Upland Software(UPLD) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION 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 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 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 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] Condensed Consolidated Statements of Comprehensive Income (Loss) 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 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] Condensed Consolidated Statements of Cash Flows 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] Notes to Condensed Consolidated Financial Statements Provides detailed explanations of Upland Software's accounting policies, significant estimates, and specific financial statement line items 1. Organization and Nature of Operations 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] - 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] 2. Basis of Presentation and Summary of Significant Accounting Policies 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][26] - Significant estimates include revenue recognition, deferred commissions, stock-based compensation, goodwill impairment, and fair value of interest rate swaps[28] - 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][48] - No individual customer accounted for more than 10% of total revenues or accounts receivable[32] - 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] 3. Acquisitions 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] - 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][54] | 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] 4. Fair Value Measurements 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] | 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][63] 5. Goodwill and Other Intangible Assets 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] | 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] 6. Income Taxes 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] - 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] 7. Debt 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] - 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][79][83] - 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][90] 8. Net Loss Per Share 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][93] | 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 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] - 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] 10. Series A Preferred Stock 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][99] - 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][102] - 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][106][107] - Holders can convert Series A Preferred Stock into Common Stock at a conversion price of $17.50, subject to anti-dilution adjustments[108] 11. Stockholders' Equity 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] | 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 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][122] - 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][125][126] - 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] | 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 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] 14. Subsequent Events 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] - 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on Upland Software's financial performance, liquidity, and critical accounting policies for Q1 2023 versus Q1 2022 Forward Looking Statements 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][147][148] 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] - 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] - 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] Recent Developments 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] 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] Results of Operations Analyzes Upland Software's financial performance for Q1 2023 compared to Q1 2022, focusing on revenue, costs, and profitability Consolidated Statements of Operations Data 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 Provides a detailed year-over-year analysis of Upland Software's financial performance for the first quarter 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] - 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][159] - Professional services revenue decreased by $0.7 million, attributed to de-emphasizing low-margin projects and a decline from Sunset Assets[161] Cost of revenue 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] - 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] Operating Expenses 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 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] Research and Development Expense 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] General and Administrative Expense 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] Depreciation and Amortization Expense 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] Acquisition-related Expenses 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] Impairment of goodwill 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] Other Income (Expense) 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] - 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] Benefit from Income Taxes 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] 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] Non-GAAP Financial Measures Explains Upland Software's use of non-GAAP financial measures, specifically Adjusted EBITDA, for evaluating operational performance Adjusted EBITDA 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] | 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] Liquidity and Capital Resources 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] | 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] - 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] Critical Accounting Policies and the Use of Estimates 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][208][213] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] - 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] - Inflation risk could impact the business if higher costs cannot be offset by price increases, potentially harming financial performance[176] Item 4. Controls and Procedures 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] - No material changes to internal control over financial reporting occurred during the quarter ended March 31, 2023[221] - Internal controls have inherent limitations, including human error and potential circumvention, which means absolute assurance of achieving financial reporting objectives cannot be provided[222] PART II. OTHER INFORMATION Presents additional information not covered in the financial statements, including updated risk factors and exhibit listings Item 1A. Risk Factors 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][227] - 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] - 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] Item 6. Exhibits 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] - Inline XBRL (Extensible Business Reporting Language) formatted materials, including condensed consolidated financial statements and notes, are filed as Exhibit 101[232]