UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~September~~June 30, ~~2019~~2020

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

For the transition period from to

Commission file number 001-36720

UPLAND SOFTWARE, INC.

(Exact name of registrant as specified in its charter)


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

401 Congress Avenue, Suite 1850 Austin, Texas			~~78701~~
~~(Address of principal executive offices)~~			~~(Zip Code)~~

401 Congress Ave., Suite 1850

Austin, Texas 78701

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

(512) 960-1010

(Registrant’s telephone number, including area ~~code: (512) 960-1010~~code)

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

UPLD

The Nasdaq Global Market

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

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

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

Large accelerated filer

¨x

Accelerated filer

x¨

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

¨☐

Emerging growth company

x☐

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

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

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

As of ~~November 1, 2019, 25,261,093~~July 31, 2020, 25,368,192 shares of the registrant’s Common Stock were outstanding.

Table of Contents

Upland Software, Inc.

Table of Contents


		Page
Part I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019	1
	Condensed Consolidated Statements of Operations for the Three and ~~Nine~~Six months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018~~2019	2
	Condensed Consolidated Statements of Comprehensive Loss for the Three and ~~Nine~~Six months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018~~2019	3
	Condensed Consolidated Statements of Stockholders' Equity for the Three and ~~Nine~~Six months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018~~2019	4
	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018~~2019	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2625
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4241
Item 4.	Controls and Procedures	4342
Part II.	OTHER INFORMATION	4443
Item 6.	Exhibits	44
~~Signature~~			4643
Exhibit Index			44
Signature			45

Table of Contents

Item 1. Financial Statements

Upland Software, Inc.

Condensed Consolidated Balance Sheets

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


		September 30, 2019		December 31, 2018			June 30, 2020		December 31, 2019
		(unaudited)					(unaudited)
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	113,306	$	16,738	Cash and cash equivalents	$	87,910	$	175,024
Accounts receivable (net of allowance of $1,478 and $1,405 at September 30, 2019 and December 31, 2018, respectively)		39,432		40,841
Accounts receivable (net of allowance of $1,771 and $1,238 at June 30, 2020 and December 31, 2019, respectively)						Accounts receivable (net of allowance of $1,771 and $1,238 at June 30, 2020 and December 31, 2019, respectively)	48,656		50,938
Deferred commissions, current	Deferred commissions, current	3,363		2,633		Deferred commissions, current	4,150		3,059
Unbilled receivables	Unbilled receivables	4,827		3,694		Unbilled receivables	5,508		5,111
Prepaid and other	Prepaid and other	4,898		3,382		Prepaid and other	6,604		4,748
Total current assets	Total current assets	165,826		67,288		Total current assets	152,828		238,880
Canadian tax credits receivable		2,885		1,573
Tax credits receivable						Tax credits receivable	4,378		4,186
Property and equipment, net	Property and equipment, net	3,468		2,827		Property and equipment, net	3,951		3,917
Operating lease right-of-use asset	Operating lease right-of-use asset	5,692		—		Operating lease right-of-use asset	13,598		8,056
Intangible assets, net	Intangible assets, net	212,645		179,572		Intangible assets, net	292,316		282,727
Goodwill	Goodwill	282,833		225,322		Goodwill	379,486		346,134
Deferred commissions, noncurrent	Deferred commissions, noncurrent	9,274		6,292		Deferred commissions, noncurrent	10,160		8,763
Other assets	Other assets	789		324		Other assets	2,666		4,165
Total assets	Total assets	$	683,412	$	483,198	Total assets	$	859,383	$	896,828
Liabilities and stockholders’ equity	Liabilities and stockholders’ equity					Liabilities and stockholders’ equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	3,409	$	3,494	Accounts payable	$	1,976	$	5,904
Accrued compensation	Accrued compensation	6,430		6,581		Accrued compensation	5,933		11,559
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	14,743		16,666		Accrued expenses and other current liabilities	14,118		15,344
Deferred revenue	Deferred revenue	59,663		57,626		Deferred revenue	81,032		76,558
Due to sellers	Due to sellers	17,383		17,267		Due to sellers	5,712		14,276
Operating lease liabilities, current	Operating lease liabilities, current	2,045		—		Operating lease liabilities, current	3,756		2,533
Current maturities of notes payable (includes unamortized discount of $1,024 and $1,109 at September 30, 2019 and December 31, 2018, respectively)		2,476		6,015
Current maturities of notes payable (includes unamortized discount of $2,216 and $2,207 at June 30, 2020 and December 31, 2019, respectively)						Current maturities of notes payable (includes unamortized discount of $2,216 and $2,207 at June 30, 2020 and December 31, 2019, respectively)	3,184		3,193
Total current liabilities	Total current liabilities	106,149		107,649		Total current liabilities	115,711		129,367

Notes payable, less current maturities (includes unamortized discount of $7,333 and $2,381 at September 30, 2019 and December 31, 2018, respectively)		339,167		273,713
Notes payable, less current maturities (includes unamortized discount of $10,395 and $11,369 at June 30, 2020 and December 31, 2019, respectively)						Notes payable, less current maturities (includes unamortized discount of $10,395 and $11,369 at June 30, 2020 and December 31, 2019, respectively)	520,155		521,881
Deferred revenue, noncurrent	Deferred revenue, noncurrent	127		578		Deferred revenue, noncurrent	2,244		496
Operating lease liabilities, noncurrent	Operating lease liabilities, noncurrent	3,985		—		Operating lease liabilities, noncurrent	11,217		5,862
Noncurrent deferred tax liability, net	Noncurrent deferred tax liability, net	11,667		13,311		Noncurrent deferred tax liability, net	24,577		25,685
Other long-term liabilities	Other long-term liabilities	4,029		640		Other long-term liabilities	33,242		676
Total liabilities	Total liabilities	465,124		395,891		Total liabilities	707,146		683,967

Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:

Common stock, $0.0001 par value; 50,000,000 shares authorized: 25,261,093 and 21,489,112 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively)		3		2
Common stock, $0.0001 par value; 50,000,000 shares authorized: 25,365,735 and 25,250,120 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively)						Common stock, $0.0001 par value; 50,000,000 shares authorized: 25,365,735 and 25,250,120 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively)	3		3
Additional paid-in capital	Additional paid-in capital	344,637		180,481		Additional paid-in capital	363,328		345,127
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(15,171)		(7,501)		Accumulated other comprehensive loss	(45,700)		(1,223)
Accumulated deficit	Accumulated deficit	(111,181)		(85,675)		Accumulated deficit	(165,394)		(131,046)
Total stockholders’ equity	Total stockholders’ equity	218,288		87,307		Total stockholders’ equity	152,237		212,861
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	683,412	$	483,198	Total liabilities and stockholders’ equity	$	859,383	$	896,828

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

Table of Contents

Upland Software, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

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


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended June 30,				Six Months Ended June 30,
		2019		2018		2019		2018			2020		2019		2020		2019
Revenue:	Revenue:									Revenue:
Subscription and support	Subscription and support	$	51,059	$	33,919	$	144,757	$	94,802	Subscription and support	$	67,699	$	48,715	$	131,590	$	93,698
Perpetual license	Perpetual license	975		915		2,207		3,224		Perpetual license	491		575		852		1,232
Total product revenue	Total product revenue	52,034		34,834		146,964		98,026		Total product revenue	68,190		49,290		132,442		94,930
Professional services	Professional services	3,031		2,310		9,607		6,679		Professional services	3,125		3,723		6,905		6,576
Total revenue	Total revenue	55,065		37,144		156,571		104,705		Total revenue	71,315		53,013		139,347		101,506
Cost of revenue:	Cost of revenue:									Cost of revenue:
Subscription and support	Subscription and support	14,678		10,566		42,574		29,395		Subscription and support	21,200		14,622		41,139		27,896
Professional services	Professional services	1,995		1,517		5,470		4,182		Professional services	2,472		1,961		4,734		3,475
Total cost of revenue	Total cost of revenue	16,673		12,083		48,044		33,577		Total cost of revenue	23,672		16,583		45,873		31,371
Gross profit	Gross profit	38,392		25,061		108,527		71,128		Gross profit	47,643		36,430		93,474		70,135
Operating expenses:	Operating expenses:									Operating expenses:
Sales and marketing	Sales and marketing	8,709		5,299		23,680		14,955		Sales and marketing	11,820		7,989		22,751		14,971
Research and development	Research and development	7,434		5,400		20,840		15,577		Research and development	10,488		7,008		19,908		13,406
Refundable Canadian tax credits	Refundable Canadian tax credits	(133)		(99)		(304)		(404)		Refundable Canadian tax credits	(194)		(85)		(496)		(171)
General and administrative	General and administrative	12,196		8,011		34,232		23,475		General and administrative	17,655		12,042		34,331		22,036
Depreciation and amortization	Depreciation and amortization	6,427		3,606		17,430		9,589		Depreciation and amortization	9,037		5,744		18,308		11,003
Acquisition-related expenses	Acquisition-related expenses	7,457		2,497		24,444		8,739		Acquisition-related expenses	5,781		9,264		20,939		16,987
Total operating expenses	Total operating expenses	42,090		24,714		120,322		71,931		Total operating expenses	54,587		41,962		115,741		78,232
Loss from operations	Loss from operations	(3,698)		347		(11,795)		(803)		Loss from operations	(6,944)		(5,532)		(22,267)		(8,097)
Other expense:	Other expense:									Other expense:
Interest expense, net	Interest expense, net	(5,517)		(3,118)		(15,879)		(8,755)		Interest expense, net	(7,873)		(5,246)		(15,516)		(10,362)
Loss on debt extinguishment		(2,317)		—		(2,317)		—
Other expense, net	Other expense, net	(228)		(744)		(1,681)		(965)		Other expense, net	(15)		(692)		(1,417)		(1,453)
Total other expense	Total other expense	(8,062)		(3,862)		(19,877)		(9,720)		Total other expense	(7,888)		(5,938)		(16,933)		(11,815)
Loss before provision for income taxes	Loss before provision for income taxes	(11,760)		(3,515)		(31,672)		(10,523)		Loss before provision for income taxes	(14,832)		(11,470)		(39,200)		(19,912)
Benefit from (provision for) income taxes		(547)		(735)		6,166		(2,118)
Benefit from income taxes										Benefit from income taxes	673		6,101		4,960		6,713

Net loss	Net loss	$	(12,307)	$	(4,250)	$	(25,506)	$	(12,641)	Net loss	$	(14,159)	$	(5,369)	$	(34,240)	$	(13,199)

Net loss per common share:	Net loss per common share:									Net loss per common share:
Net loss per common share, basic and diluted	Net loss per common share, basic and diluted	$	(0.50)	$	(0.21)	$	(1.13)	$	(0.63)	Net loss per common share, basic and diluted	$	(0.57)	$	(0.24)	$	(1.37)	$	(0.61)

Weighted-average common shares outstanding, basic and diluted	Weighted-average common shares outstanding, basic and diluted	24,568,483		20,089,919		22,550,232		19,916,907		Weighted-average common shares outstanding, basic and diluted	25,032,996		22,619,805		25,057,715		21,531,216

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

Table of Contents

Upland Software, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(unaudited)

(in thousands)


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended June 30,				Six Months Ended June 30,
		2019		2018		2019		2018			2020		2019		2020		2019
Net loss	Net loss	$	(12,307)	$	(4,250)	$	(25,506)	$	(12,641)	Net loss	$	(14,159)	$	(5,369)	$	(34,240)	$	(13,199)
Foreign currency translation adjustment	Foreign currency translation adjustment	(1,293)		253		(681)		(2,427)		Foreign currency translation adjustment	1,219		1,249		(2,240)		612
Unrealized translation loss on foreign currency denominated intercompany loans		(3,610)		—		(3,610)		—
Unrealized loss on interest rate swap		(3,379)		—		(3,379)		—
Unrealized translation gain (loss) on foreign currency denominated intercompany loans										Unrealized translation gain (loss) on foreign currency denominated intercompany loans	132		(3,006)		(7,181)		—
Unrealized loss on interest rate swaps										Unrealized loss on interest rate swaps	(3,655)		—		(35,056)		—
Comprehensive loss	Comprehensive loss	$	(20,589)	$	(3,997)	$	(33,176)	$	(15,068)	Comprehensive loss	$	(16,463)	$	(7,126)	$	(78,717)	$	(12,587)

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

Table of Contents

Upland Software, Inc.

Consolidated Statement of Stockholders’ Equity

(unaudited)

(in thousands, except share amounts)

Three Months Ended September 30, 2018
Common Stock Additional
Paid-In
Capital Accumulated
Other
Comprehensive
Loss Accumulated
Deficit Total
Stockholders’
Equity
Shares Amount
Balance at June 30, 2018 21,516,738 $ 2 $ 178,062 $ (5,083) $ (83,227) $ 89,754
Issuance of stock under Company plans, net of shares withheld for tax 72,662 — (303) — — (303)
Stock-based compensation — — 3,781 — — 3,781
Foreign currency translation adjustment — — — 253 — 253
Net loss — — — — (4,250) (4,250)
Balance at September 30, 2018 21,589,400 $ 2 $ 181,540 $ (4,830) $ (87,477) $ 89,235


		Nine Months Ended September 30, 2018																															Three Months Ended June 30, 2020
		Common Stock					Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit					Total Stockholders’ Equity			Common Stock											Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit	Total Stockholders’ Equity
		Shares	Amount																Shares		Accumulated Other Comprehensive Loss				Accumulated Deficit				Total Stockholders’ Equity
Balance at December 31, 2017		20,768,401	$	2	$	174,944							$	(2,403)			$	(81,128)												$	91,415
Balance at March 31, 2020													Balance at March 31, 2020		25,305,427				$	3			$	353,720			$	(43,396)			$	(151,235)		$	159,092

Issuance of stock under Company plans, net of shares withheld for tax	Issuance of stock under Company plans, net of shares withheld for tax	820,999	—		(3,763)		—		—		(3,763)		Issuance of stock under Company plans, net of shares withheld for tax		60,308				—			(1,372)				—				—			(1,372)
Issuance of stock, net of issuance costs		—	—		(21)		—		—		(21)

Stock-based compensation	Stock-based compensation	—	—		10,380		—		—		10,380		Stock-based compensation		—				—			10,980				—				—			10,980
Cumulative ASC 606 adjustments		—	—		—		—		6,292		6,292

Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—		(2,427)		—		(2,427)		Foreign currency translation adjustment		—				—			—				1,219				—			1,219
Unrealized translation gain on foreign currency denominated intercompany loans													Unrealized translation gain on foreign currency denominated intercompany loans		—				—			—				132				—			132
Unrealized gain loss on interest rate swaps													Unrealized gain loss on interest rate swaps		—				—			—				(3,655)				—			(3,655)
Net loss	Net loss	—	—		—		—		(12,641)		(12,641)		Net loss		—				—			—				—				(14,159)			(14,159)
Balance at September 30, 2018		21,589,400	$	2	$	181,540	$	(4,830)	$	(87,477)	$	89,235

Balance at June 30, 2020													Balance at June 30, 2020		25,365,735				$	3		$	363,328			$	(45,700)			$	(165,394)		$	152,237


	Six Months Ended June 30, 2020
	Common Stock					Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2019	25,250,120	$	3	$	345,127	$	(1,223)	$	(131,046)	$	212,861

Issuance of stock under Company plans, net of shares withheld for tax	115,615	—		(2,086)		—		—		(2,086)
Issuance of stock, net of issuance costs	—	—		(13)		—		—		(13)
Stock-based compensation	—	—		20,300		—		—		20,300
Cumulative adjustment related to adoption of accounting standard	—	—		—		—		(108)		(108)
Foreign currency translation adjustment	—	—		—		(2,240)		—		(2,240)
Unrealized translation loss on foreign currency denominated intercompany loans	—	—		—		(7,181)		—		(7,181)
Unrealized gain loss on interest rate swaps	—	—		—		(35,056)		—		(35,056)
Net loss	—	—		—		—		(34,240)		(34,240)
Balance at June 30, 2020	25,365,735	$	3	$	363,328	$	(45,700)	$	(165,394)	$	152,237

Table of Contents


	Three Months Ended June 30, 2019
	Common Stock					Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at March 31, 2019	21,443,226	$	2	$	183,700	$	(5,132)	$	(93,505)	$	85,065

Issuance of stock under Company plans, net of shares withheld for tax	9,481	—		(3,021)		—		—		(3,021)
Issuance of stock, net of issuance costs	3,795,000	1		151,152		—		—		151,153
Stock-based compensation	—	—		6,901		—		—		6,901

Foreign currency translation adjustment	—	—		—		1,249		—		1,249
Unrealized translation gain on foreign currency denominated intercompany loans	—	—		—		(3,006)		—		(3,006)
Net loss	—	—		—		—		(5,369)		(5,369)
Balance at June 30, 2019	25,247,707	$	3	$	338,732	$	(6,889)	$	(98,874)	$	232,972


	Six Months Ended June 30, 2019
	Common Stock					Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2018	21,489,112	$	2	$	180,481	$	(7,501)	$	(85,675)	$	87,307
Issuance of common stock in business combination	3,651	—		(30)		—		—		(30)
Issuance of stock under Company plans, net of shares withheld for tax	(40,056)	—		(4,400)		—		—		(4,400)
Issuance of stock, net of issuance costs	3,795,000	1		151,152		—		—		151,153
Stock-based compensation	—	—		11,529		—		—		11,529

Foreign currency translation adjustment	—	—		—		612		—		612
Net loss	—	—		—		—		(13,199)		(13,199)
Balance at June 30, 2019	25,247,707	$	3	$	338,732	$	(6,889)	$	(98,874)	$	232,972

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

~~Table of Contents~~

~~Upland Software, Inc.~~

~~Consolidated Statement of Stockholders’ Equity~~

~~(unaudited)~~

~~(in thousands, except share amounts)~~

Three Months Ended September 30, 2019
Common Stock Additional
Paid-In
Capital Accumulated
Other
Comprehensive
Loss Accumulated
Deficit Total
Stockholders’
Equity
Shares Amount
Balance at June 30, 2019 25,247,707 $ 3 $ 338,732 $ (6,889) $ (98,874) $ 232,972
Issuance of common stock in business combination 4,247 — — — — —
Issuance of stock under Company plans, net of shares withheld for tax 9,139 — (1,243) — — (1,243)
Issuance of stock, net of issuance costs — — (39) — — (39)
Stock-based compensation — — 7,187 — — 7,187
Foreign currency translation adjustment — — — (1,293) — (1,293)
Unrealized translation loss on foreign currency denominated intercompany loans — — — (3,610) — (3,610)
Unrealized loss on interest rate swap — — — (3,379) — (3,379)
Net loss — — — — (12,307) (12,307)
Balance at September 30, 2019 25,261,093 $ 3 $ 344,637 $ (15,171) $ (111,181) $ 218,288

Nine Months Ended September 30, 2019
Common Stock Additional
Paid-In
Capital Accumulated
Other
Comprehensive
Loss Accumulated
Deficit Total
Stockholders’
Equity
Shares Amount
Balance at December 31, 2018 21,489,112 $ 2 $ 180,481 $ (7,501) $ (85,675) $ 87,307
Issuance of common stock in business combination 7,898 — (30) — — (30)
Issuance of stock under Company plans, net of shares withheld for tax (30,917) — (5,643) — — (5,643)
Issuance of stock, net of issuance costs 3,795,000 1 151,113 — — 151,114
Stock-based compensation — — 18,716 — — 18,716
Foreign currency translation adjustment — — — (681) — (681)
Unrealized translation loss on foreign currency denominated intercompany loans — — — (3,610) — (3,610)
Unrealized loss on interest rate swap — — — (3,379) — (3,379)
Net loss — — — — (25,506) (25,506)
Balance at September 30, 2019 25,261,093 $ 3 $ 344,637 $ (15,171) $ (111,181) $ 218,288

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

Table of Contents

Upland Software, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)


		Nine Months Ended September 30,							Six Months Ended June 30,
		2019		2018			2020		2019
Operating activities	Operating activities					Operating activities
Net loss	Net loss	$	(25,506)	$	(12,641)	Net loss	$	(34,240)	$	(13,199)
Adjustments to reconcile net loss to net cash provided by operating activities:	Adjustments to reconcile net loss to net cash provided by operating activities:					Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	23,722		14,604		Depreciation and amortization	23,395		15,152

Deferred income taxes	Deferred income taxes	(11,176)		421		Deferred income taxes	(4,985)		(12,024)
Amortization of deferred commissions		2,555		1,709
Amortization of deferred costs						Amortization of deferred costs	1,920		1,735
Foreign currency re-measurement loss	Foreign currency re-measurement loss	155		105		Foreign currency re-measurement loss	497		(212)
Non-cash interest and other expense	Non-cash interest and other expense	979		616		Non-cash interest and other expense	1,108		565
Non-cash stock compensation expense	Non-cash stock compensation expense	18,716		10,380		Non-cash stock compensation expense	20,300		11,529

Non-cash loss on debt extinguishment		2,317		—
Changes in operating assets and liabilities, net of purchase business combinations:	Changes in operating assets and liabilities, net of purchase business combinations:					Changes in operating assets and liabilities, net of purchase business combinations:
Accounts receivable	Accounts receivable	6,405		3,173		Accounts receivable	5,188		8,410
Prepaids and other	Prepaids and other	(4,280)		(3,115)		Prepaids and other	(6,743)		2,415
Accounts payable	Accounts payable	(903)		(679)		Accounts payable	(6,258)		(483)
Accrued expenses and other liabilities	Accrued expenses and other liabilities	(5,037)		(7,097)		Accrued expenses and other liabilities	(7,101)		(5,756)
Deferred revenue	Deferred revenue	(2,893)		(2,679)		Deferred revenue	2,415		(2,736)
Net cash provided by operating activities		5,054		4,797
Net cash provided by (used in) operating activities						Net cash provided by (used in) operating activities	(4,504)		5,396
Investing activities	Investing activities					Investing activities
Purchase of property and equipment	Purchase of property and equipment	(723)		(643)		Purchase of property and equipment	(696)		(364)
Purchase of customer relationships	Purchase of customer relationships	(438)		—		Purchase of customer relationships	(201)		—
Purchase business combinations, net of cash acquired	Purchase business combinations, net of cash acquired	(105,771)		(47,850)		Purchase business combinations, net of cash acquired	(67,651)		(82,824)

Net cash used in investing activities	Net cash used in investing activities	(106,932)		(48,493)		Net cash used in investing activities	(68,548)		(83,188)
Financing activities	Financing activities					Financing activities
Payments on finance leases	Payments on finance leases	(499)		(893)		Payments on finance leases	(83)		(357)
Proceeds from notes payable, net of issuance costs	Proceeds from notes payable, net of issuance costs	382,306		49,375		Proceeds from notes payable, net of issuance costs	(142)		39,339
Payments on notes payable	Payments on notes payable	(323,218)		(2,907)		Payments on notes payable	(2,700)		(13,749)

Taxes paid related to net share settlement of equity awards	Taxes paid related to net share settlement of equity awards	(6,108)		(4,642)		Taxes paid related to net share settlement of equity awards	(2,140)		(4,811)
Issuance of common stock, net of issuance costs	Issuance of common stock, net of issuance costs	151,549		858		Issuance of common stock, net of issuance costs	41		151,535

Additional consideration paid to sellers of businesses	Additional consideration paid to sellers of businesses	(5,886)		(4,294)		Additional consideration paid to sellers of businesses	(9,580)		(3,340)
Net cash provided by financing activities		198,144		37,497
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	(14,604)		168,617
Effect of exchange rate fluctuations on cash	Effect of exchange rate fluctuations on cash	302		(38)		Effect of exchange rate fluctuations on cash	542		798
Change in cash and cash equivalents	Change in cash and cash equivalents	96,568		(6,237)		Change in cash and cash equivalents	(87,114)		91,623
Cash and cash equivalents, beginning of period	Cash and cash equivalents, beginning of period	16,738		22,326		Cash and cash equivalents, beginning of period	175,024		16,738
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	113,306	$	16,089	Cash and cash equivalents, end of period	$	87,910	$	108,361
Supplemental disclosures of cash flow information:	Supplemental disclosures of cash flow information:					Supplemental disclosures of cash flow information:
Cash paid for interest, net of interest rate swaps	Cash paid for interest, net of interest rate swaps	$	17,554	$	8,170	Cash paid for interest, net of interest rate swaps	$	14,861	$	10,298
Cash paid for taxes	Cash paid for taxes	$	2,185	$	2,480	Cash paid for taxes	$	1,260	$	1,691
Sales commissions paid, net of amortization of deferred commissions	Sales commissions paid, net of amortization of deferred commissions	$	3,712	$	1,327	Sales commissions paid, net of amortization of deferred commissions	$	2,488	$	1,184
Noncash investing and financing activities:
Non-cash investing and financing activities:						Non-cash investing and financing activities:
Business combination consideration including holdbacks and earnouts	Business combination consideration including holdbacks and earnouts	$	7,926	$	7,106	Business combination consideration including holdbacks and earnouts	$	345	$	5,175

Equipment acquired pursuant to capital lease obligations		$	44	$	—
Equipment acquired pursuant to financing lease obligations						Equipment acquired pursuant to financing lease obligations	$	—	$	44

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

Upland Software, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States ~~("GAAP"~~(“GAAP”). The condensed consolidated financial statements include the accounts of the ~~Company~~Upland Software, Inc. and its wholly owned ~~subsidiaries.~~subsidiaries (collectively referred to as “Upland”, the “Company”, “we” or “us”). All intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. There have been no significant changes in the Company’s accounting policies since December 31, 2019, except as discussed below with respect to the Company’s adoption of ASU 2016-13.

The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ~~("SEC"~~(“SEC”) for interim financial reporting. In the opinion of management of the Company, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, in all material respects, and include all adjustments of a normal recurring nature necessary for a fair presentation. The results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 are not necessarily indicative of the results to be expected for the year ending December 31, ~~2019~~2020 or for any other period.

The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s ~~2018~~2019 Annual Report on Form 10-K filed with the SEC on March ~~15, 2019.~~2, 2020.

Use of Estimates

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

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. Upland is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of August 7, 2020, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

Concentrations of Credit Risk and Significant Customers

Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents and accounts receivable. The Company’s cash and cash equivalents are placed with high-quality financial institutions, which, at times, may exceed federally insured limits. The Company has not experienced any losses in these accounts, and the Company does not believe it is exposed to any significant credit risk related to cash and cash equivalents. The Company provides credit, in the normal course of business, to a number of its customers. ~~The~~To manage accounts receivable credit risk, the Company performs periodic credit evaluations of its customers and ~~generally does not require collateral.~~ maintains current expected credit losses which considers such factors as historical loss information, geographic location of customers, current market conditions, and reasonable and supportable forecasts. The $0.5 million increase in the allowance for credit losses as of June 30, 2020, compared to December 31, 2019, was primarily related to CXM sales which have higher historical write-off rates compared to the Company’s other product revenue streams.

No individual customer represented more than 10% of total revenues for the three or ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, or more than 10% of accounts receivable as of ~~September~~June 30, ~~2019~~2020 or December 31, ~~2018.~~2019.

Derivatives

~~In August 2019, in conjunction with entering into a new credit facility (see Note 6. Debt), the~~The Company entered into a floating-to-fixed interest rate swap ~~agreement~~agreements to limit ~~the~~ exposure to interest rate risk related to our debt. ~~The~~These interest rate ~~swap~~swaps effectively ~~converts~~convert the entire balance of the Company's ~~$350~~$540 million term ~~loan~~loans from variable interest payments to fixed interest rate payments, based on an annualized fixed rate of 5.4%, for the 7 year term of the debt. ASC 815 requires entities to recognize derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. The Company assessed the effectiveness of the hedging relationship ~~by comparing changes~~under the hypothetical derivative method and noted that all of the critical terms of the hypothetical derivative and hedging instrument were the same. The hedging relationship continues to limit the Company’s exposure to the variability in ~~fair value or~~interest rates under the Company’s term loans and related cash outflows. As such, the Company has deemed this hedging relationship as highly effective in offsetting cash flows attributable to hedged risk (variability in forecasted monthly interest payments) for the term of the ~~derivative financial instrument with the changes in fair value or cash flows of the designated hedged item or transaction.~~term loans and interest rate swap agreements. All derivative financial instruments are recorded at fair value as a net asset or liability in the accompanying ~~Consolidated Balance Sheets. The~~condensed consolidated balance sheets. As of June 30, 2020 the fair value of the interest rate ~~swap recorded~~swaps included in ~~other liabilities at September 30,~~Other long term-liabilities in the Company's condensed consolidated balance sheets was $32.6 million. As of December 31, 2019, the fair value of the interest rate swaps included in Other assets in the Company's condensed consolidated balance sheet was ~~$3.4~~$2.4 million.

The change in the fair value of the hedging instruments is recorded in Other comprehensive income. Amounts deferred in Other comprehensive income will be reclassified to Interest expense in the accompanying ~~Consolidated Statements~~condensed consolidated statements of ~~Operations~~operations in the period in which the hedged item affects earnings.

Fair Value of Financial Instruments

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

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

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

Recent Accounting Pronouncements

Recently issued accounting pronouncements

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

Recently adopted accounting pronouncements

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, to eliminate, add and modify certain disclosure requirements for fair value measurements. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance is effective for annual and interim periods beginning after December 15, 2019, but entities are permitted to early adopt either the entire standard or only

the provisions that eliminate or modify the requirements. The Company ~~is currently evaluating~~adopted this guidance in the ~~effect that the adoption~~first quarter of ~~ASU 2018-13 will have~~2020 with no material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company ~~is currently evaluating the effect that the adoption of ASU 2016-13 will have on its financial statements.~~

~~Recently adopted accounting pronouncements~~

~~In January 2018, the FASB issued ASU 2018-02~~ ~~Income Statement - Reporting Comprehensive Income (ASC 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI)~~, which gives entities the option to reclassify to retained earnings the tax effects resulting from the Tax Act related to items in Additional Other Comprehensive Income (AOCI) that the FASB refers to as having been “stranded” in AOCI. The guidance is effective for annual and interim periods beginning after December 15, 2018, and is applicable to the Company in fiscal year 2019; however, early adoption is permitted. The Company adopted ASU 2018-02 as of January 1, 2019 and elected not to reclassify the income tax effect of the Tax Act from AOCI to retained earnings. The adoption of ASU 2018-02 resulted in no impact to the Company's financial statements.

~~In August 2017, the FASB issued ASU 2017-12,~~ ~~Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities~~, which amends and simplifies existing guidance to allow companies to more accurately present the economic effects of risk management activities in the financial statements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018. The Company adopted this guidance in the first quarter of ~~2019 with no material impact on its consolidated financial statements.~~

~~In February 2016,~~2020 and as a result of the ~~FASB issued ASU 2016-02,~~ ~~Leases (Topic 842)~~. The new standard supersedes the present U.S. GAAP standard on leases and requires substantially all leases to be reported on the balance sheet as right-of-use assets and lease obligations. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, and interim reporting

~~periods within those annual reporting periods. Early~~ adoption is permitted and in the original guidance the modified retrospective application was required, however, in July 2018 the FASB issued ASU 2018-11 which permits entities with another transition method in which the effective date would be the date of initial application of transition. Under this optional transition method, the Company would recognizerecorded a cumulative-effect adjustment to decrease the ~~opening~~beginning balance of ~~retained earnings~~Accumulated deficit in the ~~period~~amount of ~~adoption. The Company adopted ASU 2016-02 as of January 1, 2019 using~~$0.1 million, which represents the modified retrospective approach and the optional transition method. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward historical lease classifications.

Adoption of the new standard resulted in the recording operating lease right-of-use assets and operating lease liabilities on our consolidated balance sheets, but did not have an impact on the Company's beginning retained earnings, consolidated statement of operations or statement of cash flows. The most significant impact was theaccelerated recognition of ~~right-of-use assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. As of September 30, 2019, total right-of-use assets~~credit losses related to our ~~operating leases was $5.7 million and~~trade receivables under the expected credit loss model of calculating our current ~~and non-current operating lease liabilities were approximately $2.0 million and $4.0 million, respectively.~~ expected credit losses compared to the previous incurred loss model.

2. Acquisitions

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

2020 Acquisitions

Acquisitions completed during the ~~exception~~six months ended June 30, 2020 include the following:

•Localytics - On February 6, 2020, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of ~~Rapide Communication LTD,~~Char Software, Inc (dba Localytics), a ~~private company limited by shares organized~~Delaware corporation (“Localytics”), a provider of mobile app personalization and ~~existing under~~analytics solutions. Revenues recorded since the ~~laws of England and Wales doing business as Rant & Rave (“Rant & Rave”). Refer to “Pro Forma Financials” disclosed below.~~acquisition date through June 30, 2020 were approximately $7.1 million.

2019 Acquisitions

Acquisitions completed during the ~~nine months~~year ended ~~September 30,~~December 31, 2019 include the following:

•Postup ~~Holdings~~ - On April 18, 2019, the Company completed its purchase of the shares comprising the entire issued share capital of Postup Holdings, LLC, a Texas limited liability company (“~~Postup Holdings”~~Postup”), and Postup Digital, LLC, a Texas limited liability company, ~~(“Postup Digital”),~~ an Austin-based company providing email and audience development solutions for publishing & media brands. ~~Revenues recorded since the acquisition date through September 30, 2019 were approximately $5.4 million.~~

•Kapost - On May 24, 2019, the Company completed of its purchase of the shares comprising the entire issued share capital of Daily Inches, Inc., d/b/a Kapost, a Delaware corporation (“Kapost”), a leading content operations platform provider for sales and marketing. ~~Revenues recorded since the acquisition date through September 30, 2019 were approximately $4.5 million.~~

•Cimpl - On August 21, 2019, the Company completed its purchase of the shares comprising the entire issued share capital of Cimpl, Inc., a Canadian corporation (“Cimpl”), a leading cloud-based telecom expense management platform. ~~Revenues recorded since the acquisition date through September 30, 2019 were approximately $0.9 million.~~

•~~See Note 13. Subsequent Events for additional 2019 acquisitions completed subsequent to September 30, 2019.~~

~~2018 Acquisitions~~

~~Acquisitions completed during the year ended December 31, 2018 include the following:~~

•~~Interfax~~InGenius - On ~~March 21, 2018,~~October 1, 2019, the ~~Company’s wholly owned subsidiary, PowerSteering Software Limited, a limited liability company organized and existing under the laws of England and Wales (“PowerSteering UK”),~~Company completed its purchase of the shares comprising the entire issued share capital of ~~Interfax Communications Limited ("Interfax"~~InGenius Software Inc., a Canadian corporation (“InGenius”), ~~an Irish-based software company providing secured cloud-based messaging solutions, including~~a Computer Telephony Integration (CTI) solution for enterprise ~~cloud fax and secure document distribution.~~contact centers.

•~~RO Innovation~~ - On June 27, 2018, the Company completed its purchase of RO Innovation, Inc. ("RO Innovation"), a cloud-based customer reference solution for creating, deploying, managing, and measuring customer reference and sales enablement content.

•~~Rant & Rave~~Altify - On October ~~3, 2018,~~4, 2019, the Company’s wholly owned subsidiary, ~~PowerSteering~~Upland Software UK, ~~completed its~~a limited company incorporated under the laws of England and Wales, entered into an agreement to purchase of the shares comprising the entire issued ~~voting~~ share capital of ~~Rant & Rave,~~Altify Ireland Limited, a ~~leading provider~~private company limited by shares organized and existing under the laws of ~~cloud-based customer engagement solutions.~~

•~~Adestra~~ ~~- On December 12, 2018, the Company completed its purchase of Adestra Ltd.~~Ireland (“~~Adestra”~~Altify”), a ~~leading provider of enterprise-grade email marketing, transaction~~customer revenue optimization (CRO) cloud solution for sales and ~~automation software.~~the extended revenue teams.

Consideration

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


		Cimpl		Kapost		Postup Holdings		Adestra		Rant & Rave		RO Innovation		Interfax			Localytics		Altify		InGenius		Cimpl		Kapost		Postup
Cash	Cash	$	23,071	$	45,000	$	34,825	$	55,242	$	58,470	$	12,469	$	35,000	Cash	$	67,655	$	84,000	$	26,428	$	23,071	$	45,000	$	34,825
Holdback ⁽¹⁾	Holdback ⁽¹⁾	2,600		5,000		175		4,432		6,500		1,781		5,000		Holdback ⁽¹⁾	345		—		3,000		2,600		5,000		175
Contingent consideration ⁽²⁾	Contingent consideration ⁽²⁾	—		—		—		—		—		—		—		Contingent consideration ⁽²⁾	1,000		—		4,865		—		—		—

Working capital adjustment	Working capital adjustment	—		(601)		—		—		(211)		(87)		—		Working capital adjustment	—		—		—		—		(601)		—
Total consideration	Total consideration	$	25,671	$	49,399	$	35,000	$	59,674	$	64,759	$	14,163	$	40,000	Total consideration	$	69,000	$	84,000	$	34,293	$	25,671	$	49,399	$	35,000

(1)Represents cash holdbacks subject to indemnification claims that are payable 12 months ~~from~~following closing for Localytics, InGenius, Cimpl, Kapost ~~Postup, Adestra, Rant & Rave~~ and ~~RO Innovation and 18 months from closing for Interfax.~~Postup.

(2)~~Contingent consideration includes potential future earn-out payments related to the acquisition of RO Innovation for up to $7.5 million which was valued at $0.0 million as of~~Represents the acquisition date fair value of anticipated earn-out payments, which are based on the estimated probability of attainment of the underlying future performance-based ~~goals. During~~conditions at the ~~nine months ended September 30, 2019~~time of acquisition. The maximum potential payout for the ~~Company paid $1.5~~InGenius and Localytics earn-outs were $15.0 million based on the final valuation of this earn-out. In addition, during the year ended December 31, 2018 the Company incurred contingent consideration related to an asset acquisition in connection with our acquisition of Interfax as discussed under “Other Acquisitions” below.and $1.0 million, respectively. Refer to Note 3 for further discussion regarding the calculation of fair value of acquisition related earn-outs.

~~Unaudited Pro Forma Information~~

The pro forma statements of operations data for the three and nine months ended September 30, 2019 and September 30, 2018, shown in the table below, give effect to the Rant & Rave acquisition, described above, as if it had occurred at January 1, 2017. These amounts have been calculated after applying our accounting policies and adjusting the results of Rant & Rave to reflect: the reversal and deferral of commissions expense, the costs of debt financing incurred to acquire Rant & Rave, the additional intangible amortization and the adjustments to acquired deferred revenue that would have been recognized assuming the fair value adjustments had been applied and incurred since January 1, 2017. This pro forma data is presented for informational purposes only and does not purport to be indicative of our future results of operations.

The table below shows the pro forma statements of operations data, adjusted for the acquisition of Rant & Rave had the acquisition occurred in the year ended December 31, 2017, for the three and nine months ended September 30, 2019 and September 30, 2018 (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Revenue $ 55,065 $ 42,715 $ 156,571 $ 122,270
Net loss ⁽¹⁾
$ (12,307) $ (5,833) $ (25,506) $ (15,888)

~~(1)~~ While some recurring adjustments impact the pro forma figures presented, the decrease in pro forma net loss compared to our net loss presented on the consolidated statements of operations for the three and nine months ended September 30, 2019 and September 30, 2018 includes nonrecurring adjustments removing acquisition costs from 2018 and reflects these costs in the year ended December 31, 2017, the year the acquisition was assumed to be completed for pro forma purposes.

Fair Value of Assets Acquired and Liabilities Assumed

The Company recorded the purchase of the acquisitions described above using the acquisition method of accounting and, accordingly, recognized the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The purchase accounting for the 2019 acquisition of ~~Cimpl is~~Altify and the 2020 acquisition of Localytics are preliminary as the Company has not obtained and evaluated all of the detailed information necessary to finalize the opening balance sheet amounts in all respects, specifically the ~~valuation of intangible assets. The purchase accounting for the 2019 acquisitions of Kapost, Postup Holdings and the 2018 acquisitions of Adestra and Rant & Rave are preliminary due primarily to the~~ tax impact ~~related to the transactions~~ not being finalized as of ~~September~~June 30, ~~2019.~~2020. Management has recorded the purchase price allocations based upon acquired company information that is currently available. Management expects to complete its purchase price allocations for ~~Adestra and Rant & Rave in the fourth quarter of 2019, Kapost and Postup Holdings in the first quarter of 2020 and Cimpl~~these acquisitions in the second ~~quarter~~half of 2020.

The following condensed table presents the preliminary and finalized acquisition-date fair value of the assets acquired and liabilities assumed for the acquisitions in ~~2018~~during the year ended December 31, 2019 and through the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, as well as assets and liabilities (in thousands):


		Preliminary																				Finalized					Preliminary		Final
		Cimpl		Kapost		Postup Holdings		Adestra		Rant & Rave		RO Innovation		Interfax			Localytics		Altify		InGenius		Cimpl		Kapost		Postup
Year Acquired	Year Acquired	2019		2019		2019		2018		2018		2018		2018		Year Acquired	2020		2019		2019		2019		2019		2019

Cash	Cash	$	137	$	—	$	19	$	145	$	696	$	197	$	1,396	Cash	$	—	$	730	$	11	$	142	$	—	$	19
Accounts receivable	Accounts receivable	1,115		3,906		1,043		2,774		3,468		1,563		1,587		Accounts receivable	3,648		6,629		1,456		1,041		3,901		1,054
Other current assets	Other current assets	1,775		1,101		1,373		1,395		3,836		1,299		1,341		Other current assets	6,325		889		317		278		1,066		1,373

Tax credits receivable																Tax credits receivable	—		916		1,489		1,383		—		—
Operating lease right-of-use asset	Operating lease right-of-use asset	—		2,136		—		—		—		—		—		Operating lease right-of-use asset	7,605		1,085		1,099		230		2,136		—
Property and equipment	Property and equipment	118		687		743		796		131		15		286		Property and equipment	409		139		364		233		686		743
Customer relationships	Customer relationships	12,181		23,735		10,667		27,542		29,981		6,688		22,577		Customer relationships	30,500		50,954		11,208		12,430		23,735		10,667
Trade name	Trade name	375		787		468		709		1,099		111		649		Trade name	300		1,112		424		216		787		468
Technology	Technology	3,195		5,756		2,943		6,001		6,565		1,670		5,236		Technology	6,600		7,648		4,576		3,240		5,756		2,943
Noncompete agreements		—		—		—		—		—		1,148		—

Goodwill	Goodwill	12,778		21,542		22,105		29,218		32,589		7,568		13,862		Goodwill	40,109		34,426		24,141		12,928		20,953		21,973
Other assets	Other assets	6		—		—		—		—		—		14		Other assets	6		378		—		6		—		—
Total assets acquired	Total assets acquired	31,680		59,650		39,361		68,580		78,365		20,259		46,948		Total assets acquired	95,502		104,906		45,085		32,127		59,020		39,240
Accounts payable	Accounts payable	(302)		(64)		(448)		(543)		(1,577)		(229)		(737)		Accounts payable	(2,382)		(1,499)		(128)		(305)		(50)		(447)
Accrued expense and other	Accrued expense and other	(1,168)		(1,689)		(530)		(1,723)		(6,114)		(1,921)		(2,847)		Accrued expense and other	(6,752)		(3,901)		(2,807)		(1,206)		(3,724)		(530)
Deferred tax liabilities	Deferred tax liabilities	(4,191)		(2,483)		(3,368)		(5,104)		(3,896)		(2,129)		(3,364)		Deferred tax liabilities	(4,721)		(7,083)		(4,897)		(4,595)		(1,954)		(3,248)
Deferred revenue	Deferred revenue	(348)		(3,879)		(15)		(1,536)		(2,019)		(1,817)		—		Deferred revenue	(4,812)		(7,907)		(2,960)		(350)		(3,893)		(15)
Operating lease liabilities	Operating lease liabilities	—		(2,136)		—		—		—		—		—		Operating lease liabilities	(7,835)		(516)		—		—		—		—

Total liabilities assumed	Total liabilities assumed	(6,009)		(10,251)		(4,361)		(8,906)		(13,606)		(6,096)		(6,948)		Total liabilities assumed	(26,502)		(20,906)		(10,792)		(6,456)		(9,621)		(4,240)
Total consideration	Total consideration	$	25,671	$	49,399	$	35,000	$	59,674	$	64,759	$	14,163	$	40,000	Total consideration	$	69,000	$	84,000	$	34,293	$	25,671	$	49,399	$	35,000

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

The following table summarizes the weighted-average useful lives, by major finite-lived intangible asset class, for intangibles acquired during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and the year ended December 31, ~~2018~~2019 (in years):


		Useful Life				Useful Life
		September 30, 2019	December 31, 2018		June 30, 2020	December 31, 2019
Customer relationships	Customer relationships	9.5	9.8	Customer relationships	8.0	9.8
Trade name	Trade name	9.1	8.0	Trade name	2.0	9.2
Developed technology	Developed technology	7.5	6.7	Developed technology	5.0	7.9
Noncompete agreements		0.0	3.0

Total weighted-average useful life	Total weighted-average useful life	9.1	9.1	Total weighted-average useful life	7.4	9.5

During the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill based on changes to management's estimates and assumptions. The change in the preliminary acquisition-date fair value of assets and liabilities for ~~Adestra~~Altify during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was related primarily to a ~~$3.3~~$1.0 million decrease in ~~intangibles (customer relationships, trade name and technology) due to a change in valuation estimates.~~deferred tax liabilities.

The goodwill of ~~$139.7~~$154.5 million for the above acquisitions is primarily attributable to the synergies expected to arise after the acquisition. Goodwill deductible for tax purposes at the time of acquisition was ~~$2.4 million for Interfax, $2.7 million for RO Innovation and~~ $6.2 ~~million for Postup Holdings. There was 0 Goodwill deductible for tax purposes for our Adestra, Rant & Rave, Kapost and Cimpl acquisitions.~~

million.

Total transaction related expenses incurred with respect to acquisition activity during the three months ended ~~September~~June 30, 2020 and June 30, 2019 ~~and September 30, 2018~~ were ~~$2.2~~$0.2 million and ~~$0.2~~$3.6 million, respectively, and during the ~~nine~~six months ended ~~September~~June 30, 2020 and June 30, 2019 ~~and September 30, 2018~~ were ~~$6.2~~$3.5 million and ~~$2.8~~$4.0 million, respectively. Transaction related expenses, excluding ~~integration and~~ transformation costs, include expenses such as banker fees, legal and professional fees, insurance costs, and deal bonuses.

Other Acquisitions and Divestitures

From time to time we may purchase or sell customer relationships that meet certain criteria. During the ~~nine~~six months ended ~~September~~June 30, 2020 and year ended December 31, 2019, we completed customer relationship acquisitions totaling ~~$1.2 million.~~$0.2 million and $1.6 million, respectively.

In ~~connection with~~ the ~~acquisition~~fourth quarter of ~~Interfax,~~2019, Upland divested of certain minor non-strategic customer contracts and related website management and analytics assets. As a result, during the year ended December 31, 2019 the Company ~~acquired certain assets and customer relationships of Interfax's U.S. reseller (“Marketech”) for~~recognized a $2.0 million ~~excluding potential future earn-out payments~~non-cash expense on divestiture which is included in the Other income (expense), net line item in the Company’s condensed consolidated statement of operations, for the year ended December 31, 2019. The assets divested consisted primarily of $2.2 million in deferred commission costs, $1.1 million in intangible assets (customer relationship and related technology), $0.2 million in allocated goodwill, and $1.0 million ~~valued at $0.3 million as~~ of ~~the acquisition dated based on the probability~~liabilities primarily consisting of attainment of future performance-based goals. During the nine months ended September 30, 2019 we paid $0.6 million based on the final valuation of this earn-out. Refer to Note 3. Fair Value Measurements for further discussion regarding the calculation of fair value of acquisition related earn-outs.deferred revenue.

3. Fair Value Measurements

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

As of ~~September 30, 2019 and~~ December 31, ~~2018~~2019, the Company has contingent accrued earnout business acquisition consideration liabilities for which fair values are measured as Level 3 instruments. These contingent consideration liabilities were recorded at fair value on the acquisition date and are remeasured periodically based on the then assessed fair value and adjusted if necessary. The increases or decreases in the fair value of contingent consideration payable can result from changes in anticipated revenue levels or changes in assumed discount periods and rates. As the fair value measure is based on significant inputs that are not observable in the market, they are categorized as Level 3. Any gain (loss) related to subsequent changes in the fair value of contingent consideration is recorded in acquisition-related expense or other income (expense) in the Company's ~~Condensed Consolidated Statement~~condensed consolidated statement of ~~Operations~~operations based on management's assessment of the nature of the liability. Earnout consideration liabilities are included in Due to sellers in the Company's ~~Condensed Consolidated Balance Sheet.~~condensed consolidated balance sheets.

~~On August 6, 2019, in~~In connection with entering into, and expanding, the Company's ~~new~~current credit facility, as discussed further in Note 6. Debt, the Company entered into an interest rate ~~swap~~swaps for the full 7 year term of the Company's term loans, effectively fixing our interest rate at 5.4% for the full value $540 million of the ~~$350 million~~ term ~~loan.~~loans. The fair value of ~~this swap is~~the Company's swaps are measured at the end of each interim reporting period based on the then assessed fair value and adjusted if necessary. As the fair value measure is based on the market approach, they are categorized as Level ~~2.The~~2. As of June 30, 2020 and December 31, 2019 the fair value of the interest rate ~~swap is~~swaps are included in ~~other~~Other long term-liabilities and Other assets, respectively, on the Company's ~~Condensed Consolidated Balance Sheet.~~condensed consolidated balance sheets.

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


		Fair Value Measurements at September 30, 2019															Fair Value Measurements at June 30, 2020
		(unaudited)															(unaudited)
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total

Liabilities
Liabilities:										Liabilities:

Interest rate swap liability	Interest rate swap liability	$	—	$	3,379	$	—	$	3,379	Interest rate swap liability	$	—	$	32,632	$	—	$	32,632


		Fair Value Measurements at December 31, 2018															Fair Value Measurements at December 31, 2019
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
Liabilities
Assets:										Assets:
Interest rate swap asset										Interest rate swap asset	$	—	$	2,424	$	—	$	2,424
Liabilities:										Liabilities:
Earnout consideration liability	Earnout consideration liability	$	—	$	—	$	1,396	$	1,396	Earnout consideration liability	$	—	$	—	$	4,394	$	4,394

~~The decrease in cash earnouts from December 31, 2018 to September 30, 2019 is related primarily to cash settlement of earnouts related to Marketech and RO Innovation.~~

The following table presents additional information about earnout consideration liabilities measured at fair value on a recurring basis and for which the Company has utilized significant unobservable (Level 3) inputs to determine fair value (in thousands):


	~~September~~June 30, ~~2019~~2020
	(unaudited)
Balance at December 31, ~~2018~~2019	$	~~1,396~~4,394

Remeasurement adjustments:
~~Loss~~Gain included in earnings	~~712~~155



Acquisitions and settlements:

Acquisitions	1,000

Settlements ⁽¹⁾	~~(2,108)~~(5,549)
Balance at ~~September~~June 30, ~~2019~~2020	$	—

(1)Includes ~~a $1.5~~payments of $1.0 million ~~payment~~and $4.5 million for the outstanding balance of earnout liabilities related to the acquisition of ~~RO Innovation~~Localytics and ~~a $0.6 million payment for the outstanding balance of earnout liabilities related to the Marketech asset purchase~~InGenius, respectively, as describe in Note 2. Acquisitions.

~~The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration liabilities designated as Level 3 are as follows:~~

~~Fair Value at December 31, 2018~~

~~Valuation Technique~~

~~Significant Unobservable Inputs~~

Contingent acquisition consideration:
(Marketech and RO Innovation)

~~1,396~~

~~Binary option model~~

~~Expected future annual revenue streams and probability of achievement~~

Sensitivity to Changes in Significant Unobservable Inputs

As presented in the table above, the significant unobservable inputs used in the fair value measurement of contingent consideration related to business acquisitions are forecasts of expected future annual revenues as developed by the Company's management and the probability of achievement of those revenue forecast. Significant increases (decreases) in these unobservable inputs in isolation would likely result in a significantly (lower) higher fair value measurement.

Debt

The Company believes the carrying value of its long-term debt at ~~September~~June 30, ~~2019~~2020 approximates its fair value based on the variable interest rate feature or based upon interest rates currently available to the Company.

The estimated fair value and carrying value of the Company's debt, before debt discount, at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 are ~~$350.0~~$536.0 million and ~~$283.2~~$538.7 million, respectively, based on valuation methodologies using interest rates currently available to the Company, which are Level 2 inputs.

4. Goodwill and Other Intangible Assets

Changes in the Company’s goodwill balance for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 are summarized in the table below (in thousands):


Balance at December 31, ~~2018~~2019	$	~~225,322~~346,134
Acquired in business combinations	~~56,425~~39,646

Adjustment related to prior year business combinations	~~2,899~~ (996)
Adjustment related to finalization of current year business combinations	463
Foreign currency translation adjustment	~~(1,813)~~(5,761)
Balance at ~~September~~June 30, ~~2019~~2020	$	~~282,833~~379,486

Net intangible assets include the estimated acquisition-date fair values of customer relationships, marketing-related assets, and developed technology that the Company recorded as part of its business acquisitions. The $2.9 million adjustment to Goodwill during the nine months ended September 30, 2019 is primarily related to changes in the ASC 805 valuation of intangible assets in the prior year business combination of Adestra.

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


		Estimated Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount			Estimated Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
September 30, 2019:
June 30, 2020:									June 30, 2020:
Customer relationships	Customer relationships	1-10	$	216,595	$	46,278	$	170,317	Customer relationships	1-10	$	308,385	$	69,974	$	238,411
Trade name	Trade name	1.5-10	7,381		3,740		3,641		Trade name	1.5-10	8,966		4,255		4,711
Developed technology	Developed technology	4-8	59,612		21,595		38,017		Developed technology	4-9	76,800		27,989		48,811
Non-compete agreements	Non-compete agreements	3	1,148		478		670		Non-compete agreements	3	1,148		765		383
Total intangible assets	Total intangible assets		$	284,736	$	72,091	$	212,645	Total intangible assets		$	395,299	$	102,983	$	292,316


		Estimated Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount			Estimated Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
December 31, 2018:
December 31, 2019:									December 31, 2019:
Customer relationships	Customer relationships	1-10	$	173,592	$	30,650	$	142,942	Customer relationships	1-10	$	283,005	$	53,984	$	229,021
Trade name	Trade name	1.5-10	6,113		3,334		2,779		Trade name	1.5-10	8,827		3,884		4,943
Developed technology	Developed technology	4-7	48,943		16,049		32,894		Developed technology	4-9	71,522		23,333		48,189
Non-compete agreements	Non-compete agreements	3	1,148		191		957		Non-compete agreements	3	1,148		574		574
Total intangible assets	Total intangible assets		$	229,796	$	50,224	$	179,572	Total intangible assets		$	364,502	$	81,775	$	282,727

The Company periodically reviews the estimated useful lives of its identifiable intangible assets, taking into consideration any events or circumstances that might result in either a diminished fair value or revised useful life. ~~There have been no indicators~~During the six months ended June 30, 2020, the Company considered whether the current market and economic conditions arising from the COVID-19 pandemic could be a potential indicator of impairment of the Company’s intangible assets and goodwill. Based on management’s qualitative review no impairment of intangible assets or ~~change in~~goodwill was identified. During the fourth quarter of 2019, management made the decision to sunset and divest certain minor non-strategic customer contracts and related website management and analytics assets. The remaining useful life ~~during~~of certain customer relationship assets included in the ~~three and nine months ended September 30, 2019 and September 30, 2018, respectively.~~sunset asset group were reduced by 1 year to 2.5 years which represents the term left on the current active contracts. Total amortization expense during the three months ended ~~September~~June 30, 2020 and June 30, 2019 ~~and September 30, 2018~~ was ~~$8.0~~$11.2 million and ~~$4.8~~$7.2 million, respectively, and ~~during~~ the ~~nine~~six months ended ~~September~~June 30, 2020 and June 30, 2019 ~~and September 30, 2018~~ was ~~$22.1~~$22.4 million and ~~$12.9~~$14.0 million, respectively.

The Company has historically performed its annual goodwill and indefinite-lived intangible asset impairment test as of October 31^st. During the first quarter of 2020 the Company decided to change the date of its annual impairment test to the first day of its fourth fiscal quarter, October 1^st. This change was made to improve alignment with our quarterly financial reporting process and our annual planning and budgeting process. In connection with the change in the date of our annual goodwill and indefinite-lived intangible asset impairment test the Company will also perform a qualitative assessment as of October 31, 2020 to ensure the change does not result in the delay, acceleration or avoidance of an impairment charge.

Estimated annual amortization expense for the next five years and thereafter is as follows (in thousands):


		Amortization Expense			Amortization Expense
Year ending December 31:	Year ending December 31:			Year ending December 31:
Remainder of 2019		$	8,277
2020		31,373
Remainder of 2020				Remainder of 2020	$	22,079
2021	2021	29,850		2021	42,822
2022	2022	27,425		2022	40,290
2023	2023	25,390		2023	38,244
2024 and thereafter		90,330
2024				2024	35,603
2025 and thereafter				2025 and thereafter	113,278
Total	Total	$	212,645	Total	$	292,316

5. Income Taxes

The Company’s income tax ~~provision for~~benefit from (provision for) the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018~~2019 reflects its estimate of the effective tax rates expected to be applicable for the full years, adjusted for any discrete events that are recorded in the period in which they occur. The estimates are re-evaluated each quarter based on the estimated tax expense for the full year.

The ~~tax provision of $0.5 million and~~ tax benefit of ~~$6.2~~$0.7 million and $5.0 million recorded for the three and ~~nine~~six months ended ~~September~~June 30, 2020, respectively, is primarily related to the deferred tax benefit attributable to the release of valuation allowance related to the acquisition of deferred tax liabilities associated with the Localytics business combination, as discussed in Note 2. Acquisitions, and foreign income taxes associated with our combined non-U.S. operations. These tax benefits are offset by changes in deferred tax liabilities associated with amortization of United States tax deductible goodwill and state taxes in certain states in which the Company does not file on a consolidated basis or have net operating loss carryforwards. The release of valuation allowance is attributable to ASC 805-740-30-3 and acquisitions of domestic entities with deferred tax liabilities that, upon acquisition, allowed us to recognize certain deferred tax assets of approximately $4.4 million that had previously been offset by a valuation allowance. Approximately $0.5 million of this benefit was recognized for the three months ended June 30, 2020.

The tax benefit of $6.1 million and $6.7 million recorded for the three and six months ended June 30, 2019, respectively, is primarily related to the deferred tax benefit attributable to the release of valuation allowance and the deferred tax benefit of losses expected to be generated in the United Kingdom by entities acquired during the fourth quarter of 2018. These deferred tax benefits are offset by current income tax expense associated with our Canadian, Irish and Israeli operations, changes in deferred tax liabilities associated with amortization of United States tax deductible goodwill and state taxes in certain states in which the Company does not file on a consolidated basis or have net operating loss carryforwards. The release of valuation allowance is attributable to ASC 805-740-30-3 and acquisitions of domestic entities with deferred tax liabilities that, upon acquisition, allowed us to recognize certain deferred tax assets of approximately $5.9 million that had previously been offset by a valuation allowance.

~~The tax provision of $0.7 million and $2.1 million recorded~~ This entire benefit was recognized for the three ~~and nine months~~month period ended ~~September~~June 30, 2018, respectively, is primarily related to foreign income taxes associated with our Canadian, Irish and Israeli operations, changes in deferred tax liabilities associated with amortization of United States tax deductible goodwill and state taxes in certain states in which the Company does not file on a consolidated basis or have net operating loss.2019.

The Company has historically incurred operating losses in the United States and, given its cumulative losses and limited history of profits, has recorded a valuation allowance against its United States net deferred tax assets, exclusive of tax deductible goodwill, at ~~September~~June 30, 2020 and June 30, 2019, respectively. As of June 30, 2020, Upland had $353 million of total net operating loss carryforwards of which approximately $211 million will be available for utilization prior to expiration. These balances include the net operating losses disclosed as of December 31, 2019 and ~~September~~the estimated net operating losses acquired in the current year via acquisitions based on information available as of June 30, ~~2018,~~2020. The net operating loss carryforwards available for utilization prior to expiration consist of approximately $180 million and $31 million of U.S. federal and foreign net operating loss carryforwards, respectively.

The Company has reflected any uncertain tax positions primarily within its long-term taxes payable and a portion within deferred tax assets. ~~Federal,~~The Company and its subsidiaries file tax returns in the U.S. federal jurisdiction and in several state and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax ~~returns have been filed in jurisdictions with varying statutes of limitations. Varying among the separate companies, tax~~examinations for years ~~1999 through 2018 remain~~ending before December 31, 2016 and is no longer subject to ~~examination~~state and local or foreign income tax examinations by ~~federal and most state~~ tax authorities ~~due~~for years ending before December 31, 2015. The Company is not currently under audit for federal, state or any foreign jurisdictions. U.S. operating losses generated in years prior to ~~our~~2016 remain open to adjustment until the statute of limitations closes for the tax year in which the net operating ~~loss carryforwards. In foreign jurisdictions, tax years 2014 through 2018 remain subject to examination.~~losses are utilized.

6. Debt

Long-term debt consisted of the following at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):


		September 30, 2019		December 31, 2018			June 30, 2020		December 31, 2019
Senior secured loans (includes unamortized discount of $8,357 and $3,490 based on an imputed interest rate of 5.8% and 6.9%, at September 30, 2019 and December 31, 2018, respectively)		$	341,643	$	279,728
Senior secured loans (includes unamortized discount of $12,611 and $13,576 based on an imputed interest rate of 5.8% and 5.8%, at June 30, 2020 and December 31, 2019, respectively)						Senior secured loans (includes unamortized discount of $12,611 and $13,576 based on an imputed interest rate of 5.8% and 5.8%, at June 30, 2020 and December 31, 2019, respectively)	$	523,339	$	525,074

Less current maturities	Less current maturities	(2,476)		(6,015)		Less current maturities	(3,184)		(3,193)
Total long-term debt	Total long-term debt	$	339,167	$	273,713	Total long-term debt	$	520,155	$	521,881

Credit Facility

On August 6, 2019, the Company entered into a ~~new~~ credit agreement (the “Credit Facility”) which provides for (i) a fully-drawn $350 million, 7 year, senior secured term loan B facility (the “Term Loan”) and (ii) a new $60 million, 5 year, revolving credit facility (the “Revolver”) that was fully available as of ~~September~~June 30, ~~2019.~~2020. The Credit Facility replaced the Company's previous credit ~~facility.~~agreement. All outstanding balances under our previous credit facility were paid off using proceeds from our new Credit Facility.

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

Payment terms

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

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

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

Lenders under the Credit Facility are entitled to a premium in the event of certain prepayments or repricings of the Term Loan made within six months of the Closing in an amount equal to 1.0% times the aggregate principal amount of the initial Term Loan prepaid in connection with a repricing transaction or the aggregate principal amount of the initial Term Loan outstanding on such date that is subject to an effective pricing reduction pursuant to a repricing transaction, as applicable.

Interest rate ~~swap~~swaps

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

The interest rate swap has been designated as a cash flow hedge and is valued using a market approach, which is a Level 2 valuation technique. At ~~September~~June 30, ~~2019,~~2020, the fair value of the interest rate swap was ~~$3.4~~$32.6 million liability as a result of a decline

in short term interest ~~rates and a continued flattening of the forward yield curve during the first nine months of 2019.~~rates. In the next twelve months, the Company estimates that ~~$0.5~~$5.4 million will be reclassified from ~~Other~~Accumulated other comprehensive income (loss) and recorded as an ~~increase/decrease~~increase to Interest expense.

~~Three Months Ended September 30, 2019~~

~~(Loss) gain recognized in Other comprehensive income on derivative financial instruments~~

~~(3,379)~~

~~(Loss) gain reclassified from Other comprehensive income to Interest expense~~

~~283~~

~~Total Interest expense in which the effects of cash flow hedges are recorded~~

~~(3,162)~~


	Three Months Ended June 30, 2020		Six Months Ended June 30, 2020
(Loss) gain recognized in Other comprehensive income on derivative financial instruments	$	(3,655)	$	(35,056)
(Loss) gain reclassified from Other comprehensive income to Interest expense	$	1,520	$	1,454
Total Interest expense in which the effects of cash flow hedges are recorded	$	5,794	$	13,191

Revolver

Loans under the Revolver are available up to $60 million. The Revolver provides a ~~subfacility~~sub-facility whereby the Company may request letters of credit (the “Letters of Credit”) in an aggregate amount not to exceed, at any one time outstanding, ~~$10,000,000~~$10.0 million for the Company. The aggregate amount of outstanding Letters of Credit are reserved against the credit availability under the Maximum Revolver Amount. The Company incurs a 0.50% per annum unused line fee on the unborrowed balance of the Revolver which is paid quarterly.

Loans under the Revolver may be borrowed, repaid and reborrowed until August 6, 2024 (the “Maturity Date”), at which time all amounts borrowed under the Revolver must be repaid. As of June 30, 2020, the Company had no borrowings outstanding under the Revolver or related sub-facility.

Covenants

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

•Incur additional indebtedness or guarantee indebtedness of others;

•Create liens on their assets;

•Make investments, including certain acquisitions;

•Enter into mergers or consolidations;

•Dispose of assets;

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

•Enter into transactions with affiliates; and

•Prepay indebtedness or make changes to certain agreements.

The Credit ~~Agreement also contains~~Facility has no financial covenants as long as less than 35% of the Revolver is drawn as of the last day of any fiscal quarter. If 35% of the Revolver is drawn as of the last day of a ~~financial covenant that requires~~given fiscal quarter the Company will be required to maintain a Total Leverage Ratio (the ratio of funded indebtedness as of such date less the amount of unrestricted cash and cash equivalents of the Company and its guarantors in an amount not to exceed ~~$50,000,000,~~$50.0 million, to adjusted EBITDA (calculated on a pro forma basis including giving effect to any acquisition)), measured on a quarter-end basis for each four consecutive fiscal quarters then ended, of not greater than 6.00 to 1.00. ~~This financial~~

In addition, the Credit Facility contains customary events of default subject to customary cure periods for certain defaults that include, among others, non-payment defaults, inaccuracy of representations and warranties, covenant ~~however, is only~~defaults, cross-defaults to certain other material indebtedness, change in ~~effect if, as~~control, bankruptcy and insolvency defaults and material judgment defaults. The occurrence of an event of default could result in the acceleration of Term Loans and Revolver and a right by the agent and lenders to exercise remedies. At the election of the ~~last day~~lenders, a default interest rate shall apply on all obligations during an event of ~~any fiscal quarter, beginning with the fiscal quarter ended December 31, 2019, the aggregate outstanding amount of all Loans and Letters of Credit under the Revolver facility~~default, at ~~such time is~~a rate per annum equal to ~~or greater than 35% of~~2.00% above the ~~aggregate outstanding revolving commitments as of the most recently ended fiscal quarter.~~

applicable interest rate. The Term Loan and Revolver are secured by substantially all of the Company's assets. As of ~~September~~June 30, ~~2019~~2020 the Company was in compliance with all covenants under the Credit Facility.

Cash interest costs averaged ~~6.3%~~5.4% and ~~6.6%~~6.0% for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and for the year ended December 31, ~~2018,~~2019, respectively.

In addition, as of June 30, 2020 and December 31, 2019 the Company had $12.6 million and $13.6 million, respectively, of unamortized deferred financing costs associated with the Credit Facility. These financing costs will be amortized to non-cash interest expense over the remaining term of the Credit Facility.

As a result of the paydown of our previous credit facility, the Company was required to write off debt issuance cost of $2.3 million as Loss on debt extinguishment, related to the unamortized debt discount on our previous term loan.

7. Net Loss Per Share

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


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended June 30,				Six Months Ended June 30,
		2019		2018		2019		2018			2020		2019		2020		2019

Numerator:	Numerator:									Numerator:
Net Loss	Net Loss	$	(12,307)	$	(4,250)	$	(25,506)	$	(12,641)	Net Loss	$	(14,159)	$	(5,369)	$	(34,240)	$	(13,199)

Denominator:	Denominator:									Denominator:
Weighted–average common shares outstanding, basic and diluted	Weighted–average common shares outstanding, basic and diluted	24,568,483		20,089,919		22,550,232		19,916,907		Weighted–average common shares outstanding, basic and diluted	25,032,996		22,619,805		25,057,715		21,531,216
Net loss per common share, basic and diluted	Net loss per common share, basic and diluted	$	(0.50)	$	(0.21)	$	(1.13)	$	(0.63)	Net loss per common share, basic and diluted	$	(0.57)	$	(0.24)	$	(1.37)	$	(0.61)

Due to the net losses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018,~~2019, respectively, basic and diluted loss per share were the same, as the effect of all potentially dilutive securities would have been anti–dilutive. The following table sets forth the anti–dilutive common share equivalents as of ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018:~~2019:

September 30,
2019 2018
Stock options 330,590 410,506
Restricted stock awards 709,444 1,473,898
Restricted stock units⁽¹⁾
903,643 —
Total anti–dilutive common share equivalents 1,943,677 1,884,404

~~(1)~~During the three and nine months ended September 30, 2019 the Company granted restricted stock units under its 2014 Equity Incentive Plan for the first time in lieu of restricted stock awards. See Note 10. Stockholders' Equity in the notes to our unaudited condensed consolidated financial statements for more information.


	June 30,
	2020	2019

Stock options	320,840	345,792
Restricted stock awards	197,623	773,860
Restricted stock units	1,778,557	891,329
Performance restricted stock units	66,297	—
Total anti–dilutive common share equivalents	2,363,317	2,010,981

8. ~~Leases~~

~~Operating Leases~~

The Company leases office space under operating leases that expire between 2019 and 2025. The terms of the Company's non-cancelable operating lease arrangements typically contain fixed rent increases over the term of the lease, rent holidays and provide for additional renewal periods. Rent expense on these operating leases is recognized over the term of the lease on a straight-line basis.

~~Finance Leases~~

The current and long-term portion of finance lease obligations are recorded in other current liabilities and other long-term liabilities line items on the balance sheet, respectively. The Company's finance lease agreements are generally for ~~four~~ ~~years and contain a bargain purchase option at the end of the lease term.~~

~~The components of lease expense were as follows (in thousands):~~

Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Operating lease cost $ 819 1,966
Finance lease costs:
Amortization of right-of-use assets 152 611
Interest on lease liabilities 22 64
Total lease costs $ 993 2,641

~~Other information about lease amounts recognized in our consolidated financial statements is summarized as follows:~~

Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities (in thousands):
Operating cash flows from operating leases $ 807 $ 2,231
Operating cash flows form finance leases $ 16 $ 68
Financing cash flows from finance leases $ 120 $ 503
Right-of-use assets obtained in exchange for lease obligations (in thousands):
Operating leases $ 231 $ 2,541
Weighted average remaining lease term (in years):
Operating leases 4.3
Finance leases 1.2
Weighted average discount rate
Operating leases 6.4 %
Finance leases 5.7 %

~~Future minimum payments for operating and finance lease obligations and purchase commitments are as follows (in thousands):~~

Finance Leases Operating
Leases
Remainder of 2019 $ 37 $ 712
2020 85 1,768
2021 10 1,308
2022 10 1,187
2023 6 1,094
Thereafter — 1,000
Total minimum lease payments 148 7,069
Less amount representing interest (18) (1,039)
Present value of lease liabilities $ 130 $ 6,030
Accrued expenses and other current liabilities $ 123 $ —
Operating lease liabilities, current — 2,045
Operating lease liabilities, noncurrent — 3,985
Other long-term liabilities 7 —
Total lease liabilities $ 130 $ 6,030

9. Commitments and Contingencies

Purchase Commitments

The Company has ~~an outstanding~~purchase commitments related to hosting services, third-party technology used in the Company's solutions and for other services the Company purchases as part of normal operations. In certain cases these arrangements require a minimum annual purchase commitment. As of June 30, 2020, the remaining aggregate minimum purchase commitment ~~with Amazon Web Services (“AWS”) to support its cloud infrastructure in conjunction with the consolidation and elimination of~~under these arrangements was approximately $8.3 million through 2024. Obligations under contracts that we can cancel without a substantial portion of its physical cloud infrastructure formerly maintained around the United States, Canada and the UK. Total expense with AWS for the three months ended September 30, 2019 and September 30, 2018 were approximately $1.5 million and $1.1 million, respectively, and for the nine months ended September 30, 2019 and September 30, 2018 were approximately $4.2 million and $2.6 million, respectively. The remaining purchase obligation after September 30, 2019 through June 30, 2021 is $1.4 million.significant penalty are not included.

In addition, the Company purchased software development services pursuant to a technology services agreement with DevFactory FZ-LLC for the three months ended ~~September~~June 30, 2020 and June 30, 2019 ~~and September 30, 2018~~ totaling ~~$1.2~~$1.8 million and ~~$0.8~~$1.2 million, respectively, and for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018~~2019 were approximately $3.7 million and ~~$2.4~~$2.5 million, respectively. The remaining purchase obligation after ~~September~~June 30, ~~2019~~2020 through December 31, ~~2019~~2020 is ~~$1.2~~$3.7 million. See Note 12. Related Party Transactions for more information regarding our purchase commitment to this related party.

Litigation

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

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

statements until realized.

1917

~~10.~~9. Stockholders' Equity

Registration Statement

On December 12, 2018, the Company filed a registration statement on Form S-3 (File No. 333-228767) (the “S-3”), to register Upland securities in an aggregate amount of up to $250.0 million for offerings from time to time. On May 13, 2019, the Company completed a registered underwritten public offering pursuant to the S-3 of 3,795,000 shares of the Company's $0.0001 par value common stock for an offering price to the public of $42.00 per share. This included the 495,000 shares issuable pursuant to a fully exercised option to purchase additional shares granted to the underwriters of the offering. The net proceeds of the offering of $151.1 million, net of issuance costs of $8.3 million, were used for general business purposes, including the funding of acquisitions.

~~Foreign Currency Translation~~Accumulated Comprehensive Income (Loss)

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

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


	June 30, 2020		December 31, 2019
Foreign currency translation adjustment	$	(6,770)	$	(4,530)
Unrealized translation gain (loss) on foreign currency denominated intercompany loans	(6,298)		883
Unrealized gain (loss) on interest rate swaps	(32,632)		2,424
Total accumulated other comprehensive loss	$	(45,700)	$	(1,223)

Income tax expense/benefit allocated to each component of other comprehensive income (loss) is not material.

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

The Company has foreign currency denominated intercompany loans that were used to fund the acquisitions of foreign subsidiaries. Due to the long-term nature of the loan, the foreign currency gains (losses) resulting from re-measurement are recognized as a component of accumulated other comprehensive income (loss). ~~During~~As of April 1, 2020 the three and nine months ended September 30, 2019, a foreign currency translation adjustment loss of $3.6 million and $3.6 million, respectively, was recognized as a component of accumulated other comprehensive income (loss) relatedCompany amended the loan agreements to ~~this long-term intercompany loan.~~be denominated in U.S dollar.

Stock-Based Compensation

The Company recognized stock-based compensation expense from all awards in the following expense categories (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Cost of revenue $ 250 $ 195 $ 763 $ 464
Research and development 683 383 1,637 871
Sales and marketing 508 169 1,012 368
General and administrative 5,746 3,034 15,304 8,677
Total $ 7,187 $ 3,781 $ 18,716 $ 10,380

~~Restricted Stock Awards~~

~~Restricted share activity during the nine months ended September 30, 2019 was as follows:~~

Number of
Restricted Shares
Outstanding Weighted-Average Grant Date Fair Value
Unvested balances at December 31, 2018 997,014 $ 23.93
Awards vested (279,403) 23.85
Awards forfeited (8,167) 28.06
Unvested balances at September 30, 2019 709,444 $ 23.91


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Cost of revenue	$	570	$	353	$	888	$	513
Research and development	1,019		632		1,634		953
Sales and marketing	898		365		1,447		504
General and administrative	8,493		5,551		16,331		9,559
Total	$	10,980	$	6,901	$	20,300	$	11,529

2018

Restricted Stock Units

~~During the nine months ended September 30,~~Beginning in 2019, the Company ~~granted~~began granting restricted stock units under its 2014 Stock Incentive Plan, in lieu of restricted stock awards, primarily for stock plan administrative purposes. Restricted stock unit activity during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was as follows:


		Number of Restricted Stock Units Outstanding	Weighted-Average Grant Date Fair Value			Number of Restricted Stock Units Outstanding	Weighted-Average Grant Date Fair Value
Unvested balances at December 31, 2018
Unvested balances at December 31, 2019					Unvested balances at December 31, 2019	790,807	$	39.55
Units granted	Units granted	1,013,747	39.31		Units granted	1,281,523	40.30
Units vested	Units vested	(105,104)	34.83		Units vested	(205,053)	40.55
Awards forfeited	Awards forfeited	(5,000)	41.73		Awards forfeited	(88,720)	42.09
Unvested balances at September 30, 2019		903,643	$	39.82
Unvested balances at June 30, 2020					Unvested balances at June 30, 2020	1,778,557	$	39.85

Performance Based Restricted Stock Units

In 2020 50 percent of the awards made to our Chief Executive Officer were performance based restricted stock units ("PRSUs"). The PRSU agreement provides that the quantity of units subject to vesting may range from 0% to 300% of the units granted per the table below based on the Company's absolute total shareholder return at the end of the eighteen month performance period. Units granted per the table below are based on a 100% target payout. Compensation expense is recognized over the required service period of the grant and is determined based on the grant date fair value of the award and is not subject to fluctuation due to achievement of the underlying market-based target. The Company did not grant PRSUs prior to 2020.

PRSU activity during the six months ended June 30, 2020 was as follows:


	Number of PRSUs Outstanding	Weighted-Average Grant Date Fair Value (1)
Unvested balances at December 31, 2019	—	$	—
Units granted	66,297	79.72


Unvested balances at June 30, 2020	66,297	$	79.72

(1) Fair value is calculated based on the grant closing stock price of $41.48 as of February 24, 2020 multiplied by a fair value factor of 192.20% as determined using a Monte Carlo simulation.

Significant assumptions used in the Monte Carlo simulation model for the PRSUs granted during the six months ended June 30, 2020 are as follows:


			June 30, 2020
Expected volatility			45.1%
Risk-free interest rate			1.3%
Remaining performance period (in years)			1.35
Dividend yield			—

Restricted Stock Awards

Restricted share activity during the six months ended June 30, 2020 was as follows:


	Number of Restricted Shares Outstanding	Weighted-Average Grant Date Fair Value
Unvested balances at December 31, 2019	371,217	$	28.26

Awards vested	(149,590)	27.20
Awards forfeited	(24,004)	28.45
Unvested balances at June 30, 2020	197,623	$	29.03

Stock Option Activity

Stock option activity during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was as follows:

Number of
Options
Outstanding Weighted–
Average
Exercise
Price
Outstanding at December 31, 2018 408,899 $ 8.08
Options exercised (77,444) 6.12
Options forfeited (556) 7.74
Options expired (309) 1.49
Outstanding at September 30, 2019 330,590 $ 8.55


	Number of Options Outstanding	Weighted– Average Exercise Price
Outstanding at December 31, 2019	329,698	$	8.57

Options exercised	(8,712)	6.13

Options expired	(146)	1.79
Outstanding at June 30, 2020	320,840	$	8.64

~~11.~~10. Revenue Recognition

Revenue Recognition Policy

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

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

•Identification of the contract with a customer

•Identification of the performance obligations in the contract

•Determination of the transaction price

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

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

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

2120

Subscription and Support Revenues

The Company's software solutions are available for use as hosted application arrangements under subscription fee agreements without licensing perpetual rights to the software. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company's solution is made available to the customer. As our customers have access to use our solutions over the term of the contract agreement we believe this method of revenue recognition provides a faithful depiction of the transfer of services provided. Our subscription contracts are generally ~~one~~1 to ~~three~~3 years in length. Amounts that have been invoiced are recorded in accounts receivable and deferred revenues or revenues, depending on whether the revenue recognition criteria have been met. Additional fees for monthly usage above the levels included in the standard subscription fee are recognized as revenue at the end of each month and is invoiced concurrently.

Perpetual License Revenues

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

Professional Services Revenue

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

Messaging-related Revenue

The Company recognizes subscription revenue for its digital engagement application which provides short code connectivity for its two-way SMS programs and campaigns. The Company evaluates whether it is appropriate to recognize revenue based on the gross amount billed to its customers for these ~~services.~~services or net of telecom messaging costs incurred from third parties in fulfilling the Company’s service obligations. Since the Company is primarily obligated in these transactions, has latitude in establishing prices associated with its messaging program management services, is responsible for fulfillment of the transaction, and has credit risk, revenue is recorded on a gross basis. While none of the factors individually are considered presumptive or determinative, in reaching conclusions on gross versus net revenue recognition, the Company places the most weight on the analysis of whether or not it is the primary obligor in the arrangement.

Significant Judgments

Performance Obligations and Standalone Selling Price

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

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

Other Considerations

The Company evaluates whether it is the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis) for vendor reseller agreements. Generally, the Company reports revenues from these types of contracts on a gross basis, meaning the amounts billed to customers are recorded as revenues, and expenses incurred are recorded as cost of revenues. Where the Company is the principal, it first obtains control of the inputs to the specific good or service and directs

2221

their use to create the combined output. The Company's control is evidenced by its involvement in the integration of the good or service on its platform before it is transferred to its customers, and is further supported by the Company being primarily responsible to its customers and having a level of discretion in establishing pricing. Revenues provided from agreements in which the Company is an agent are immaterial.

~~Payment terms and conditions vary by contract type, although terms generally include a requirement~~Deferred revenues primarily consist of ~~payment within 30~~amounts that have been billed to ~~60 days and include no general rights of return. In instances where the timing~~or received from customers in advance of revenue recognition ~~differs~~and prepayments received from customers in advance for maintenance and other services, as well as initial subscription fees. We recognize deferred revenues as revenues when the ~~timing of invoicing, we have determined our contracts~~services are performed, and the corresponding revenue recognition criteria are met. Customer prepayments are generally ~~do not include a significant financing component. The primary purpose~~applied against invoices issued to customers when services are performed and billed. Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing ~~terms~~and when payment is due is not significant. For certain products our services and customer types, we require payment before the products or services are delivered to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. Example includes invoicing at the ~~beginning of a subscription term with revenue recognized ratably over the contract period.~~customer.

Contract Balances

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

Unbilled Receivables

Unbilled receivables represent amounts for which the Company has recognized revenue, pursuant to its revenue recognition policy, for software licenses already delivered and professional services already performed, but billed in arrears and for which the Company believes it has an unconditional right to payment. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, unbilled receivables were ~~$4.8~~$5.5 million and ~~$3.7~~$5.1 million, respectively.

Deferred Commissions

Sales commissions earned by our sales force, and related payroll taxes, are considered incremental and recoverable costs of obtaining a contract with a customer. Deferred commissions and other costs for ~~a particular~~new customer ~~agreement for initial~~ contracts are capitalized upon contract signing and amortized over the expected life of the customer relationships, which has been determined to be approximately 6 years based on historical data and managements judgment ~~once~~in a pattern similar to how revenue ~~recognition criteria~~is recognized. Commissions paid on renewal contracts are ~~met.~~not commensurate with commissions paid on new customer contracts, as such, deferred commissions related to renewals are capitalized and amortized over the estimated contractual renewal term of 18 months. We utilized the 'portfolio approach' practical expedient permitted under ASC 606-10-10-4, which allows entities to apply the guidance to a portfolio of contracts with similar characteristics as the effects on the financial statements of this approach would not differ materially from applying the guidance to individual contracts. The portion of capitalized costs expected to be amortized during the succeeding twelve-month period is recorded in current assets as deferred commissions, current, and the remainder is recorded in long-term assets as deferred commissions, net of current portion. Amortization expense is included in sales and marketing expenses in the accompanying condensed consolidated statements of operations. Deferred commissions are reviewed for impairment whenever events or circumstances indicate their carrying value may not be recoverable consistent with the Company's long-lived assets policy. No indicators of impairment were identified during the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020.

The following table presents the activity impacting deferred commissions for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 (in thousands):


Balance at December 31, ~~2018~~2019	$	~~8,925~~11,822


Capitalized deferred commissions	~~6,267~~4,388
Amortization of deferred commissions	~~(2,555)~~(1,900)
Balance at ~~September~~June 30, ~~2019~~2020	$	~~12,637~~14,310

Deferred Revenue

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

Deferred revenue is mainly unearned revenue related to subscription services and support services. During the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, we recognized ~~$47.2~~$51.1 million and $2.3 million of subscription services and professional services

revenue, respectively, that was included in the deferred revenue balances at the beginning of the period. In addition, during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 we recognized ~~$2.4~~$3.3 million in revenue that was included in the acquired deferred revenue ~~balances~~balance of our ~~2019 acquisitions~~2020 acquisition as disclosed in Note 2. Acquisitions.

Remaining Performance Obligations

As of ~~September~~June 30, ~~2019,~~2020, approximately ~~$166.4~~$242.8 million of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 70% of these remaining performance obligations over the next 12 months, with the balance recognized thereafter.

Disaggregated Revenue

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

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


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended June 30,				Six Months Ended June 30,
		2019		2018		2019		2018			2020		2019		2020		2019
Revenues:	Revenues:									Revenues:
Subscription and support:	Subscription and support:									Subscription and support:
United States	United States	$	36,503	$	27,966	$	100,778	$	76,685	United States	$	50,619	$	34,436	$	96,590	$	64,275
United Kingdom	United Kingdom	9,334		1,277		28,082		4,039		United Kingdom	9,350		9,432		19,346		18,748
Canada	Canada	2,501		1,355		6,233		4,084		Canada	3,360		1,348		7,942		3,732
Other International	Other International	2,721		3,321		9,664		9,994		Other International	4,370		3,499		7,712		6,943
Total subscription and support revenue	Total subscription and support revenue	51,059		33,919		144,757		94,802		Total subscription and support revenue	67,699		48,715		131,590		93,698
Perpetual license:	Perpetual license:									Perpetual license:
United States	United States	830		787		1,882		1,805		United States	222		484		504		1,052
United Kingdom	United Kingdom	20		4		37		94		United Kingdom	—		8		16		17
Canada	Canada	37		71		94		251		Canada	36		15		57		57
Other International	Other International	88		53		194		1,074		Other International	233		68		275		106
Total perpetual license revenue	Total perpetual license revenue	975		915		2,207		3,224		Total perpetual license revenue	491		575		852		1,232

Professional services:	Professional services:									Professional services:
United States	United States	2,229		1,939		6,764		5,145		United States	2,197		2,555		4,907		4,535
United Kingdom	United Kingdom	525		87		1,709		237		United Kingdom	375		693		1,189		1,184
Canada	Canada	114		107		406		455		Canada	96		172		234		292
Other International	Other International	163		177		728		842		Other International	457		303		575		565
Total professional service revenue	Total professional service revenue	3,031		2,310		9,607		6,679		Total professional service revenue	3,125		3,723		6,905		6,576
Total revenue	Total revenue	$	55,065	$	37,144	$	156,571	$	104,705	Total revenue	$	71,315	$	53,013	$	139,347	$	101,506

12. Related Party Transactions

We are a party to 2 agreements with companies controlled by a non-management investor in the Company:

•On March 28, 2017, the Company entered into an amendment to the Amended and Restated Technology Services Agreement with DevFactory FZ LLC ("DevFactory") to extend the initial term end date from December 31, 2017 to December 31, 2021. Additionally, the Company amended the option for either party to renew annually for one additional year. The effective date of the amendment is January 1, 2017. DevFactory is an affiliate of ESW Capital LLC, which holds more than 5% of the Company's capital stock. The Company has an outstanding purchase commitment in ~~2019~~2020 for software development services pursuant to this agreement in the amount of ~~$4.9~~$7.3 million. For years after ~~2019,~~2020, the purchase commitment amount for software development services will be equal to the prior year purchase commitment increased (decreased) by the percentage change in total revenue for the prior year as compared to the preceding year. For example, if ~~2019~~2020 total revenues increase by 10% as compared to ~~2018~~2019 total revenues, then the ~~2020~~2021 purchase commitment will increase by approximately ~~$0.5~~$0.8 million from the ~~2019~~2020 purchase commitment amount to approximately ~~$5.4~~$8.1 million. The Company purchased software development services pursuant to this agreement with DevFactory of ~~$1.2~~$1.8 million and ~~$0.8~~$1.2 million during the three months ended ~~September~~June 30, 2020 and June 30, 2019, ~~and September 30, 2018,~~ respectively, and for the six months ended June 30, 2020 and June 30, 2019 were approximately $3.7 million and ~~$2.4~~$2.5 million, ~~during the nine months ended September~~respectively. As of June 30, 2020 and December 31, 2019 amounts included in accounts payable owed to this company totaled $1.8 million and ~~September 30, 2018,~~$1.2 million, respectively.

•The Company purchased services from Crossover, Inc. ("Crossover"), a company controlled by ESW Capital, LLC (a non-management investor) during the three months ended ~~September~~June 30, 2020 and June 30, 2019 ~~and September 30, 2018~~ of approximately ~~$0.8~~$1.4 million and ~~$0.8~~$0.9 million, respectively, and ~~during~~for the ~~nine~~six months ended ~~September~~June 30, 2020 and June 30, 2019 ~~and September 30, 2018~~were approximately ~~$2.7~~$2.5 million and ~~$2.4~~$1.9 million, respectively. Crossover provides a proprietary technology system to help the Company identify, screen, select, assign, and connect with necessary resources from time to time to perform technology software development and other services throughout the Company, and track productivity of such resources. While there are 0 purchase commitments with Crossover, the Company continues to use its services in ~~2019.~~2020. As of June 30, 2020 and December 31, 2019 amounts included in accounts payable owed to this company totaled $1.4 million and $0.4 million, respectively.

The Company has an arrangement with a former subsidiary, Visionael Corporation ("Visionael"), to provide management, human resource, payroll and administrative services. John T. McDonald, the Company's Chief Executive Officer and Chairman of the Board, beneficially holds an approximate 26.18% interest in Visionael. The Company received fees from this arrangement of $15,000 and $15,000 during the three months ended ~~September~~June 30, 2020 and June 30, 2019, ~~and September 30, 2018 totaling $15,000 and $15,000,~~ respectively, and ~~during~~$30,000 and $30,000 for the ~~nine~~six months ended ~~September~~June 30, 2020 and June 30, 2019, ~~and September 30, 2018 totaling $45,000 and $45,000,~~ respectively.

~~13. Subsequent Events~~

~~Subsequent to the period ended September 30, 2019 the Company completed the below acquisition.~~

On October 1, 2019, the Company completed its acquisition of InGenius Software Inc., a Canadian corporation (“InGenius”), pursuant to a Stock Purchase Agreement dated October 1, 2019 ("Purchase Agreement"), by and among Upland, 11636243 Canada Inc., a Canadian corporation and a wholly owned indirect subsidiary of the Company ("Acquisition Sub"), InGenius, the Stockholders of InGenius and Dale Gantous, as Stockholder Representative. Pursuant to the Purchase Agreement, Upland, through the Acquisition Sub, purchased 100% of outstanding shares of InGenius. The purchase price paid for InGenius was $26.4 million in cash at closing and a $3.0 million cash holdback payable in 12 months (subject to indemnification claims).

On October 4, 2019, the Company’s wholly owned subsidiary, PowerSteering Software Limited, a limited company incorporated under the laws of England and Wales (“PowerSteering UK”), entered into an agreement to purchase the shares comprising the entire issued share capital of Altify Ireland Limited, a private company limited by shares organized and existing under the laws of Ireland (“Altify”), pursuant to a Share Purchase Agreement by and among PowerSteering UK, the sellers of shares of Altify named therein, and Roy Enright, as sellers' representative (the “Share Purchase Agreement”). The aggregate consideration paid for the Altify shares was $84 million in cash at closing. The purchase price consideration paid by the Company came from the Company's cash on hand and borrowings under the Company's credit facility.

In conjunction with the acquisition of Altify, $59 million was drawn on Upland's revolving credit facility, taking Upland's gross debt outstanding to $409 million. With approximately $56 million of cash on-hand, Upland's net debt immediately following the acquisition was approximately $353 million.

In addition, subsequent to September 30, 2019, in connection with the periodic review of its business and in light of Upland's new go-to-market strategy that is centered on thematic solution suites of related products, Upland has decided to divest and/or sunset certain small non-strategic customer contracts and related assets (the “Sunset Assets”). The Sunset Assets accounted for approximately 1% of the Company's assets as of September 30, 2019.

2524

Table of Contents

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

Forward Looking Statements

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, filed on March ~~15, 2019.~~2, 2020. In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements generally relate to future events or our future financial or operating performance. Forward-looking statements may be identified by the use of forward-looking words such as “anticipate,” “believe,” “may,” “will,” “continue,” “seek,” “estimate,” “intend,” “hope,” “predict,” “could,” “should,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions, although not all forward-looking statements contain these words.

~~Factors or risks that could cause our actual results to differ from the results we anticipate~~ These forward-looking statements include, but are not limited ~~to:~~to, statements concerning the following:

•our financial performance and our ability to achieve or sustain profitability or predict future results;

•our plans regarding future acquisitions and our ability to consummate and integrate acquisitions;

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

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

•our ability to attract and retain customers;

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

•our ability to comply with privacy laws and regulations;

•our ability to deliver high-quality customer service;

•the growth of demand for enterprise work management applications;

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

•maintaining our senior management team and key personnel;

•our ability to maintain and expand our direct sales organization;

•the performance of our resellers;

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

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

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

•~~the operation and reliability of our third-party data centers and hosting providers;~~

•~~our ability to manage our consultants and contractors;~~

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

•the anticipated impact on our business of the COVID-19 pandemic and related public health measures;

•economic and financial conditions;

•our ability to integrate our applications with other software applications;

•maintaining and expanding our relationships with third parties;

•costs associated with defending intellectual property infringement and other claims;

•our ability to maintain, protect and enhance our brand and intellectual property;

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

•our expectations with ~~privacy laws~~regard to revenue from perpetual licenses and ~~regulations;~~professional services;

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

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

•other risk factors included under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, filed with the SEC on March ~~15, 2019,~~2, 2020, as updated by this Quarterly Report on Form 10-Q and periodically updated as necessary in our future quarterly reports on Form 10-Q and other filings that we make with the SEC.

Table of Contents

The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from our forward-looking statements, including risks and uncertainties detailed in this and our other reports and filings with the SEC. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the

~~Table of Contents~~

extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

Overview

We provide cloud-based enterprise work management software. We define enterprise work management software as software applications that enable organizations to plan, manage and execute projects and work. Our family of applications enables users to manage their projects, professional workforce and IT investments, automate document-intensive business processes, and effectively engage with their customers, prospects, and community via the web and mobile technologies.

The continued growth of an information-based economy has given rise to a large and growing group of knowledge workers who operate in dynamic work environments as part of geographically dispersed and virtual teams. We believe that manual processes and legacy on- premise enterprise systems are insufficient to address the needs of the modern work environment. In order for knowledge workers to be successful, they need to interact with intuitive enterprise work systems in a collaborative way, including real-time access. Today, legacy processes and systems are being disrupted and replaced by cloud-based enterprise work management software that improves visibility, collaboration and productivity.

In response to these changes, we are providing organizations and their knowledge workers with software applications that better align resources with business objectives and increase visibility, governance, collaboration, quality of customer experience, and responsiveness to changes in the business environment. This results in increased work capacity, higher productivity, better execution, and greater levels of customer engagement. Our applications are easy-to-use, scalable, and offer real-time collaboration for knowledge workers distributed on a local or global scale. Our software applications address diverse enterprise work challenges ~~in the following enterprise solution categories:~~and our four cloud offerings are as follows:

•Customer Experience ~~Management.~~Management Cloud.The Upland Customer Experience Management Cloud, or CXM ~~solutions enable~~Cloud, enables organizations to manage the complete customer ~~relationships~~lifecycle from awareness to acquisition to advocacy across multiple channels - including email, short message service, or SMS, multimedia messaging service, or MMS, web, social, and mobile apps. ~~Upland products within this solution suite include Upland Mobile Messaging, Rant & Rave, Adestra, RightAnswers and Postup.~~

•Enterprise Sales ~~Enablement.~~and Marketing Cloud. The Upland Enterprise Sales ~~Enablement solutions enable~~and Marketing Cloud, or ESM Cloud, enables sales and marketing organizations to ~~automate delivery of processes,~~optimize sales activities, digital content ~~systems,~~production, automate key proposal and reference processes, and track key metrics ~~at multiple stages of the sales process. Upland products within this solution suite include Qvidian, RO Innovation, LeadLander~~to more effectively and ~~Kapost.~~

•~~Professional Services Automation.~~ ~~Upland Professional Services Automation, or PSA, solutions enable services organizations to manage professional services delivery~~predictably drive revenue retention and ~~related functions. Upland products within this solution suite include Tenrox, RightAnswers, FileBound, RO Innovation, and Qvidian.~~growth.

•Project and ~~Financial Management.~~IT Management Cloud. The Upland Project and ~~Financial~~IT Management ~~solutions enable enterprises~~Cloud, or PITM Cloud, enables professional services and information technology (“IT”) organizations to better manage services delivery, project portfolios, enterprise knowledge sharing and ~~track, analyze~~spending across projects and ~~manage IT, cloud, and~~ IT/telecom ~~spending. Upland products within this solution suite include PowerSteering, Eclipse PPM, RightAnswers, ComSci, and Cimpl.~~infrastructure.

•~~Enterprise Knowledge Management.~~Document Workflow Cloud. The Upland ~~Enterprise Knowledge Management,~~Document Workflow Cloud, or ~~KM, solutions enable knowledge-sharing across different departments within an organization. Upland products within this solution suite include RightAnswers, Tenrox, and PowerSteering.~~

•~~Secure Document Services.~~ ~~Upland Secure Document Services solutions enable organizations~~DW Cloud, enables enterprises to manage and automate document intensive business processes with data security ~~of data~~ through scan and fax platforms, data monitoring and breach prevention capabilities, and the automated routing of content to its final destination. ~~Upland products within this solution suite include AccuRoute, FileBound, and InterFAX.~~

•~~Document Lifecycle Automation.~~ Upland Document Lifecycle solutions enable users to digitize, organize, automate, integrate, analyze and optimize high volume processes. Upland products within this solution suite include AccuRoute, FileBound, Qvidian, and RO Innovation.

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

Our subscription agreements are typically sold either on a per-seat basis or on a minimum contracted volume basis with overage fees billed in arrears, depending on the application being sold. We service customers ranging from large global

~~Table of Contents~~

corporations and government agencies to small- and medium-sized businesses. We have more than 9,000 customers with over 1,000,000 users across a broad range of industries, including financial services, retail, technology, manufacturing, legal, education, consumer goods, media, telecommunications, government, non-profit, food and beverage, healthcare and life sciences.

Table of Contents

Through a series of acquisitions and integrations, we have established a diverse family of software applications under the Upland brand and in the product solution categories listed above, each of which addresses a specific enterprise work management need. Our revenue has grown from $22.8 million in 2012 to ~~$149.9~~$222.6 million in ~~2018~~2019 (and to ~~$156.6~~$139.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019)~~2020), representing an approximate ~~558%~~878% growth rate between 2012 and 2018. Historically, our revenues have been primarily generated in the United States, however, as a result of acquisitions made over the past three years of companies with more international presence, domestic revenue as a percentage of total revenue has decreased.2019. During the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 foreign revenue as a percent of total revenue ~~increased~~decreased to ~~30%~~27% compared to ~~22%~~30% during the year ended December 31, 2018. The increase in foreign revenue as a percent of total revenue is due primarily to the acquisitions of Rant & Rave and Adestra during the fourth quarter of 2018, as a majority of each company's operations reside outside the United States.2019. See Note ~~11.~~10. Revenue Recognition in the notes to our unaudited condensed consolidated financial statements for more information regarding our revenue as it relates to domestic and foreign operations.

In the fourth quarter of 2019, in connection with the periodic review of its business and in light of Upland’s new go-to-market strategy that is centered on thematic solution suites of related products, Upland has determined to divest of and/or sunset certain minor non-strategic customer contracts and related website management and analytics assets (collectively referred to as “Sunset Assets”). Refer to Note 2. Acquisitions and Note 4. Goodwill and Other Intangible Assets in our condensed consolidated financial statements for further discussion.

To support continued growth, we intend to pursue acquisitions within our core enterprise solution suites of complementary technologies and businesses. This will expand our product families, customer base, and market access resulting in increased benefits of scale. Consistent with our growth strategy, we have made ~~twenty-three~~twenty-six acquisitions from February 2012 through ~~September~~June 30, ~~2019.~~2020.

COVID-19 Impact

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout the U.S. and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. We cannot predict the extent to which the COVID-19 outbreak will impact our business or operating results, which is highly dependent on inherently uncertain future developments, including the severity of COVID-19 and the actions taken by governments and private businesses in relation to COVID-19 containment. As our platform is offered as a subscription-based service, the effect of the outbreak may not be fully reflected in our operating results until future periods, if at all. As of the date of this report, we do not yet know the extent of the negative impact on our ability to attract, serve, retain or upsell customers. Furthermore, existing and potential customers may choose to reduce or delay technology spending in response to the COVID-19 outbreak, or attempt to renegotiate contracts and obtain concessions, which may materially and negatively impact our operating results, financial condition and prospects.

As a result of the pandemic, Upland has taken certain measures to support the health and well-being of our employees, customers, partners and communities during this time of uncertainty. Prior to the wide-spread implementation of stay-at-home measures, approximately 60 percent of our employee and contractor workforce was already remote. This enabled us to quickly convert the entire company to remote work status to ensure the safety of our employees, while still allowing us to continue serving our customers without disruption. In addition, while we typically host virtual user conferences for our customers, we do not anticipate hosting any in person user group meetings for the remainder of 2020.

As approximately 95% of our revenue is associated with recurring revenue with minimal organic growth assumptions the disruptions related to the pandemic did not have a material adverse impact on our financial results for the six months ended June 30, 2020. While we have limited exposure to the industry verticals that have been hardest hit by the pandemic (including the travel, transportation, entertainment and retail industries) we have seen an impact to new bookings and churn which we attribute to COVID-19. We currently expect to see a continued impact to new bookings and churn during the second half of 2020 as a result of the pandemic, which may be partially mitigated by strength in our cloud offerings that enable our customers to digitally transform their organizations at a time when they must adapt to remote work and digital engagement even more quickly. We expect that current cash and cash equivalent balances and cash flows generated from operations will be sufficient to meet our domestic and international working capital needs for at least the next 12 months. We anticipate a pause in the pace of our acquisition activity until, at least, the fourth quarter of 2020 while we continue to gauge the overall economic impact of the pandemic and focus on evaluating our pipeline of opportunities. As a result, we anticipate acquisition related costs to continue to decrease for the remainder of 2020.

Key Metrics

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

Table of Contents

Adjusted EBITDA

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

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

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
(dollars in thousands)
Reconciliation of net income (loss) to Adjusted EBITDA:
Net loss $ (12,307) $ (4,250) $ (25,506) $ (12,641)
Add:
Depreciation and amortization expense 8,570 5,387 23,722 14,604
Interest expense, net 5,517 3,118 15,879 8,755
Loss on debt extinguishment 2,317 — 2,317 —
Other expense (income), net 228 744 1,681 965
Provision for income taxes 547 735 (6,166) 2,118
Stock-based compensation expense 7,187 3,781 18,716 10,380
Acquisition-related expense 7,457 2,497 24,444 8,739
Purchase accounting deferred revenue discount 1,176 1,052 2,458 3,470
Adjusted EBITDA $ 20,692 $ 13,064 $ 57,545 $ 36,390

~~Table of Contents~~


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019

	(dollars in thousands)
Reconciliation of net loss to Adjusted EBITDA:
Net loss	$	(14,159)	$	(5,369)	$	(34,240)	$	(13,199)
Add:

Depreciation and amortization expense	11,658		7,765		23,395		15,152
Interest expense, net	7,873		5,246		15,516		10,362

Other expense (income), net	15		692		1,417		1,453
Benefit from income taxes	(673)		(6,101)		(4,960)		(6,713)
Stock-based compensation expense	10,980		6,901		20,300		11,529
Acquisition-related expense	5,781		9,264		20,939		16,987


Purchase accounting deferred revenue discount	2,272		685		5,973		1,282
Adjusted EBITDA	$	23,747	$	19,083	$	48,340	$	36,853

We believe that Adjusted EBITDA provides useful information to management, investors and others in understanding and evaluating our operating results for the following reasons:

•Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired;

•our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, in the preparation of our annual operating budget, as a measure of our operating performance, to assess the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance because Adjusted EBITDA eliminates the impact of items that we do not consider indicative of our core operating performance;

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

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

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

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

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

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

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

Table of Contents

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

~~Table of Contents~~

Results of Operations

Consolidated Statements of Operations Data

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

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Amount Percent of Revenue Amount Percent of Revenue Amount Percent of Revenue Amount Percent of Revenue
(dollars in thousands, except share and per share data)
Revenue:
Subscription and support $ 51,059 93 % $ 33,919 91 % $ 144,757 92 % $ 94,802 91 %
Perpetual license 975 2 % 915 2 % 2,207 1 % 3,224 3 %
Total product revenue 52,034 95 % 34,834 93 % 146,964 93 % 98,026 94 %
Professional services 3,031 5 % 2,310 7 % 9,607 7 % 6,679 6 %
Total revenue 55,065 100 % 37,144 100 % 156,571 100 % 104,705 100 %
Cost of revenue:
Subscription and support ⁽¹⁾⁽³⁾
14,678 27 % 10,566 28 % 42,574 27 % 29,395 28 %
Professional services ⁽¹⁾
1,995 3 % 1,517 5 % 5,470 4 % 4,182 4 %
Total cost of revenue 16,673 30 % 12,083 33 % 48,044 31 % 33,577 32 %
Gross profit 38,392 70 % 25,061 67 % 108,527 69 % 71,128 68 %
Operating expenses:
Sales and marketing ⁽¹⁾
8,709 16 % 5,299 14 % 23,680 15 % 14,955 14 %
Research and development ⁽¹⁾
7,434 14 % 5,400 15 % 20,840 13 % 15,577 15 %
Refundable Canadian tax credits (133) — % (99) — % (304) — % (404) — %
General and administrative ⁽¹⁾⁽²⁾
12,196 22 % 8,011 22 % 34,232 22 % 23,475 22 %
Depreciation and amortization 6,427 12 % 3,606 10 % 17,430 11 % 9,589 9 %
Acquisition-related expenses 7,457 12 % 2,497 6 % 24,444 16 % 8,739 9 %
Total operating expenses 42,090 76 % 24,714 67 % 120,322 77 % 71,931 69 %
(Loss) from operations (3,698) (6) % 347 — % (11,795) (8) % (803) (1) %
Other Expense:
Interest expense, net (5,517) (10) % (3,118) (8) % (15,879) (10) % (8,755) (8) %
Loss on debt extinguishment (2,317) (4) % — — % (2,317) (1) % — — %
Other income (expense), net (228) — % (744) (2) % (1,681) (2) % (965) (1) %
Total other expense (8,062) (15) % (3,862) (10) % (19,877) (13) % (9,720) (9) %
Loss before provision for income taxes (11,760) (21) % (3,515) (10) % (31,672) (21) % (10,523) (10) %
Benefit from (provision for) income taxes (547) (1) % (735) (1) % 6,166 5 % (2,118) (2) %
Net loss $ (12,307) (22) % $ (4,250) (11) % $ (25,506) (16) % $ (12,641) (12) %
Net loss per common share, basic and diluted $ (0.50) $ (0.21) $ (1.13) $ (0.63)
Weighted-average common shares outstanding, basic and diluted 24,568,483 20,089,919 22,550,232 19,916,907
⁽¹⁾Includes stock-based compensation detailed under Share-based Compensation in Note 10 — Stockholders' Equity.
⁽²⁾ Includes General and administrative stock-based compensation of $5.7 million and $3.0 million for the three months September 30, 2019 and September 30, 2018, respectively, and $15.3 million and $8.7 million for the nine months ended September 30, 2019 and September 30, 2018, respectively. General and administrative expense excluding stock-based compensation as a percentage of total revenues was 12% and 13% for the three months ended September 30, 2019 and September 30, 2018, respectively, and 12% and 14% for the nine months ended September 30, 2019 and September 30, 2018, respectively.
⁽³⁾ Includes depreciation and amortization of $2.1 million and $1.8 million for the three months ended September 30, 2019 and September 30, 2018, respectively, and $6.3 million and $5.0 million for the nine months ended September 30, 2019 and September 30, 2018, respectively.


	Three Months Ended June 30,														Six Months Ended June 30,
	2020						2019						2020				2019
	Amount		Percent of Revenue		Amount		Percent of Revenue		Amount		Percent of Revenue		Amount		Percent of Revenue

	(dollars in thousands, except share and per share data)
Revenue:
Subscription and support	$	67,699	95	%	$	48,715	92	%	$	131,590	94	%	$	93,698	92	%
Perpetual license	491		1	%	575		1	%	852		1	%	1,232		1	%
Total product revenue	68,190		96	%	49,290		93	%	132,442		95	%	94,930		93	%
Professional services	3,125		4	%	3,723		7	%	6,905		5	%	6,576		7	%
Total revenue	71,315		100	%	53,013		100	%	139,347		100	%	101,506		100	%
Cost of revenue:
Subscription and support ⁽¹⁾⁽³⁾	21,200		30	%	14,622		28	%	41,139		30	%	27,896		27	%
Professional services ⁽¹⁾	2,472		3	%	1,961		3	%	4,734		3	%	3,475		4	%
Total cost of revenue	23,672		33	%	16,583		31	%	45,873		33	%	31,371		31	%
Gross profit	47,643		67	%	36,430		69	%	93,474		67	%	70,135		69	%
Operating expenses:
Sales and marketing ⁽¹⁾	11,820		17	%	7,989		15	%	22,751		16	%	14,971		15	%
Research and development ⁽¹⁾	10,488		15	%	7,008		13	%	19,908		14	%	13,406		13	%
Refundable tax credits	(194)		—	%	(85)		—	%	(496)		—	%	(171)		—	%
General and administrative ⁽¹⁾⁽²⁾	17,655		25	%	12,042		23	%	34,331		25	%	22,036		22	%
Depreciation and amortization	9,037		13	%	5,744		11	%	18,308		13	%	11,003		11	%
Acquisition-related expenses	5,781		7	%	9,264		17	%	20,939		15	%	16,987		16	%
Total operating expenses	54,587		77	%	41,962		79	%	115,741		83	%	78,232		77	%
Loss from operations	(6,944)		(10)	%	(5,532)		(10)	%	(22,267)		(16)	%	(8,097)		(8)	%
Other Expense:
Interest expense, net	(7,873)		(11)	%	(5,246)		(10)	%	(15,516)		(11)	%	(10,362)		(10)	%

Other income (expense), net	(15)		—	%	(692)		(1)	%	(1,417)		(1)	%	(1,453)		(2)	%
Total other expense	(7,888)		(11)	%	(5,938)		(11)	%	(16,933)		(12)	%	(11,815)		(12)	%
Loss before provision for income taxes	(14,832)		(21)	%	(11,470)		(21)	%	(39,200)		(28)	%	(19,912)		(20)	%
Benefit from income taxes	673		1	%	6,101		11	%	4,960		3	%	6,713		7	%


Net loss	$	(14,159)	(20)	%	$	(5,369)	(10)	%	$	(34,240)	(25)	%	$	(13,199)	(13)	%





Net loss per common share, basic and diluted	$	(0.57)			$	(0.24)			$	(1.37)			$	(0.61)
Weighted-average common shares outstanding, basic and diluted	25,032,996				22,619,805				25,057,715				21,531,216

⁽¹⁾Includes stock-based compensation detailed under Share-based Compensation in Note 9 — Stockholders' Equity.
⁽²⁾ Includes General and administrative stock-based compensation of $8.5 million and $5.6 million for the three months June 30, 2020 and June 30, 2019, respectively, and $16.3 million and $9.6 million for the six months ended June 30, 2020 and June 30, 2019, respectively. General and administrative expense excluding stock-based compensation as a percentage of total revenues was 13% and 12% for the three months ended June 30, 2020 and June 30, 2019, respectively, and 13% and 12% for the six months ended June 30, 2020 and June 30, 2019, respectively..


⁽³⁾ Includes depreciation and amortization of $2.6 million and $2.0 million for the three months ended June 30, 2020 and June 30, 2019, respectively, and $5.1 million and $4.1 million for the six months ended June 30, 2020 and June 30, 2019, respectively.

3029

Table of Contents

Comparison of the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

Revenue

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 % Change 2019 2018 % Change
(dollars in thousands)
Revenue:
Subscription and support $ 51,059 $ 33,919 51 % $ 144,757 $ 94,802 53 %
Perpetual license 975 915 7 % 2,207 3,224 (32) %
Total product revenue 52,034 34,834 49 % 146,964 98,026 50 %
Professional services 3,031 2,310 31 % 9,607 6,679 44 %
Total revenue $ 55,065 $ 37,144 48 % $ 156,571 $ 104,705 50 %
Percentage of revenue:
Subscription and support 93 % 91 % 92 % 91 %
Perpetual license 2 % 2 % 1 % 3 %
Total product revenue 95 % 93 % 93 % 94 %
Professional services 5 % 7 % 7 % 6 %
Total revenue 100 % 100 % 100 % 100 %


	Three Months Ended June 30,														Six Months Ended June 30,
	2020			2019			% Change		2020			2019			% Change

	(dollars in thousands)
Revenue:
Subscription and support	$	67,699		$	48,715		39	%	$	131,590		$	93,698		40	%
Perpetual license	491			575			(15)	%	852			1,232			(31)	%
Total product revenue	68,190			49,290			38	%	132,442			94,930			40	%
Professional services	3,125			3,723			(16)	%	6,905			6,576			5	%
Total revenue	$	71,315		$	53,013		35	%	$	139,347		$	101,506		37	%

Percentage of revenue:
Subscription and support	95		%	92		%			94		%	92		%
Perpetual license	1		%	1		%			1		%	1		%
Total product revenue	96		%	93		%			95		%	93		%
Professional services	4		%	7		%			5		%	7		%
Total revenue	100		%	100		%			100		%	100		%

For the Three Months Ended ~~September~~June 30, ~~2019~~

2020

Total revenue was ~~$55.1~~$71.3 million in the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$37.1~~$53.0 million in the three months ended ~~September~~June 30, ~~2018,~~2019, an increase of ~~$18.0~~$18.3 million, or ~~48%~~35%. The acquisitions not fully in the comparative period contributed ~~$16.2~~$17.2 million to the increase after the reduction of ~~$1.1~~$2.2 million purchase accounting deferred revenue discount in the three months ended ~~September~~June 30, ~~2019.~~2020. Total revenue related to Sunset Assets declined by $1.1 million as a result of decreased sales and marketing focus on those Sunset Assets. Our organic business (the “Organic Business”) excludes acquisitions closed during or subsequent to the prior year comparable period and business operations related to Sunset Assets. Therefore, total revenue for ~~the organic business~~our Organic Business increased by ~~$1.8~~$2.2 million , or 5%.

The increase in revenue from our Organic Business was primarily driven by an increase in CXM usage across verticals from election-year political campaigns and advocacy to media and retail.

Subscription and support revenue was ~~$51.1~~$67.7 million in the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$33.9~~$48.7 million in the three months ended ~~September~~June 30, ~~2018,~~2019, an increase of ~~$17.2~~$19.0 million, or ~~51%~~39%. The acquisitions not fully in the comparative period contributed ~~$15.3~~$16.6 million to the increase in subscription and support revenue after the reduction of ~~$1.1~~$2.2 million purchase accounting deferred revenue discount in the three months ended ~~September~~June 30, ~~2019.~~2020. Subscription and support revenue related to our Sunset Assets decreased $0.9 million as a result of decreased sales and marketing focus on those Sunset Assets. Therefore, subscription and support revenue for ~~the organic business~~our Organic Business increased by ~~$1.9~~$3.3 million, or 6%8%.

Perpetual license revenue was ~~$1.0~~$0.5 million in the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$0.9~~$0.6 million in the three months ended ~~September~~June 30, ~~2018, an increase~~2019, a decrease of $0.1 million, or 7%15%. The acquisitions not fully in the comparative period contributed no perpetual license revenue in the three months ended ~~September~~June 30, ~~2019.~~2020. Therefore, perpetual license revenue for ~~the organic business increased~~our Organic Business decreased by $0.1 million, or 7%15%.

Professional services revenue was ~~$3.0~~$3.1 million in the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$2.3~~$3.7 million in the three months ended ~~September~~June 30, ~~2018, an increase~~2019, a decrease of ~~$0.7~~$0.6 million, or ~~31%~~16%. The acquisitions not fully in the comparative period contributed ~~$0.9~~$0.6 million to the increase in professional services revenue in the three months ended ~~September~~June 30, ~~2019.~~2020. Professional services revenue related to our Sunset Assets decreased $0.2 million as a result of decreased sales and marketing focus on those Sunset Assets. Therefore, professional services revenue for ~~the organic business~~our Organic Business decreased by ~~$0.2~~$1.0 million, or ~~10%~~31%.

Table of Contents

For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~

2020

Total revenue was ~~$156.6~~$139.3 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$104.7~~$101.5 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, an increase of ~~$51.9~~$37.8 million, or ~~50%~~37%. The acquisitions not fully in the comparative period contributed ~~$47.3~~$35.4 million to the increase after the reduction of ~~$2.1~~$5.9 million purchase accounting deferred revenue discount in the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. Total Revenue related to Sunset Assets declined by $2.0 million as a result of decreased sales and marketing focus on those Sunset Assets. Therefore, total revenue for the ~~organic business~~Organic Business increased by ~~$4.6~~$4.4 million, or 5%.

~~Table of Contents~~

The increase in revenue from our Organic Business was primarily driven by an increase in CXM usage across verticals from election-year political campaigns and advocacy to media and retail.

Subscription and support revenue was ~~$144.8~~$131.6 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$94.8~~$93.7 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, an increase of ~~$50.0~~$37.9 million, or ~~53%~~40%. The acquisitions not fully in the comparative period contributed ~~$44.6~~$33.7 million to the increase in subscription and support revenue after the reduction of ~~$2.1~~$5.9 million purchase accounting deferred revenue discount in the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. Subscription and support revenue related to our Sunset Assets decreased $1.7 million as a result of decreased sales and marketing focus on those Sunset Assets. Therefore, subscription and support revenue for the ~~organic business~~Organic Business increased by ~~$5.4~~$5.9 million, or 6%7%.

Perpetual license revenue was ~~$2.2~~$0.9 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$3.2~~$1.2 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, a decrease of ~~$1.0,~~$0.3 million, or ~~32%~~31%. The acquisitions not fully in the comparative period contributed no perpetual license revenue in the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. Therefore, perpetual license revenue for the ~~organic business~~Organic Business decreased by ~~$1.0~~$0.3 million, or ~~32%~~31%.

Professional services revenue was ~~$9.6~~$6.9 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$6.7~~$6.6 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, an increase of ~~$2.9~~$0.3 million, or ~~44%~~5%. The acquisitions not fully in the comparative period contributed ~~$2.7~~$1.7 million to the increase in professional services revenue in the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. Professional services revenue related to our Sunset Assets decreased by $0.3 million as a result of decreased sales and marketing focus on those Sunset Assets. Therefore, professional services revenue for the ~~organic business increased~~Organic Business decreased by ~~$0.2~~$1.1 million, or 4%18%.

Cost of Revenue and Gross Profit Percentage


		Three Months Ended September 30,														Nine Months Ended September 30,														Three Months Ended June 30,					Six Months Ended June 30,
		2019			2018			% Change		2019			2018			% Change			2020			2019			% Change		2020			2019			% Change

		(dollars in thousands)																															(dollars in thousands)
Cost of revenue:	Cost of revenue:																	Cost of revenue:
Subscription and support ⁽¹⁾	Subscription and support ⁽¹⁾	$	14,678		$	10,566		39	%	$	42,574		$	29,395		45	%	Subscription and support ⁽¹⁾	$	21,200		$	14,622		45	%	$	41,139		$	27,896		47	%
Professional services	Professional services	1,995			1,517			32	%	5,470			4,182			31	%	Professional services	2,472			1,961			26	%	4,734			3,475			36	%
Total cost of revenue	Total cost of revenue	16,673			12,083			38	%	48,044			33,577			43	%	Total cost of revenue	23,672			16,583			43	%	45,873			31,371			46	%
Gross profit	Gross profit	$	38,392		$	25,061		53	%	$	108,527		$	71,128		53	%	Gross profit	$	47,643		$	36,430		31	%	$	93,474		$	70,135		33	%

Percentage of total revenue:	Percentage of total revenue:																	Percentage of total revenue:
Subscription and support ⁽¹⁾	Subscription and support ⁽¹⁾	27		%	28		%			27		%	28		%			Subscription and support ⁽¹⁾	30		%	28		%			30		%	27		%
Professional services	Professional services	3		%	5		%			4		%	4		%			Professional services	3		%	3		%			3		%	4		%
Total cost of revenue	Total cost of revenue	30		%	33		%			31		%	32		%			Total cost of revenue	33		%	31		%			33		%	31		%
Gross profit	Gross profit	70		%	67		%			69		%	68		%			Gross profit	67		%	69		%			67		%	69		%

⁽¹⁾ Includes depreciation, amortization and stock compensation expense as follows:	⁽¹⁾ Includes depreciation, amortization and stock compensation expense as follows:																											⁽¹⁾ Includes depreciation, amortization and stock compensation expense as follows:
Depreciation	Depreciation	$	197		$	406				$	716		$	1,269				Depreciation	$	45		$	238				$	116		$	519
Amortization	Amortization	$	1,946		$	1,375				$	5,576		$	3,746				Amortization	$	2,576		$	1,783				$	4,971		$	3,630
Stock Compensation	Stock Compensation	$	250		$	195				$	763		$	464				Stock Compensation	$	570		$	353				$	888		$	513

For the Three Months Ended ~~September~~June 30, ~~2019~~2020

Cost of subscription and support revenue was ~~$14.7~~$21.2 million in the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$10.6~~$14.6 million in the three months ended ~~September~~June 30, ~~2018,~~2019, an increase of ~~$4.1~~$6.6 million, or ~~39%~~45%. The acquisitions not fully in the comparative period contributed ~~$4.4~~$5.4 million to the increase to cost of subscription and support revenue, primarily related to ~~mobile messaging~~ costs associated with the ~~newly acquired Rant & Rave product line, increased amortization~~delivery of ~~acquired intangible assets in~~ the ~~three months ended September 30, 2019~~Postup, InGenius, Altify, and Localytics products. Cost of subscription and support

Table of Contents

revenue related to ~~the acquisitions not fully~~our Sunset Assets remained flat in the comparative ~~period, personnel and related costs, and increased hosting and infrastructure costs associated with the newly acquired Rant & Rave, Adestra, PostUp, Kapost, and CIMPL product lines.~~periods. Therefore, cost of subscription and support revenue for ~~the organic portion of~~ our ~~business decreased~~Organic Business increased by ~~$0.3~~$1.2 million, primarily related to ~~a decrease~~an increase in ~~depreciation~~telecom messaging costs related to an increase in CXM usage across verticals from election-year political campaigns and ~~amortization costs, as a result of assets becoming fully depreciated or amortized.~~advocacy to media and retail.

Cost of professional services revenue was $2.5 million in the three months ended June 30, 2020, compared to $2.0 million in the three months ended ~~September~~June 30, 2019, ~~compared to $1.5 million in the three months ended September 30, 2018,~~ an increase of $0.5 million, or ~~32%~~26%. The acquisitions not fully in the comparative period contributed ~~$0.7~~$0.6 million to the increase to cost of professional services revenue, primarily related to an increase in personnel and related costs in the three months ended ~~September~~June 30, ~~2019.~~2020. Therefore, cost of professional services revenue for ~~the organic portion of~~ our ~~business~~Organic Business decreased by ~~$0.2~~$0.1 million, primarily related to personnel and related ~~costs,~~expenses, most of which were the result of our planned operating efficiencies.

~~Table of Contents~~

For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020

Cost of subscription and support revenue was ~~$42.6~~$41.1 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$29.4~~$27.9 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, an increase of $13.2 million, or ~~45%~~47%. The acquisitions not fully in the comparative period contributed ~~$13.5~~$10.4 million to the increase to cost of subscription and support revenue, ~~primarily related to mobile messaging~~ costs associated with the ~~newly acquired Rant & Rave product line, increased amortization~~delivery of ~~acquired intangible assets in~~ the ~~nine months ended September 30, 2019~~Postup, Kapost, CIMPL, InGenius, Altify, and Localytics products. Cost of subscription and support revenue related to ~~the acquisitions not fully in the comparative period, and increased~~our Sunset Assets decreased $0.3 million primarily related to hosting and infrastructure ~~costs associated with the newly acquired Rant & Rave, Adestra, PostUp, Kapost, and CIMPL product lines.~~costs. Therefore, cost of subscription and support revenue for the organic portion of our business ~~decreased~~increased by ~~$0.3~~$3.1 million, primarily related to ~~a decrease~~an increase in ~~depreciation~~messaging costs related to an increase in CXM usage across verticals from election-year political campaigns and ~~amortization costs, as a result of assets becoming fully depreciated or amortized.~~advocacy to media and retail.

Cost of professional services revenue was ~~$5.5~~$4.7 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$4.2~~$3.5 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, an increase of ~~$1.3~~$1.2 million, or ~~31%~~36%. The acquisitions not fully in the comparative period contributed ~~$1.6~~$1.3 million to the increase to cost of professional services revenue, primarily related to an increase in personnel and related costs in the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. Therefore, cost of professional services revenue for ~~the organic portion of~~ our ~~business~~Organic Business decreased by ~~$0.3 million, primarily related to personnel and related expenses, most of which were the result of our planned operating efficiencies.~~$0.1 million.

Operating Expenses

Sales and Marketing Expense


		Three Months Ended September 30,														Nine Months Ended September 30,														Three Months Ended June 30,					Six Months Ended June 30,
		2019			2018			% Change		2019			2018			% Change			2020			2019			% Change		2020			2019			% Change

		(dollars in thousands)																															(dollars in thousands)
Sales and marketing ⁽¹⁾	Sales and marketing ⁽¹⁾	$	8,709		$	5,299		64	%	$	23,680		$	14,955		58	%	Sales and marketing ⁽¹⁾	$	11,820		$	7,989		48	%	$	22,751		$	14,971		52	%
Percentage of total revenue	Percentage of total revenue	16		%	14		%			15		%	14		%			Percentage of total revenue	17		%	15		%			16		%	15		%

⁽¹⁾ Includes stock compensation expense as follows:	⁽¹⁾ Includes stock compensation expense as follows:																											⁽¹⁾ Includes stock compensation expense as follows:
Stock Compensation	Stock Compensation	$	508		$	169				$	1,012		$	368				Stock Compensation	$	898		$	365				$	1,447		$	504

For the Three Months Ended ~~September~~June 30, ~~2019~~2020

Sales and marketing expense was ~~$8.7~~$11.8 million in the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$5.3~~$8.0 million in the three months ended ~~September~~June 30, ~~2018,~~2019, an increase of ~~$3.4~~$3.8 million, or ~~64%~~48%. The acquisitions not fully in the comparative period contributed ~~$2.7~~$4.0 million to the increase in sales and marketing expense, primarily consisting of personnel and related costs in the three months ended ~~September~~June 30, ~~2019.~~2020. Sales and marketing expense related to our Sunset Assets decreased by $0.2 million primarily due to reductions in personnel costs. Therefore, sales and marketing expense for our Organic Business remained flat in the ~~organic portion~~comparative periods.

Table of ~~our business increased by $0.7 million, primarily related to non-cash stock compensation expense.~~Contents

For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020

Sales and marketing expense was ~~$23.7~~$22.8 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to $15.0 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, an increase of ~~$8.7~~$7.8 million, or ~~58%~~52%. The acquisitions not fully in the comparative period contributed ~~$6.1~~$7.9 million to the increase in sales and marketing expense, primarily consisting of personnel and related costs in the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. Sales and marketing expense related to our Sunset Assets decreased by $0.4 million primarily due to reductions in personnel costs. Therefore, sales and marketing expense for the organic portion of our business increased by ~~$2.6~~$0.3 million, primarily related to personnel and related ~~costs, non-cash stock compensation expense, and sales systems and tools.~~

~~Table of Contents~~

costs.

Research and Development Expense


		Three Months Ended September 30,														Nine Months Ended September 30,														Three Months Ended June 30,					Six Months Ended June 30,
		2019			2018			% Change		2019			2018			% Change			2020			2019			% Change		2020			2019			% Change

		(dollars in thousands)																															(dollars in thousands)
Research and development ⁽¹⁾	Research and development ⁽¹⁾	$	7,434		$	5,400		38	%	$	20,840		$	15,577		34	%	Research and development ⁽¹⁾	$	10,488		$	7,008		50	%	$	19,908		$	13,406		49	%
Refundable Canadian tax credits		(133)			(99)			34	%	(304)			(404)			(25)	%
Refundable tax credits																		Refundable tax credits	(194)			(85)			128	%	(496)			(171)			190	%
Total research and development	Total research and development	$	7,301		$	5,301		38	%	$	20,536		$	15,173		35	%	Total research and development	$	10,294		$	6,923		49	%	$	19,412		$	13,235		47	%

Percentage of total revenue:	Percentage of total revenue:																	Percentage of total revenue:
Research and development	Research and development	14		%	15		%			13		%	15		%			Research and development	15		%	13		%			14		%	13		%
Refundable Canadian tax credits		—		%	—		%			—		%	—		%
Refundable tax credits																		Refundable tax credits	—		%	—		%			—		%	—		%
Total research and development	Total research and development	14		%	15		%			13		%	15		%			Total research and development	15		%	13		%			14		%	13		%

⁽¹⁾ Includes stock compensation expense as follows:	⁽¹⁾ Includes stock compensation expense as follows:																											⁽¹⁾ Includes stock compensation expense as follows:
Stock Compensation	Stock Compensation	$	683		$	383				$	1,637		$	871				Stock Compensation	$	1,019		$	632				$	1,634		$	953

For the Three Months Ended ~~September~~June 30, ~~2019~~2020

Research and development expense was ~~$7.4~~$10.5 million in the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$5.4~~$7.0 million in the three months ended ~~September~~June 30, ~~2018,~~2019, an increase of ~~$2.0~~$3.5 million,or ~~38%~~50%. The acquisitions not fully in the comparative period contributed ~~$1.5~~$3.2 million to the increase in research and development expense primarily consisting of personnel and related costs in the three months ended ~~September~~June 30, ~~2019.~~2020. Research and development expense related to our Sunset Assets decreased by $0.1 million primarily due to reductions in personnel costs. Therefore, research and development costs for ~~the organic portion of~~ our ~~business~~Organic Business increased by ~~$0.5~~$0.4 million primarily related to an increase in non-cash stock compensation expense.

Refundable ~~Canadian~~ tax credits were ~~$0.1~~$0.2 million in the three months ended ~~September~~June 30, ~~2019,~~2020, compared to $0.1 million in the three months ended ~~September~~June 30, ~~2018.~~2019.

For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020

Research and development expense was ~~$20.8~~$19.9 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$15.6~~$13.4 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, an increase of ~~$5.2~~$6.5 million, or ~~34%~~49%. The acquisitions not fully in the comparative period contributed ~~$4.7~~$5.9 million to the increase in research and development expense primarily consisting of personnel and related costs in the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. Research and development expense related to our Sunset Assets decreased by $0.1 million primarily due to reductions in personnel costs. Therefore, research and development costs for ~~the organic portion of~~ our ~~business~~Organic Business increased by ~~$0.5~~$0.7 million primarily related to an increase in non-cash stock compensation expense.

Refundable Canadian tax credits were ~~$0.3~~$0.5 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$0.4~~$0.2 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~

2019.

3433

Table of Contents

General and Administrative Expense


		Three Months Ended September 30,														Nine Months Ended September 30,														Three Months Ended June 30,					Six Months Ended June 30,
		2019			2018			% Change		2019			2018			% Change			2020			2019			% Change		2020			2019			% Change

		(dollars in thousands)																															(dollars in thousands)
General and administrative ⁽¹⁾	General and administrative ⁽¹⁾	$	12,196		$	8,011		52	%	$	34,232		$	23,475		46	%	General and administrative ⁽¹⁾	$	17,655		$	12,042		47	%	$	34,331		$	22,036		56	%
Percentage of total revenue	Percentage of total revenue	22		%	22		%			22		%	22		%			Percentage of total revenue	25		%	23		%			25		%	22		%

⁽¹⁾ Includes stock compensation expense as follows:	⁽¹⁾ Includes stock compensation expense as follows:																											⁽¹⁾ Includes stock compensation expense as follows:
Stock Compensation	Stock Compensation	$	5,746		$	3,034				$	15,304		$	8,677				Stock Compensation	$	8,493		$	5,551				$	16,331		$	9,559

For the Three Months Ended ~~September~~June 30, ~~2019~~2020

General and administrative expense was ~~$12.2~~$17.7 million in the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$8.0~~$12.0 million in the three months ended ~~September~~June 30, ~~2018,~~2019, an increase of ~~$4.2~~$5.7 million, or ~~52%~~47%. An increase in general administrative expense of $0.6 million was due to the acquisitions not fully in the comparative period, which consisted primarily of personnel and related costs and administrative expenses in the three months ended ~~September~~June 30, ~~2019.~~2020. Therefore, general and administrative expense for ~~the organic portion of~~ our ~~business~~Organic Business increased by ~~$3.6~~$5.1 million, which was driven primarily by non-cash stock compensation expense and personnel related ~~expenses.~~expenses and costs incurred related to the implementation of our new enterprise resource management (“ERP”) system.

For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020

General and administrative expense was ~~$34.2~~$34.3 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$23.5~~$22.0 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, an increase of ~~$10.7~~$12.3 million, or ~~46%~~56%. An increase in general administrative expense of ~~$1.8~~$1.6 million was due to the acquisitions not fully in the comparative period, which consisted primarily of personnel and related costs and administrative expenses in the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. Therefore, general and administrative expense for ~~the organic portion of~~ our ~~business~~Organic Business increased by ~~$8.9~~$10.7 million, which was driven primarily by non-cash stock compensation expense and personnel related ~~expenses.~~expenses and costs incurred related to the implementation of our new ERP system.

Depreciation and Amortization Expense


		Three Months Ended September 30,														Nine Months Ended September 30,														Three Months Ended June 30,					Six Months Ended June 30,
		2019			2018			% Change		2019			2018			% Change			2020			2019			% Change		2020			2019			% Change

		(dollars in thousands)																															(dollars in thousands)
Depreciation and amortization:	Depreciation and amortization:																	Depreciation and amortization:
Depreciation	Depreciation	$	361		$	137		163	%	$	953		$	390		144	%	Depreciation	$	453		$	323		40	%	$	914		$	592		54	%
Amortization	Amortization	6,066			3,469			75	%	16,477			9,199			79	%	Amortization	8,584			5,421			58	%	17,394			10,411			67	%
Total depreciation and amortization	Total depreciation and amortization	$	6,427		$	3,606		78	%	$	17,430		$	9,589		82	%	Total depreciation and amortization	$	9,037		$	5,744		57	%	$	18,308		$	11,003		66	%

Percentage of total revenue:	Percentage of total revenue:																	Percentage of total revenue:
Depreciation	Depreciation	1		%	1		%			—		%	1		%			Depreciation	1		%	1		%			1		%	2		%
Amortization	Amortization	11		%	9		%			11		%	9		%			Amortization	12		%	10		%			12		%	10		%
Total depreciation and amortization	Total depreciation and amortization	12		%	10		%			11		%	9		%			Total depreciation and amortization	13		%	11		%			13		%	11		%

For the Three Months Ended ~~September~~June 30, ~~2019~~2020

Depreciation and amortization expense was ~~$6.4~~$9.0 million in the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$3.6~~$5.7 million in the three months ended ~~September~~June 30, ~~2018,~~2019, an increase of ~~$2.8~~$3.3 million, or ~~78%~~57%. The acquisitions not fully in the comparative period increased depreciation and amortization expense by ~~$2.8~~$3.4 million in the three months ended ~~September~~June 30, ~~2019.~~2020. Therefore, depreciation and amortization expense for our Organic Business decreased by $0.1 million in the ~~organic portion of our business did not change period over period.~~

comparative periods.

3534

Table of Contents

For the Six Months Ended June 30, 2020

Depreciation and amortization expense was ~~$17.4~~$18.3 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$9.6~~$11.0 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, an increase of ~~$7.8~~$7.3 million, or ~~82%~~66%. The acquisitions not fully in the comparative period increased depreciation and amortization expense by ~~$8.0~~$7.3 million in the ~~nine~~six months ended ~~September~~June 30, 2019, while the depreciation and amortization expense for the organic portion of our business decreased by $0.2 million as a result of assets acquired in earlier years becoming fully amortized or depreciated.2020.

Acquisition-related Expenses


		Three Months Ended September 30,														Nine Months Ended September 30,														Three Months Ended June 30,					Six Months Ended June 30,
		2019			2018			% Change		2019			2018			% Change			2020			2019			% Change		2020			2019			% Change

		(dollars in thousands)																															(dollars in thousands)
Acquisition-related expenses	Acquisition-related expenses	$	7,457		$	2,497		199	%	$	24,444		$	8,739		180	%	Acquisition-related expenses	$	5,781		$	9,264		(38)	%	$	20,939		$	16,987		23	%
Percentage of total revenue	Percentage of total revenue	12		%	6		%			16		%	9		%			Percentage of total revenue	7		%	17		%			15		%	16		%

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

For the Three Months Ended ~~September~~June 30, ~~2019~~2020

Acquisition-related expense was ~~$7.5~~$5.8 million in the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$2.5~~$9.3 million in the three months ended ~~September~~June 30, ~~2018, an increase~~2019, a decrease of ~~$5.0~~$3.5 million, or ~~199%~~38%. ~~Acquisition-related expenses incurred during~~During the three months ended ~~September~~June 30, 2020 and June 30, 2019 ~~increased~~transaction related expenses were $0.2 million and $3.6 million, respectively, and transformational expenses were $5.6 million and $5.7 million, respectively. Transaction costs decreased compared to the same period in ~~2018 primarily~~2019 as a result of ~~increased~~a slowdown in our acquisition activity in ~~2019. Over~~2020 as a result of the ~~last four quarters we completed five acquisitions representing approximately $73.0 million in acquired annual revenue~~COVID-19 pandemic. We closed no transactions during the three months ended June 30, 2020 compared to ~~three acquisitions representing approximately $40.5 million in acquired annual revenue~~two transactions during the ~~comparable~~same period in prior year.

For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020

Acquisition related expense was ~~$24.4~~$20.9 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$8.7~~$17.0 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, an increase of ~~$15.7~~$3.9 million, or ~~180%~~23%. ~~Acquisition-related expenses incurred during~~During the ~~three~~six months ended ~~September~~June 30, 2020 and June 30, 2019 ~~increased compared~~transaction related expenses were $3.5 million and $4.0 million, respectively, and transformational expenses were $17.4 million and $13.0 million, respectively. Transformational expenses for the six months ended June 30, 2020 includes approximately $2.8 million of accelerated rent expense incurred in conjunction with the closures of offices related to ~~the same period in 2018 primarily~~recently acquired companies as ~~a result of the increased acquisition activity in 2019. Over the last four quarters~~ we ~~completed five acquisitions representing approximately $73.0 million in acquired annual revenue compared~~continue to ~~three acquisitions representing approximately $40.5 million in acquired annual revenue during the comparable period in prior year.~~consolidate and integrate these acquisitions.

Other Income (Expense)


		Three Months Ended September 30,														Nine Months Ended September 30,														Three Months Ended June 30,					Six Months Ended June 30,
		2019			2018			% Change		2019			2018			% Change			2020			2019			% Change		2020			2019			% Change

		(dollars in thousands)																															(dollars in thousands)
Other expense:	Other expense:																	Other expense:
Interest expense, net	Interest expense, net	$	(5,517)		$	(3,118)		77	%	$	(15,879)		$	(8,755)		81	%	Interest expense, net	$	(7,873)		$	(5,246)		50	%	$	(15,516)		$	(10,362)		50	%
Loss on debt extinguishment		(2,317)			—			NA		(2,317)			—			NA

Other income (expense), net	Other income (expense), net	(228)			(744)			(69)	%	(1,681)			(965)			74	%	Other income (expense), net	(15)			(692)			(98)	%	(1,417)			(1,453)			(2)	%
Total other expense	Total other expense	$	(8,062)		$	(3,862)		109	%	$	(19,877)		$	(9,720)		104	%	Total other expense	$	(7,888)		$	(5,938)		33	%	$	(16,933)		$	(11,815)		43	%

Percentage of total revenue:	Percentage of total revenue:																	Percentage of total revenue:
Interest expense, net	Interest expense, net	(10)		%	(8)		%			(10)		%	(8)		%			Interest expense, net	(11)		%	(10)		%			(11)		%	(10)		%

Other income (expense), net	Other income (expense), net	—		%	(2)		%			(2)		%	(1)		%			Other income (expense), net	—		%	(1)		%			(1)		%	(2)		%
Total other expense	Total other expense	(15)		%	(10)		%			(13)		%	(9)		%			Total other expense	(11)		%	(11)		%			(12)		%	(12)		%

3635

Table of Contents

For the Three Months Ended ~~September~~June 30, ~~2019~~2020

Interest expense was ~~$5.5~~$7.9 million in the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$3.1~~$5.2 million in the three months ended ~~September~~June 30, ~~2018,~~2019, an increase in interest expense of ~~$2.4~~$2.7 million, or ~~77%~~50%. The increase is attributable to increased borrowing under our new credit facility used to fund our acquisitions. See the “Liquidity and Capital Resources” section herein for further discussion regarding our new credit facility. ~~Our interest rate swap offset interest~~

Other expense ~~by $0.3 million during the three months ended September 30, 2018.~~

~~Loss on debt extinguishment~~ was ~~$2.3~~$0.0 million in the three months ended ~~September~~June 30, 2019, compared to $0.0 million three months ended September 30, 2018, an increase in loss on debt extinguishment of $2.3 million. The loss on debt extinguishment was the result of the successful completion of our new credit facility thereby causing the remaining deferred debt offering costs from our previous credit facility to be written off. See the “Liquidity and Capital Resources” section herein for further discussion regarding our new credit facility.

~~Other expense was $0.2 million in the three months ended September 30, 2019,~~2020, compared to other expense of $0.7 million in the three months ended ~~September~~June 30, ~~2018.~~2019. Other expense ~~was~~ recognized in the three months ended ~~September~~June 30, 2019 was due primarily to a foreign currency exchange losses related primarily to our UK entities. ~~Other expense was recognized in three months ended September 30, 2018 due primarily to an adjustment to the Waterfall acquisition earnout and foreign exchange loss related to our Canadian entity.~~

For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020

Interest expense was ~~$15.9~~$15.5 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$8.8~~$10.4 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, an increase in interest expense of ~~$7.1~~$5.1 million, or ~~81%~~50%. The increase is attributable to increased borrowing under our expanded term loan used to fund our acquisitions. Our interest rate swap, ~~offset~~which fixes our interest rate at 5.4%, accounted for $1.5 million of the interest expense ~~by $0.3 million during~~for the ~~nine months ended September 30, 2019.~~

Loss on debt extinguishment was $2.3 million nine months ended September 30, 2019, compared to $0.0 million nine months ended September 30, 2018, an increase in loss on debt extinguishment of $2.3 million. The loss on debt extinguishment was theperiod as a result of the ~~successful completion~~decrease in market interest rates resulting from the economic impact of ~~our new credit facility thereby causing~~ the ~~remaining deferred debt offering costs from our previous term loan to be written off.~~COVID-19 pandemic during the six months ended June 30, 2020.

Other expense was ~~$1.7~~$1.4 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to other expense of ~~$1.0~~$1.5 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. Other expense was recognized in the ~~nine~~six months ended ~~September~~June 30, 2020 and June 30, 2019 ~~due~~related primarily to a foreign currency exchange losses ~~related to~~from our UK entities. ~~Other expense was recognized in the nine months ended September 30, 2018 due primarily to an increase to the Waterfall acquisition earnout estimate.~~

Benefit from ~~(Provision for)~~ Income Taxes


		Three Months Ended September 30,														Nine Months Ended September 30,														Three Months Ended June 30,					Six Months Ended June 30,
		2019			2018			% Change		2019			2018			% Change			2020			2019			% Change		2020			2019			% Change

		(dollars in thousands)																															(dollars in thousands)
Benefit from (provision for) income taxes		$	(547)		$	(735)		(26)	%	$	6,166		$	(2,118)		(391)	%
Benefit from income taxes																		Benefit from income taxes	$	673		$	6,101		(89)	%	$	4,960		$	6,713		(26)	%
Percentage of total revenue	Percentage of total revenue	(1)		%	(1)		%			5		%	(2)		%			Percentage of total revenue	1		%	11		%			3		%	7		%

For the Three Months Ended ~~September~~June 30, ~~2019~~2020

~~Provision for~~Benefit from income taxes was ~~$0.5 million in the three months ended September 30, 2019, compared to a provision for income taxes of~~ $0.7 million in the three months ended ~~September~~June 30, ~~2018,~~2020, compared to a benefit from income taxes of $6.1 million in the three months ended June 30, 2019, a decrease of ~~$0.2~~$5.4 million.The change in provision was due primarily to ~~decreases related~~the deferred tax benefit attributable to ~~losses expected to be generated in~~ the ~~United Kingdom for the year and increases related to increasing taxable income in Canada.~~

~~For the Nine Months Ended September 30, 2019~~

Benefit for income taxes was $6.2 million in the nine months ended September 30, 2019, compared to a provision for income taxes of $2.1 million in the nine months ended September 30, 2018, a decrease of $8.3 million.~~The change in provision was due primarily to decreases related to losses expected to be generated in the United Kingdom for the year, the~~

~~Table of Contents~~

release of valuation allowance attributable to acquisitions of domestic entities with deferred tax liabilities that, upon acquisition, allowed us to recognize certain deferred tax assets that had previously been offset by a valuation allowance.

For the Six Months Ended June 30, 2020

Benefit from income taxes was $5.0 million in the six months ended June 30, 2020, compared to a benefit from income taxes of $6.7 million in the six months ended June 30, 2019, a decrease of $1.7 million. The change in provision was due primarily to decreases related the release of valuation allowance ~~and increases related~~attributable to ~~increasing taxable income in Ireland, Israel and Canada.~~acquisitions of domestic entities with deferred tax liabilities that, upon acquisition, allowed us to recognize certain deferred tax assets that had previously been offset by a valuation allowance. The entire benefit for the six months ended June 30, 2019 was recognized for the three months ended June 30, 2019.

Table of Contents

Liquidity and Capital Resources

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

As of ~~September~~June 30, ~~2019,~~2020, we had cash and cash equivalents of ~~$113.3~~$87.9 million, $60.0 million of available borrowings under our credit facility, as discussed below, and ~~$350~~$536.0 million of borrowings outstanding under our credit facility. As of December 31, ~~2018,~~2019, we had cash and cash equivalents of ~~$16.7~~$175.0 million, $60.0 million of available borrowings under our ~~previous credit facility (excluding the $55.0 million uncommitted Accordion in our~~ Credit ~~Agreement),~~Facility, and ~~$283.2~~$538.7 million of borrowings outstanding under our previous credit facility. The $87.1 million decrease in cash and cash equivalents from December 31, 2019 to June 30, 2020 includes a $67.7 million cash payment for an acquisition in the period. Our cash and cash equivalents held by our foreign subsidiaries was ~~$20.0~~$26.2 million as of ~~September~~June 30, ~~2019.~~2020. If these funds held by our foreign subsidiaries are needed for our domestic operations, wea repatriation of these funds would ~~be required~~require us to accrue and pay dividend withholding taxes in the foreign jurisdictions where applicable and accrue and pay U.S. taxes to ~~repatriate these funds~~the extent such dividend income exceeds our ability to ~~the U.S.~~utilize net operating losses. However, our intent is to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate them to fund our domestic operations. We do not provide for federal income taxes on the undistributed earnings of our foreign subsidiaries.

As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, we had a working capital surplus of ~~$59.7~~$37.1 million and ~~deficit~~surplus of ~~$40.4~~$109.5 million, respectively, which included ~~$59.7~~$81.0 million and ~~$57.6~~$76.6 million of deferred revenue recorded as a current liability as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. This deferred revenue will be recognized as revenue in future periods in accordance with our revenue recognition policy.

Subsequent to September 30, 2019, in conjunction with the acquisition of Altify, $59 million was drawn on Upland's revolving credit facility, taking Upland's gross debt outstanding to $409 million. With approximately $56 million of cash on-hand immediately following the Altify acquisition, Upland's net debt was approximately $353 million. Refer to Note 13, Subsequent Events, to our condensed consolidated financial statements.

Credit Facility

On August 6, 2019, we entered into a ~~new~~ credit agreement (the “Credit Facility”) which provides for (i) a fully-drawn $350 million, 7 year, senior secured term loan B facility (the “Term Loan”) and (ii) a ~~new~~ $60 million, 5 year, revolving credit facility (the “Revolver”) that was fully available as of ~~September~~June 30, ~~2019.~~2020. The ~~new~~ Credit Facility replaced our previous credit facility. All outstanding balances under our previous credit facility were paid off using proceeds from our ~~new~~current Credit Facility.

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

The Credit Facility has no financial covenants as long as less than 35% of the Revolver is drawn as of the last day of any fiscal quarter. The credit facility is secured by a security interest in substantially all of our assets and requires us to maintain certain financial covenants. The Credit Facility contains certain non-financial restrictive covenants that limit our ability to transfer or dispose of assets, merge with other companies or consummate certain changes of control, acquire other companies, pay dividends, incur additional indebtedness and liens, effect changes in management and enter into new businesses. As of ~~September~~June 30, ~~2019~~2020 we were in compliance with all covenants under the Credit Facility. See Note 6. Debt for more information regarding our Credit Facility and outstanding debt as of ~~September~~June 30, ~~2019.~~2020.

Registration Statement

On December 12, 2018, the Company filed a registration statement on Form S-3 (File No. 333-228767) (the “S-3”), to register Upland securities in an aggregate amount of up to $250.0 million for offerings from time to time. In connection with the filing of the S-3 the Company withdrew its previous registration statement filed on May 12, 2017 which registered Upland securities in an aggregate amount of up to $75.0 million of which $29.0 million in aggregate offering price remained available for issuance at the time of withdrawal.

3837

Table of Contents

On May 13, 2019, we completed a registered underwritten public offering pursuant to the S-3 of 3,795,000 shares of the Company's $0.0001 par value common stock for an offering price to the public of $42.00 per share. This included the 495,000 shares issuable pursuant to a fully exercised option to purchase additional shares granted to the underwriters of the offering. The net proceeds of the offering of $151.1 million, net of issuance costs of $8.3 million, will be used for general business purposes, including the funding of future acquisitions. As of ~~September~~June 30, ~~2019~~2020 an aggregate amount of up to $90.6 million of Upland securities remain available for issuance under the S-3.

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


		Nine Months Ended September 30,							Six Months Ended June 30,
		2019		2018			2020		2019

		(dollars in thousands)							(dollars in thousands)
Consolidated Statements of Cash Flow Data:	Consolidated Statements of Cash Flow Data:					Consolidated Statements of Cash Flow Data:
Net cash provided by operating activities		$	5,054	$	4,797
Net cash provided by (used in) operating activities						Net cash provided by (used in) operating activities	$	(4,504)	$	5,396
Net cash used in investing activities	Net cash used in investing activities	(106,932)		(48,493)		Net cash used in investing activities	(68,548)		(83,188)
Net cash provided by financing activities		198,144		37,497
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	(14,604)		168,617
Effect of exchange rate fluctuations on cash	Effect of exchange rate fluctuations on cash	302		(38)		Effect of exchange rate fluctuations on cash	542		798
Change in cash and cash equivalents	Change in cash and cash equivalents	96,568		(6,237)		Change in cash and cash equivalents	(87,114)		91,623
Cash and cash equivalents, beginning of period	Cash and cash equivalents, beginning of period	16,738		22,326		Cash and cash equivalents, beginning of period	175,024		16,738
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	113,306	$	16,089	Cash and cash equivalents, end of period	$	87,910	$	108,361

Cash Flows from Operating Activities

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

Our cash provided by operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 primarily reflects our net loss of ~~$25.5~~$34.2 million, which includes ~~$24.4~~$20.9 million of acquisition-related expenses, and includes non-cash items comprised of ~~$23.7~~$23.4 million of depreciation and amortization expense, ~~$18.7~~$20.3 million of non-cash stock compensation expense, ~~$2.6~~$1.9 million of amortization of deferred commissions, and ~~$1.0~~$1.1 million of non-cash interest and other expense, ~~all~~and $0.5 million of foreign currency re-measurement losses which were partially offset by ~~$11.2~~$5.0 million of deferred income ~~taxes, which includes $5.9 million related to a decrease in deferred tax liabilities, and $0.2 million of foreign currency re-measurement losses.~~taxes. Working capital sources of cash included a ~~$6.4~~$5.2 million decrease in accounts ~~receivable.~~receivable and a $2.4 million increase in deferred revenue which was related primarily to the timing of collections. Working capital uses of cash included a ~~$4.3~~$6.7 million increase in prepaids and other related primarily to payments of annual software/hosting fees, a ~~$0.9~~$6.3 million decrease in accounts payable, ~~a $2.9 million decrease in deferred revenu~~eand a ~~$5.0~~$7.1 million decrease in accrued expenses, which ~~includes a one-time non-recurring $1.7 million interest payment~~is attributable primarily to ~~settle-up our previous credit facility and a one-time acquisition earnout~~the payment of ~~$1.6 million.~~the Company’s annual bonus and severance payments related to acquisitions completed in prior periods.

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

Cash Flows from Investing Activities

Our primary investing activities have consisted of acquisitions of complementary technologies, products and businesses. As our business grows, we expect our primary investing activities to continue to further expand our family of software applications and infrastructure and support additional personnel.

For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, cash used in investing activities consisted of ~~$105.8~~$67.7 million ~~primarily~~ associated with the ~~three acquisitions~~acquisition of Localytics which closed during the ~~nine~~six months ended ~~September~~June 30, ~~2019, and~~2020, the purchases of property and equipment of $0.7 million, and the purchase of customer relationships of $0.2 million.

3938

Table of Contents

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

Cash Flows from Financing Activities

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

During the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, we ~~borrowed $382.3 million of term loans payable, primarily driven by proceeds of $350.0 million under~~made payments on our ~~new credit facility. Payments on~~ notes payable balance of ~~$323.2~~$2.7 million, includes the paydown of our previous credit facility. In addition, we received net cash of $151.5 million from issuance of stock, primarily related to the offering described in the “Registration Statement” section above, paid ~~$5.9~~$9.6 million in additional consideration to sellers of acquired businesses related to holdback and earnout payments, paid ~~$6.1~~$2.1 million in taxes related to net share settlements of restricted stock vesting events, and made principal payments of ~~$0.5~~$0.1 million on finance leases.

Contractual Obligations and Commitments

There have been no material changes to the contractual obligations table included in our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 filed with the SEC on March ~~15, 2019 except those related to principal debt obligations and other contractual commitments.~~

~~The following table summarizes our contractual obligations as of September 30, 2019 for principal debt obligations and other contractual commitments:~~

Payment Due by Period
Total Less than 1 Year 1-3 Years >3-5 Years More Than 5 Years
Debt Obligations⁽¹⁾
$ 350,000 $ 3,500 $ 7,000 $ 7,000 $ 332,500
Interest on Debt Obligations ⁽²⁾
$ 126,642 $ 19,086 $ 37,495 $ 36,779 $ 33,282
Total $ 476,642 $ 22,586 $ 44,495 $ 43,779 $ 365,782

~~(1)~~In August 6, 2019, we entered into a new fully-drawn $350 million, 7 year, senior secured term loan B facility and a new $60 million, 5 year, revolving credit facility that was fully available as of September 30, 2019. The new credit facilities replaced our previous credit facility and paid off all outstanding amounts under our previous credit facility at closing. Future debt maturities of long-term debt exclude debt discounts and consist of obligations under our Credit Facility. See “Liquidity and Capital Resources” above for further discussion regarding our Credit Facility.

~~(2)~~Future interest on debt obligations is calculated using the interest rate effective as of September 30, 2019. In conjunction with our new $350 million, 7 year, term credit facility we entered into an interest rate hedge instrument for the full 7 year term, effectively fixing our interest rate at 5.4%. However, the interest rate associated with our new $60 million, 5 year, undrawn revolving credit facility remains floating. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for further discussion.2, 2020.

Off-Balance Sheet Arrangements

During the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018,~~2019, respectively, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special-purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

~~Table of Contents~~

Critical Accounting Policies and the Use of Estimates

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

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

• revenue recognition and deferred revenue;

• stock-based compensation;

• deferred sales commissions and sales commission expense;

• income taxes; and

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

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of May 8, 2020, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

Other Key Accounting Policies

Our unaudited interim financial statements and other financial information for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, as presented herein and in Item 1 to this Quarterly Report on Form 10-Q, reflects no material changes in our critical accounting policies and estimates as set forth in our Annual report on Form 10-K for the year ended December 31, ~~2018~~2019 filed with the SEC on March 9, ~~2019.~~2020. Please refer to this Annual Report for a detailed description of our critical accounting policies that involve significant management judgment.

Table of Contents

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

~~Under Section 107(b)~~Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements and the impact of ~~the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply~~these pronouncements on our condensed consolidated financial statements, refer to ~~private companies. We are choosing~~Note 1. Significant Accounting Policies to opt out of such extended transition period, however, and we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our ~~decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.~~

condensed consolidated financial statements.

4140

Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

Our exposure to market risk for changes in interest rates primarily relates to our cash equivalents and any variable rate indebtedness. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This objective is accomplished currently by making diversified investments, consisting only of money market mutual funds and certificates of deposit. In conjunction with our new $350 million, 7 year, term ~~credit facility~~loan, and subsequent entry into an additional $190 million in incremental term loans under the Credit Facility, we entered into an interest rate hedge ~~instrument~~instruments for the full 7 year term, effectively fixing our interest rate at 5.4%. However, the interest rate associated with our new $60 million, 5 year, revolving credit facility remains floating. As of ~~September~~June 30, ~~2019,~~2020, we had a principal balance of ~~$350.0~~$536.0 under our Credit Agreement. As there was no debt outstanding under our revolving credit facility as of ~~September~~June 30, ~~2019,~~2020, a hypothetical change of 100 basis points would result in a maximum potential change to interest expense of $0.0 million annually.

Foreign Currency Exchange Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, which expose us to foreign exchange rate risk. In addition, we incur a portion of our operating expenses in foreign currencies, including Canadian dollars, British pounds and Euros, and in the future as we expand into other foreign countries, we expect to incur operating expenses in other foreign currencies. In addition, our customers are generally invoiced in the currency of the country in which they are located. We are exposed to foreign exchange rate fluctuations as the financial results of our international operations are translated from the local functional currency into U.S. dollars upon consolidation. A decline in the U.S. dollar relative to foreign functional currencies would increase our non-U.S. revenue and improve our operating results. Conversely, if the U.S. dollar strengthens relative to foreign functional currencies, our revenue and operating results would be adversely affected. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would have resulted in a change in revenue of ~~$4.1~~$3.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. To date, we have not engaged in any hedging strategies. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in foreign currency exchange rates.

The non-financial assets and liabilities of our foreign subsidiaries are translated into United States dollars using the exchange rates in effect at the balance sheet date. The related translation adjustments are recorded in a separate component of stockholders' equity in accumulated other comprehensive loss. In addition, we have a foreign currency denominated intercompany ~~loan~~loans that ~~was~~were used to fund the acquisition of a foreign ~~subsidiary~~subsidiaries during the ~~year~~years ended December 31, 2019 and December 31, 2018. Due to the long-term nature of ~~the loan,~~these loans, the foreign currency gains (losses) resulting from remeasurement are recognized as a component of accumulated other comprehensive income (loss).

Inflation

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

Table of Contents

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of ~~September~~June 30, ~~2019,~~2020, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of such ~~date.~~date as a result of the material weakness in our internal control over financial reporting related to our annual accounting for income taxes as described in Part II, Item 9A, "Controls and Procedures", of our most recently filed Annual Report on Form 10-K.

Notwithstanding the material weakness discussed above, our management has concluded that the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows (including supplemental disclosures of cash flow information related to cash paid for taxes) for the periods presented in conformity with accounting principles generally accepted in the United States.

Status of Remediation Plan

Our management has begun implementing a remediation plan to address the operating effectiveness control deficiencies that led to the material weakness described above. Management’s plan of remediation includes adding additional resources to the Company’s tax and accounting teams and streamlining certain internal processes and systems, which management believes will improve the Company’s annual income tax review process and accelerate the Company’s accounting close process. We believe the remediation will be complete prior to the performance of these annual controls for the fiscal year ending December 31, 2020.

Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2020, we implemented a new global enterprise resource planning (“ERP”) system, which is expected to improve our transactional processing and financial reporting by providing more automation and standardization. While we believe that the implementation of the ERP system and related changes to internal controls will strengthen our ability to continue to scale our business and enhance our internal controls over financial reporting, there are inherent risks in implementing a new ERP system. We have taken the necessary steps to monitor and maintain appropriate internal control over financial reporting during the system change and will continue to monitor the impact of this implementation on our processes and procedures, as well as the impact on our internal controls over financial reporting.

There were no other changes to our internal control over financial reporting (as defined in Rules 13a- 15(f) and 15d- 15(f) of the Exchange Act) during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

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

4342

Table of Contents

PART II – OTHER INFORMATION

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our ~~2018~~2019 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. ~~There~~With the exception of the risk factor included below, there have been no material changes during ~~2019~~2020 to the risk factors that were included in the Company's Form ~~10-K.~~10-K filed with the SEC on March 2, 2020.

Risks Related to Our Business

The ongoing COVID-19 pandemic could adversely affect our business, results of operations and financial condition.

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout the U.S. and the world. The COVID-19 pandemic has resulted in travel restrictions prohibitions of non-essential activities, disruption and shutdown of businesses and greater uncertainty in global financial markets.

We cannot predict the extent to which the COVID-19 pandemic will impact our business or operating results, which is highly dependent on inherently uncertain future developments, including the severity of COVID-19 and the actions taken by governments and private businesses in relation to COVID-19 containment. As our platform is offered as a subscription-based service, the effect of the outbreak may not be fully reflected in our operating results until future periods, if at all. As of the date of this report, we do not yet know the extent of the negative impact on our ability to attract, serve, retain or upsell customers. Furthermore, existing and potential customers may choose to reduce or delay technology spending in response to the coronavirus outbreak, or attempt to renegotiate contracts and obtain concessions, which may materially and negatively impact our operating results, financial condition and prospects.

Item 6. Exhibits

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

Table of Contents

EXHIBIT INDEX

Exhibit Number

Exhibit Description

31.1*

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

31.2*

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

32.1**

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

32.2**

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

101.INS***

Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH***

Inline XBRL Taxonomy Extension Schema Document

101.CAL***

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF***

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB***

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE***

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104*

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

* Filed herewith.

** Furnished herewith.

*** The financial information contained in these XBRL documents is unaudited and these are not the official publicly filed financial statements of Upland Software, Inc. Investors should continue to rely on the official filed version of the furnished documents and not rely on this information in making investment decisions. In accordance with Rule 402 of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

Table of Contents

SIGNATURES

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


			UPLAND SOFTWARE, INC.
Dated: ~~November 12, 2019~~August 7, 2020			/s/ Michael D. Hill
			Michael D. Hill
			Chief Financial Officer

4645


	Three Months Ended September 30, 2018
	Common Stock					Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at June 30, 2018	21,516,738	$	2	$	178,062	$	(5,083)	$	(83,227)	$	89,754

Issuance of stock under Company plans, net of shares withheld for tax	72,662	—		(303)		—		—		(303)

Stock-based compensation	—	—		3,781		—		—		3,781

Foreign currency translation adjustment	—	—		—		253		—		253
Net loss	—	—		—		—		(4,250)		(4,250)
Balance at September 30, 2018	21,589,400	$	2	$	181,540	$	(4,830)	$	(87,477)	$	89,235


	Three Months Ended September 30, 2019
	Common Stock					Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at June 30, 2019	25,247,707	$	3	$	338,732	$	(6,889)	$	(98,874)	$	232,972

Issuance of common stock in business combination	4,247	—		—		—		—		—
Issuance of stock under Company plans, net of shares withheld for tax	9,139	—		(1,243)		—		—		(1,243)
Issuance of stock, net of issuance costs	—	—		(39)		—		—		(39)
Stock-based compensation	—	—		7,187		—		—		7,187

Foreign currency translation adjustment	—	—		—		(1,293)		—		(1,293)
Unrealized translation loss on foreign currency denominated intercompany loans	—	—		—		(3,610)		—		(3,610)
Unrealized loss on interest rate swap	—	—		—		(3,379)		—		(3,379)
Net loss	—	—		—		—		(12,307)		(12,307)
Balance at September 30, 2019	25,261,093	$	3	$	344,637	$	(15,171)	$	(111,181)	$	218,288


	Nine Months Ended September 30, 2019
	Common Stock					Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2018	21,489,112	$	2	$	180,481	$	(7,501)	$	(85,675)	$	87,307
Issuance of common stock in business combination	7,898	—		(30)		—		—		(30)
Issuance of stock under Company plans, net of shares withheld for tax	(30,917)	—		(5,643)		—		—		(5,643)
Issuance of stock, net of issuance costs	3,795,000	1		151,113		—		—		151,114
Stock-based compensation	—	—		18,716		—		—		18,716

Foreign currency translation adjustment	—	—		—		(681)		—		(681)
Unrealized translation loss on foreign currency denominated intercompany loans	—	—		—		(3,610)		—		(3,610)
Unrealized loss on interest rate swap	—	—		—		(3,379)		—		(3,379)
Net loss	—	—		—		—		(25,506)		(25,506)
Balance at September 30, 2019	25,261,093	$	3	$	344,637	$	(15,171)	$	(111,181)	$	218,288


	September 30,
	2019	2018

Stock options	330,590	410,506
Restricted stock awards	709,444	1,473,898
Restricted stock units⁽¹⁾	903,643	—
Total anti–dilutive common share equivalents	1,943,677	1,884,404


	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost	$	819	1,966
Finance lease costs:
Amortization of right-of-use assets	152		611
Interest on lease liabilities	22		64

Total lease costs	$	993	2,641


	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities (in thousands):
Operating cash flows from operating leases	$	807	$	2,231
Operating cash flows form finance leases	$	16	$	68
Financing cash flows from finance leases	$	120	$	503
Right-of-use assets obtained in exchange for lease obligations (in thousands):
Operating leases	$	231	$	2,541
Weighted average remaining lease term (in years):
Operating leases			4.3
Finance leases			1.2
Weighted average discount rate
Operating leases			6.4		%
Finance leases			5.7		%


	Finance Leases		Operating Leases
Remainder of 2019	$	37	$	712
2020	85		1,768
2021	10		1,308
2022	10		1,187
2023	6		1,094
Thereafter	—		1,000
Total minimum lease payments	148		7,069
Less amount representing interest	(18)		(1,039)
Present value of lease liabilities	$	130	$	6,030

Accrued expenses and other current liabilities	$	123	$	—
Operating lease liabilities, current	—		2,045
Operating lease liabilities, noncurrent	—		3,985
Other long-term liabilities	7		—
Total lease liabilities	$	130	$	6,030


	Number of Options Outstanding	Weighted– Average Exercise Price
Outstanding at December 31, 2018	408,899	$	8.08

Options exercised	(77,444)	6.12
Options forfeited	(556)	7.74
Options expired	(309)	1.49
Outstanding at September 30, 2019	330,590	$	8.55


	Payment Due by Period
	Total		Less than 1 Year		1-3 Years		>3-5 Years		More Than 5 Years
Debt Obligations⁽¹⁾	$	350,000	$	3,500	$	7,000	$	7,000	$	332,500
Interest on Debt Obligations ⁽²⁾	$	126,642	$	19,086	$	37,495	$	36,779	$	33,282



Total	$	476,642	$	22,586	$	44,495	$	43,779	$	365,782