continue to expand the company's software library and infrastructure[181](index=181&type=chunk)[183](index=183&type=chunk) [Cash Flows from Financing Activities](index=40&type=section&id=Cash%20Flows%20from%20Financing%20Activities) This subsection analyzes the cash flows related to debt, equity, and other financing transactions - Cash used in financing activities increased by **$2.1 million** to **$4.2 million** in Q1 2022, driven by a **$1.8 million** increase in additional consideration paid to sellers (holdbacks) and a **$0.5 million** increase in net share employee payroll tax settlement payments[185](index=185&type=chunk) [Critical Accounting Policies and the Use of Estimates](index=40&type=section&id=Critical%20Accounting%20Policies%20and%20the%20Use%20of%20Estimates) This section highlights the accounting policies that require significant judgment and estimates by management - Key accounting policies requiring significant judgment and estimates include revenue recognition, income taxes, deferred sales commissions, business combinations (goodwill and long-lived assets), and stock-based compensation[187](index=187&type=chunk) - No material changes to critical accounting policies were reported in Q1 2022 compared to the 2021 Annual Report on Form 10-K[188](index=188&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=42&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section details Upland Software's exposure to and management of market risks, including interest rate, foreign exchange, and inflation risks [Interest Rate Risk](index=42&type=section&id=Interest%20Rate%20Risk) This subsection describes the company's exposure to fluctuations in interest rates and its mitigation strategies - Upland's interest rate risk primarily relates to cash equivalents and variable rate indebtedness. Interest rate swap agreements fix the interest rate on **$540 million** of term loans at **5.4%**, mitigating exposure to variable rates[193](index=193&type=chunk) - As of March 31, 2022, with no outstanding debt under the revolving credit facility, a hypothetical **100 basis point** change in interest rates would not impact total interest expense[193](index=193&type=chunk) [Foreign Currency Exchange Risk](index=42&type=section&id=Foreign%20Currency%20Exchange%20Risk) This subsection outlines the company's exposure to foreign currency fluctuations and their potential impact - The company is exposed to foreign exchange rate fluctuations as it invoices customers and incurs operating expenses in various foreign currencies (e.g., AUD, CAD, GBP, EUR)[194](index=194&type=chunk) - A hypothetical **10%** change in foreign currency exchange rates could result in a **$2.0 million** change in revenue for the three months ended March 31, 2022. The company has not engaged in currency hedging strategies to date[194](index=194&type=chunk) [Inflation](index=42&type=section&id=Inflation) This subsection discusses the potential impact of inflation on the company's business and financial results - Inflation has not had a material effect on the business in the last three fiscal years, but potential future inflationary pressures could increase costs and adversely affect financial results if not offset by price increases[196](index=196&type=chunk) [Item 4. Controls and Procedures](index=43&type=section&id=Item%204.%20Controls%20and%20Procedures) This section evaluates Upland Software's disclosure controls and internal control over financial reporting, confirming their effectiveness and reporting no material changes for Q1 2022 - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2022[199](index=199&type=chunk) - No material changes to internal control over financial reporting occurred during the quarter ended March 31, 2022[200](index=200&type=chunk) [Part II. OTHER INFORMATION](index=44&type=section&id=Part%20II.%20OTHER%20INFORMATION) This section contains additional information not covered in Part I, including updated risk factors and exhibits [Item 1A. Risk Factors](index=44&type=section&id=Item%201A.%20Risk%20Factors) This section updates previously disclosed risk factors, emphasizing the potential adverse effects of inflation on the company's liquidity, business, financial condition, and operational results - The company may be adversely affected by inflation, which could increase overall cost structure, particularly if commensurate price increases cannot be achieved[205](index=205&type=chunk) - Inflation may lead to higher interest rates, capital costs, shipping costs, supply shortages, increased labor costs, and weakening exchange rates[205](index=205&type=chunk) [Item 6. Exhibits](index=44&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including CEO and CFO certifications and Inline XBRL financial data - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), and 18 U.S.C. Section 1350[209](index=209&type=chunk) - The report also includes Inline XBRL formatted financial statements and notes, and a Cover Page Interactive Data File[209](index=209&type=chunk) [SIGNATURES](index=46&type=section&id=SIGNATURES) This section contains the official signatures, certifying the filing of the Quarterly Report on Form 10-Q by Upland Software, Inc. on May 4, 2022 - The report was duly signed on behalf of UPLAND SOFTWARE, INC. by Michael D. Hill, Chief Financial Officer, on May 4, 2022[213](index=213&type=chunk)