UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June~~September 30, 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)


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

401 Congress Ave., Suite 1850

Austin, Texas 78701

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

(512) 960-1010

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

UPLD

The Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

☐

Emerging growth company

☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No 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 ~~July 31,~~October 30, 2020, ~~25,368,192~~29,464,254 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 ~~June~~September 30, 2020 and December 31, 2019	1
	Condensed Consolidated Statements of Operations for the Three and ~~Six~~Nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019	2
	Condensed Consolidated Statements of Comprehensive Loss for the Three and ~~Six~~Nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019	3
	Condensed Consolidated Statements of Stockholders' Equity for the Three and ~~Six~~Nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019	4
	Condensed Consolidated Statements of Cash Flows for the ~~Six~~Nine Months Ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	42
Part II.	OTHER INFORMATION	43
Item 6.	Exhibits	43
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)


		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019
		(unaudited)
Assets	Assets					Assets	(unaudited)
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	87,910	$	175,024	Cash and cash equivalents	$	232,972	$	175,024
Accounts receivable (net of allowance of $1,771 and $1,238 at June 30, 2020 and December 31, 2019, respectively)		48,656		50,938
Accounts receivable (net of allowance of $1,579 and $1,238 at September 30, 2020 and December 31, 2019, respectively)						Accounts receivable (net of allowance of $1,579 and $1,238 at September 30, 2020 and December 31, 2019, respectively)	41,126		50,938
Deferred commissions, current	Deferred commissions, current	4,150		3,059		Deferred commissions, current	4,758		3,059
Unbilled receivables	Unbilled receivables	5,508		5,111		Unbilled receivables	6,912		5,111
Prepaid and other	Prepaid and other	6,604		4,748		Prepaid and other	8,064		4,748
Total current assets	Total current assets	152,828		238,880		Total current assets	293,832		238,880
Tax credits receivable	Tax credits receivable	4,378		4,186		Tax credits receivable	4,175		4,186
Property and equipment, net	Property and equipment, net	3,951		3,917		Property and equipment, net	3,181		3,917
Operating lease right-of-use asset	Operating lease right-of-use asset	13,598		8,056		Operating lease right-of-use asset	10,831		8,056
Intangible assets, net	Intangible assets, net	292,316		282,727		Intangible assets, net	285,312		282,727
Goodwill	Goodwill	379,486		346,134		Goodwill	383,336		346,134
Deferred commissions, noncurrent	Deferred commissions, noncurrent	10,160		8,763		Deferred commissions, noncurrent	11,259		8,763
Other assets	Other assets	2,666		4,165		Other assets	2,394		4,165
Total assets	Total assets	$	859,383	$	896,828	Total assets	$	994,320	$	896,828
Liabilities and stockholders’ equity	Liabilities and stockholders’ equity					Liabilities and stockholders’ equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	1,976	$	5,904	Accounts payable	$	6,469	$	5,904
Accrued compensation	Accrued compensation	5,933		11,559		Accrued compensation	6,912		11,559
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	14,118		15,344		Accrued expenses and other current liabilities	13,228		15,344
Deferred revenue	Deferred revenue	81,032		76,558		Deferred revenue	78,503		76,558
Due to sellers	Due to sellers	5,712		14,276		Due to sellers	3,494		14,276
Operating lease liabilities, current	Operating lease liabilities, current	3,756		2,533		Operating lease liabilities, current	3,233		2,533
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
Current maturities of notes payable (includes unamortized discount of $2,215 and $2,207 at September 30, 2020 and December 31, 2019, respectively)						Current maturities of notes payable (includes unamortized discount of $2,215 and $2,207 at September 30, 2020 and December 31, 2019, respectively)	3,185		3,193
Total current liabilities	Total current liabilities	115,711		129,367		Total current liabilities	115,024		129,367

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
Notes payable, less current maturities (includes unamortized discount of $9,861 and $11,369 at September 30, 2020 and December 31, 2019, respectively)						Notes payable, less current maturities (includes unamortized discount of $9,861 and $11,369 at September 30, 2020 and December 31, 2019, respectively)	519,339		521,881
Deferred revenue, noncurrent	Deferred revenue, noncurrent	2,244		496		Deferred revenue, noncurrent	1,493		496
Operating lease liabilities, noncurrent	Operating lease liabilities, noncurrent	11,217		5,862		Operating lease liabilities, noncurrent	9,224		5,862
Noncurrent deferred tax liability, net	Noncurrent deferred tax liability, net	24,577		25,685		Noncurrent deferred tax liability, net	27,299		25,685
Interest rate swap liabilities						Interest rate swap liabilities	33,073		0
Other long-term liabilities	Other long-term liabilities	33,242		676		Other long-term liabilities	624		676
Total liabilities	Total liabilities	707,146		683,967		Total liabilities	706,076		683,967

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

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
Common stock, $0.0001 par value; 50,000,000 shares authorized: 29,460,588 and 25,250,120 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively)						Common stock, $0.0001 par value; 50,000,000 shares authorized: 29,460,588 and 25,250,120 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively)	3		3
Additional paid-in capital	Additional paid-in capital	363,328		345,127		Additional paid-in capital	504,425		345,127
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(45,700)		(1,223)		Accumulated other comprehensive loss	(39,480)		(1,223)
Accumulated deficit	Accumulated deficit	(165,394)		(131,046)		Accumulated deficit	(176,704)		(131,046)
Total stockholders’ equity	Total stockholders’ equity	152,237		212,861		Total stockholders’ equity	288,244		212,861
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	859,383	$	896,828	Total liabilities and stockholders’ equity	$	994,320	$	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 June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2020		2019		2020		2019
Revenue:	Revenue:									Revenue:
Subscription and support	Subscription and support	$	67,699	$	48,715	$	131,590	$	93,698	Subscription and support	$	70,992	$	51,059	$	202,582	$	144,757
Perpetual license	Perpetual license	491		575		852		1,232		Perpetual license	411		975		1,263		2,207
Total product revenue	Total product revenue	68,190		49,290		132,442		94,930		Total product revenue	71,403		52,034		203,845		146,964
Professional services	Professional services	3,125		3,723		6,905		6,576		Professional services	2,781		3,031		9,686		9,607
Total revenue	Total revenue	71,315		53,013		139,347		101,506		Total revenue	74,184		55,065		213,531		156,571
Cost of revenue:	Cost of revenue:									Cost of revenue:
Subscription and support	Subscription and support	21,200		14,622		41,139		27,896		Subscription and support	23,562		14,678		64,701		42,574
Professional services	Professional services	2,472		1,961		4,734		3,475		Professional services	2,021		1,995		6,755		5,470
Total cost of revenue	Total cost of revenue	23,672		16,583		45,873		31,371		Total cost of revenue	25,583		16,673		71,456		48,044
Gross profit	Gross profit	47,643		36,430		93,474		70,135		Gross profit	48,601		38,392		142,075		108,527
Operating expenses:	Operating expenses:									Operating expenses:
Sales and marketing	Sales and marketing	11,820		7,989		22,751		14,971		Sales and marketing	11,760		8,709		34,511		23,680
Research and development	Research and development	10,488		7,008		19,908		13,406		Research and development	10,400		7,434		30,308		20,840
Refundable Canadian tax credits	Refundable Canadian tax credits	(194)		(85)		(496)		(171)		Refundable Canadian tax credits	(433)		(133)		(929)		(304)
General and administrative	General and administrative	17,655		12,042		34,331		22,036		General and administrative	16,864		12,196		51,195		34,232
Depreciation and amortization	Depreciation and amortization	9,037		5,744		18,308		11,003		Depreciation and amortization	9,117		6,427		27,425		17,430
Acquisition-related expenses	Acquisition-related expenses	5,781		9,264		20,939		16,987		Acquisition-related expenses	3,574		7,457		24,513		24,444
Total operating expenses	Total operating expenses	54,587		41,962		115,741		78,232		Total operating expenses	51,282		42,090		167,023		120,322
Loss from operations	Loss from operations	(6,944)		(5,532)		(22,267)		(8,097)		Loss from operations	(2,681)		(3,698)		(24,948)		(11,795)
Other expense:	Other expense:									Other expense:
Interest expense, net	Interest expense, net	(7,873)		(5,246)		(15,516)		(10,362)		Interest expense, net	(8,078)		(5,517)		(23,594)		(15,879)
Other expense, net		(15)		(692)		(1,417)		(1,453)
Loss on debt extinguishment										Loss on debt extinguishment	0		(2,317)		0		(2,317)
Other income (expense), net										Other income (expense), net	598		(228)		(819)		(1,681)
Total other expense	Total other expense	(7,888)		(5,938)		(16,933)		(11,815)		Total other expense	(7,480)		(8,062)		(24,413)		(19,877)
Loss before provision for income taxes		(14,832)		(11,470)		(39,200)		(19,912)
Benefit from income taxes		673		6,101		4,960		6,713
Loss before benefit from (provision for) income taxes										Loss before benefit from (provision for) income taxes	(10,161)		(11,760)		(49,361)		(31,672)
Benefit from (provision for) income taxes										Benefit from (provision for) income taxes	(1,149)		(547)		3,811		6,166

Net loss	Net loss	$	(14,159)	$	(5,369)	$	(34,240)	$	(13,199)	Net loss	$	(11,310)	$	(12,307)	$	(45,550)	$	(25,506)

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	$	(0.57)	$	(0.24)	$	(1.37)	$	(0.61)	Net loss per common share, basic and diluted	$	(0.42)	$	(0.50)	$	(1.77)	$	(1.13)

Weighted-average common shares outstanding, basic and diluted	Weighted-average common shares outstanding, basic and diluted	25,032,996		22,619,805		25,057,715		21,531,216		Weighted-average common shares outstanding, basic and diluted	27,220,134		24,568,483		25,725,495		22,550,232

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 June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2020		2019		2020		2019
Net loss	Net loss	$	(14,159)	$	(5,369)	$	(34,240)	$	(13,199)	Net loss	$	(11,310)	$	(12,307)	$	(45,550)	$	(25,506)
Foreign currency translation adjustment	Foreign currency translation adjustment	1,219		1,249		(2,240)		612		Foreign currency translation adjustment	2,734		(1,293)		494		(681)
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 translation gain (loss) on foreign currency denominated intercompany loans	3,927		(3,610)		(3,254)		(3,610)
Unrealized loss on interest rate swaps	Unrealized loss on interest rate swaps	(3,655)		—		(35,056)		—		Unrealized loss on interest rate swaps	(441)		(3,379)		(35,497)		(3,379)
Comprehensive loss	Comprehensive loss	$	(16,463)	$	(7,126)	$	(78,717)	$	(12,587)	Comprehensive loss	$	(5,090)	$	(20,589)	$	(83,807)	$	(33,176)

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 June 30, 2020																											Three Months Ended September 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															Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity
Balance at March 31, 2020		25,305,427	$	3	$	353,720							$	(43,396)			$									(151,235)	$	159,092
Balance at June 30, 2020														Balance at June 30, 2020	25,365,735				$	3		$	363,328		$	(45,700)	$	(165,394)	$	152,237

Issuance of stock under Company plans, net of shares withheld for tax	Issuance of stock under Company plans, net of shares withheld for tax	60,308	—		(1,372)		—		—		(1,372)			Issuance of stock under Company plans, net of shares withheld for tax	69,853				—			20			—		—		20

Issuance of stock, net of issuance costs														Issuance of stock, net of issuance costs	4,025,000				—			130,114			—		—		130,114
Stock-based compensation	Stock-based compensation	—	—		10,980		—		—		10,980			Stock-based compensation	—				—			10,963			—		—		10,963

Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—		1,219		—		1,219			Foreign currency translation adjustment	—				—			—			2,734		—		2,734
Unrealized translation gain on foreign currency denominated intercompany loans		—	—		—		132		—		132
Unrealized gain loss on interest rate swaps		—	—		—		(3,655)		—		(3,655)
Unrealized translation gain on intercompany loans with foreign subsidiaries														Unrealized translation gain on intercompany loans with foreign subsidiaries	—				—			—			3,927		—		3,927
Unrealized loss on interest rate swaps														Unrealized loss on interest rate swaps	—				—			—			(441)		—		(441)
Net loss	Net loss	—	—		—		—		(14,159)		(14,159)			Net loss	—				—			—			—		(11,310)		(11,310)
Balance at June 30, 2020		25,365,735	$	3	$	363,328	$	(45,700)	$	(165,394)	$	152,237
Balance at September 30, 2020														Balance at September 30, 2020	29,460,588				$	3		$	504,425		$	(39,480)	$	(176,704)	$	288,244


		Six Months Ended June 30, 2020																													Nine Months Ended September 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															Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity
Balance at December 31, 2019	Balance at December 31, 2019	25,250,120	$	3	$	345,127							$	(1,223)			$									(131,046)	$	212,861	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	Issuance of stock under Company plans, net of shares withheld for tax	115,615	—		(2,086)		—		—		(2,086)			Issuance of stock under Company plans, net of shares withheld for tax	185,468				—			(2,066)			—		—				(2,066)
Issuance of stock, net of issuance costs	Issuance of stock, net of issuance costs	—	—		(13)		—		—		(13)			Issuance of stock, net of issuance costs	4,025,000				—			130,101			—		—				130,101
Stock-based compensation	Stock-based compensation	—	—		20,300		—		—		20,300			Stock-based compensation	—				—			31,263			—		—				31,263
Cumulative adjustment related to adoption of accounting standard	Cumulative adjustment related to adoption of accounting standard	—	—		—		—		(108)		(108)			Cumulative adjustment related to adoption of accounting standard	—				—			—			—		(108)				(108)
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—		(2,240)		—		(2,240)			Foreign currency translation adjustment	—				—			—			494		—				494
Unrealized translation loss on foreign currency denominated intercompany loans		—	—		—		(7,181)		—		(7,181)
Unrealized gain loss on interest rate swaps		—	—		—		(35,056)		—		(35,056)
Unrealized translation loss on intercompany loans with foreign subsidiaries														Unrealized translation loss on intercompany loans with foreign subsidiaries	—				—			—			(3,254)		—				(3,254)
Unrealized loss on interest rate swaps														Unrealized loss on interest rate swaps	—				—			—			(35,497)		—				(35,497)
Net loss	Net loss	—	—		—		—		(34,240)		(34,240)			Net loss	—				—			—			—		(45,550)				(45,550)
Balance at June 30, 2020		25,365,735	$	3	$	363,328	$	(45,700)	$	(165,394)	$	152,237
Balance at September 30, 2020														Balance at September 30, 2020	29,460,588				$	3		$	504,425		$	(39,480)	$	(176,704)			$	288,244

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

Table of Contents


		Three Months Ended June 30, 2019																											Three Months Ended September 30, 2019
		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															Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity
Balance at March 31, 2019		21,443,226	$	2	$	183,700							$	(5,132)			$									(93,505)	$	85,065

Balance at June 30, 2019														Balance at June 30, 2019	25,247,707				$	3		$	338,732		$	(6,889)	$	(98,874)	$	232,972
Issuance of common stock in business combination														Issuance of common stock in business combination	4,247				—			0			—		—		0
Issuance of stock under Company plans, net of shares withheld for tax	Issuance of stock under Company plans, net of shares withheld for tax	9,481	—		(3,021)		—		—		(3,021)			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	Issuance of stock, net of issuance costs	3,795,000	1		151,152		—		—		151,153			Issuance of stock, net of issuance costs	0				0			(39)			—		—		(39)
Stock-based compensation	Stock-based compensation	—	—		6,901		—		—		6,901			Stock-based compensation	—				—			7,187			—		—		7,187

Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—		1,249		—		1,249			Foreign currency translation adjustment	—				—			—			(1,293)		—		(1,293)
Unrealized translation gain on foreign currency denominated intercompany loans		—	—		—		(3,006)		—		(3,006)
Unrealized translation loss on intercompany loans with foreign subsidiaries														Unrealized translation loss on intercompany loans with foreign subsidiaries	—				—			—			(3,610)		—		(3,610)
Unrealized loss on interest rate swaps														Unrealized loss on interest rate swaps	—				—			—			(3,379)		—		(3,379)
Net loss	Net loss	—	—		—		—		(5,369)		(5,369)			Net loss	—				—			—			—		(12,307)		(12,307)
Balance at June 30, 2019		25,247,707	$	3	$	338,732	$	(6,889)	$	(98,874)	$	232,972
Balance at September 30, 2019														Balance at September 30, 2019	25,261,093				$	3		$	344,637		$	(15,171)	$	(111,181)	$	218,288

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


	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 intercompany loans with foreign subsidiaries	—	—		—		(3,610)		—		(3,610)
Unrealized loss on interest rate swaps	—	—		—		(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)

Six Months Ended June 30,
2020 2019
Operating activities
Net loss $ (34,240) $ (13,199)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 23,395 15,152
Deferred income taxes (4,985) (12,024)
Amortization of deferred costs 1,920 1,735
Foreign currency re-measurement loss 497 (212)
Non-cash interest and other expense 1,108 565
Non-cash stock compensation expense 20,300 11,529
Changes in operating assets and liabilities, net of purchase business combinations:
Accounts receivable 5,188 8,410
Prepaids and other (6,743) 2,415
Accounts payable (6,258) (483)
Accrued expenses and other liabilities (7,101) (5,756)
Deferred revenue 2,415 (2,736)
Net cash provided by (used in) operating activities (4,504) 5,396
Investing activities
Purchase of property and equipment (696) (364)
Purchase of customer relationships (201) —
Purchase business combinations, net of cash acquired (67,651) (82,824)
Net cash used in investing activities (68,548) (83,188)
Financing activities
Payments on finance leases (83) (357)
Proceeds from notes payable, net of issuance costs (142) 39,339
Payments on notes payable (2,700) (13,749)
Taxes paid related to net share settlement of equity awards (2,140) (4,811)
Issuance of common stock, net of issuance costs 41 151,535
Additional consideration paid to sellers of businesses (9,580) (3,340)
Net cash provided by (used in) financing activities (14,604) 168,617
Effect of exchange rate fluctuations on cash 542 798
Change in cash and cash equivalents (87,114) 91,623
Cash and cash equivalents, beginning of period 175,024 16,738
Cash and cash equivalents, end of period $ 87,910 $ 108,361
Supplemental disclosures of cash flow information:
Cash paid for interest, net of interest rate swaps $ 14,861 $ 10,298
Cash paid for taxes $ 1,260 $ 1,691
Sales commissions paid, net of amortization of deferred commissions $ 2,488 $ 1,184
Non-cash investing and financing activities:
Business combination consideration including holdbacks and earnouts $ 345 $ 5,175
Equipment acquired pursuant to financing lease obligations $ — $ 44




	Nine Months Ended September 30,
	2020		2019
Operating activities
Net loss	$	(45,550)	$	(25,506)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	35,091		23,722

Deferred income taxes	(3,346)		(11,176)
Amortization of deferred costs	3,172		2,555
Foreign currency re-measurement loss	311		155
Non-cash interest and other expense	1,669		979
Non-cash stock compensation expense	31,263		18,716


Non-cash loss on retirement of fixed assets	473		0
Non-cash loss on debt extinguishment	0		2,317
Changes in operating assets and liabilities, net of purchase business combinations:
Accounts receivable	13,140		6,405
Prepaids and other	(10,093)		(4,280)
Accounts payable	(1,782)		(903)
Accrued expenses and other liabilities	(8,789)		(5,037)
Deferred revenue	(1,407)		(2,893)
Net cash provided by operating activities	14,152		5,054
Investing activities
Purchase of property and equipment	(833)		(723)
Purchase of customer relationships	(201)		(438)
Purchase business combinations, net of cash acquired	(67,651)		(105,771)

Net cash used in investing activities	(68,685)		(106,932)
Financing activities
Payments on finance leases	(86)		(499)
Proceeds from notes payable, net of issuance costs	(169)		382,306
Payments on notes payable	(4,050)		(323,218)



Taxes paid related to net share settlement of equity awards	(2,140)		(6,108)
Issuance of common stock, net of issuance costs	130,174		151,549

Additional consideration paid to sellers of businesses	(11,652)		(5,886)
Net cash provided by financing activities	112,077		198,144
Effect of exchange rate fluctuations on cash	404		302
Change in cash and cash equivalents	57,948		96,568
Cash and cash equivalents, beginning of period	175,024		16,738
Cash and cash equivalents, end of period	$	232,972	$	113,306
Supplemental disclosures of cash flow information:
Cash paid for interest, net of interest rate swaps	$	22,456	$	17,554
Cash paid for taxes	$	2,220	$	2,185
Sales commissions paid, net of amortization of deferred commissions	$	4,195	$	3,712
Non-cash investing and financing activities:
Business combination consideration including holdbacks and earnouts	$	345	$	7,926

Equipment acquired pursuant to financing lease obligations	$	0	$	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”). The condensed consolidated financial statements include the accounts of ~~the~~ Upland Software, Inc. and its wholly owned 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”) 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 ~~six~~nine months ended ~~June~~September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 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 2019 Annual Report on Form 10-K filed with the SEC on March 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 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,~~November 6, 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. To manage accounts receivable credit risk, the Company performs periodic credit evaluations of its customers and maintains current expected credit losses which considers such factors as historical loss information, geographic location of customers, current market conditions, and reasonable and supportable forecasts. The ~~$0.5~~$0.3 million increase in the allowance for credit losses as of ~~June~~September 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 ~~six~~nine months ended ~~June~~September 30, 2020, or more than 10% of accounts receivable as of ~~June~~September 30, 2020 or December 31, 2019.

Derivatives

The Company entered into a floating-to-fixed interest rate swap agreements to limit exposure to interest rate risk related to our debt. These interest rate swaps effectively ~~convert~~converted the entire balance of the Company's $540 million term loans from variable interest payments to fixed interest rate payments, based on an annualized fixed rate of 5.4%, for ~~the~~a 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 under the hypothetical derivative method and noted that all of the critical terms of the hypothetical derivative and hedging instrument were the same. The hedging relationship continues to limit the Company’s exposure to the variability in interest rates under the Company’s term loans and related cash outflows. As such, the Company has deemed this hedging relationship as highly effective in offsetting cash flows attributable to hedged risk (variability in forecasted monthly interest payments) for the term of the term loans and interest rate swap agreements. All derivative financial instruments are recorded at fair value as a net asset or liability in the accompanying condensed consolidated balance sheets. As of ~~June~~September 30, 2020 the fair value of the interest rate swaps included in ~~Other long term-liabilities~~Interest rate swap liabilities in the Company's condensed consolidated balance sheets was ~~$32.6~~$33.1 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 $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 condensed consolidated statements of operations in the period in which the hedged item affects earnings.

Fair Value of Financial Instruments

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

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

The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable and 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~~Financial Accounting Standards Board (“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 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 adopted this guidance in the first quarter of 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 adopted this guidance in the first quarter of 2020 and as a result of the adoption recorded a cumulative-effect adjustment to decrease the beginning balance of Accumulated deficit in the amount of $0.1 million, which represents the accelerated recognition of credit losses related to our trade receivables under the expected credit loss model of calculating our current 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.

2020 Acquisitions

Acquisitions completed during the ~~six~~nine months ended ~~June~~September 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 Char Software, Inc (dba Localytics), a Delaware corporation (“Localytics”), a provider of mobile app personalization and analytics solutions. Revenues recorded since the acquisition date through ~~June~~September 30, 2020 were approximately ~~$7.1~~$11.8 million.

2019 Acquisitions

Acquisitions completed during the year ended December 31, 2019 include the following:

•Postup - 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”), and Postup Digital, LLC, a Texas limited liability company, an Austin-based company providing email and audience development solutions for publishing & media brands.

•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.

•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.

•InGenius - On October 1, 2019, the Company completed its purchase of the shares comprising the entire issued share capital of InGenius Software Inc., a Canadian corporation (“InGenius”), a Computer Telephony Integration (CTI) solution for enterprise contact centers.

•Altify - On October 4, 2019, the Company’s wholly owned subsidiary, Upland Software UK, a limited company incorporated under the laws of England and Wales, 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”), a customer revenue optimization (CRO) cloud solution for sales and the extended revenue teams.

Consideration

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


		Localytics		Altify		InGenius		Cimpl		Kapost		Postup			Localytics		Altify		InGenius		Cimpl		Kapost		Postup
Cash	Cash	$	67,655	$	84,000	$	26,428	$	23,071	$	45,000	$	34,825	Cash	$	67,655	$	84,000	$	26,428	$	23,071	$	45,000	$	34,825
Holdback ⁽¹⁾	Holdback ⁽¹⁾	345		—		3,000		2,600		5,000		175		Holdback (1)	345		0		3,000		2,600		5,000		175
Contingent consideration ⁽²⁾	Contingent consideration ⁽²⁾	1,000		—		4,865		—		—		—		Contingent consideration (2)	1,000		0		4,865		0		0		0

Working capital adjustment	Working capital adjustment	—		—		—		—		(601)		—		Working capital adjustment	0		0		0		0		(601)		0
Total consideration	Total consideration	$	69,000	$	84,000	$	34,293	$	25,671	$	49,399	$	35,000	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 following closing for Localytics, InGenius, Cimpl, Kapost and Postup.

(2)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 conditions at the time of acquisition. The maximum potential payout for the InGenius and Localytics earn-outs were $15.0 million and $1.0 million, respectively. These earn-outs were paid in full during the nine months ended September 30, 2020 based on their ending fair values of $4.5 million and $1.0 million, respectively. Refer to Note 3 for further discussion regarding the calculation of fair value of acquisition related earn-outs.

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 Altify and the~~ 2020 acquisition of Localytics ~~are~~is preliminary as the Company has not ~~obtained and evaluated all of~~finalized the ~~detailed information necessary to finalize the opening balance sheet amounts in all respects, specifically the tax impact not being finalized as of June 30, 2020.~~purchase price allocation. Management has recorded the purchase price allocations based upon acquired company information that is currently available. Management expects to complete its purchase price ~~allocations~~allocation for ~~these acquisitions in~~Localytics no later than the ~~second half~~first quarter of ~~2020.~~2021.

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


		Preliminary						Final															Preliminary		Final
		Localytics		Altify		InGenius		Cimpl		Kapost		Postup			Localytics		Altify		InGenius		Cimpl		Kapost		Postup
Year Acquired	Year Acquired	2020		2019		2019		2019		2019		2019		Year Acquired	2020		2019		2019		2019		2019		2019

Cash	Cash	$	—	$	730	$	11	$	142	$	—	$	19	Cash	$	0	$	730	$	11	$	142	$	0	$	19
Accounts receivable	Accounts receivable	3,648		6,629		1,456		1,041		3,901		1,054		Accounts receivable	3,648		6,629		1,456		1,041		3,901		1,054
Other current assets	Other current assets	6,325		889		317		278		1,066		1,373		Other current assets	6,325		889		317		278		1,066		1,373
Tax credits receivable	Tax credits receivable	—		916		1,489		1,383		—		—		Tax credits receivable	0		916		1,489		1,383		0		0
Operating lease right-of-use asset	Operating lease right-of-use asset	7,605		1,085		1,099		230		2,136		—		Operating lease right-of-use asset	7,605		1,085		1,099		230		2,136		0
Property and equipment	Property and equipment	409		139		364		233		686		743		Property and equipment	409		139		364		233		686		743
Customer relationships	Customer relationships	30,500		50,954		11,208		12,430		23,735		10,667		Customer relationships	30,500		50,954		11,208		12,430		23,735		10,667
Trade name	Trade name	300		1,112		424		216		787		468		Trade name	300		1,112		424		216		787		468
Technology	Technology	6,600		7,648		4,576		3,240		5,756		2,943		Technology	6,600		7,648		4,576		3,240		5,756		2,943

Goodwill	Goodwill	40,109		34,426		24,141		12,928		20,953		21,973		Goodwill	39,919		34,426		24,141		12,928		20,953		21,973
Other assets	Other assets	6		378		—		6		—		—		Other assets	6		378		0		6		0		0
Total assets acquired	Total assets acquired	95,502		104,906		45,085		32,127		59,020		39,240		Total assets acquired	95,312		104,906		45,085		32,127		59,020		39,240
Accounts payable	Accounts payable	(2,382)		(1,499)		(128)		(305)		(50)		(447)		Accounts payable	(2,382)		(1,499)		(128)		(305)		(50)		(447)
Accrued expense and other	Accrued expense and other	(6,752)		(3,901)		(2,807)		(1,206)		(3,724)		(530)		Accrued expense and other	(6,752)		(3,901)		(2,807)		(1,206)		(3,724)		(530)
Deferred tax liabilities	Deferred tax liabilities	(4,721)		(7,083)		(4,897)		(4,595)		(1,954)		(3,248)		Deferred tax liabilities	(4,531)		(7,083)		(4,897)		(4,595)		(1,954)		(3,248)
Deferred revenue	Deferred revenue	(4,812)		(7,907)		(2,960)		(350)		(3,893)		(15)		Deferred revenue	(4,812)		(7,907)		(2,960)		(350)		(3,893)		(15)
Operating lease liabilities	Operating lease liabilities	(7,835)		(516)		—		—		—		—		Operating lease liabilities	(7,835)		(516)		0		0		0		0

Total liabilities assumed	Total liabilities assumed	(26,502)		(20,906)		(10,792)		(6,456)		(9,621)		(4,240)		Total liabilities assumed	(26,312)		(20,906)		(10,792)		(6,456)		(9,621)		(4,240)
Total consideration	Total consideration	$	69,000	$	84,000	$	34,293	$	25,671	$	49,399	$	35,000	Total consideration	$	69,000	$	84,000	$	34,293	$	25,671	$	49,399	$	35,000

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

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


		Useful Life				Useful Life
		June 30, 2020	December 31, 2019		September 30, 2020	December 31, 2019
Customer relationships	Customer relationships	8.0	9.8	Customer relationships	8.0	9.8
Trade name	Trade name	2.0	9.2	Trade name	2.0	9.2
Developed technology	Developed technology	5.0	7.9	Developed technology	5.0	7.9

Total weighted-average useful life	Total weighted-average useful life	7.4	9.5	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 Altify during the ~~six~~nine months ended ~~June~~September 30, 2020 was related primarily to a $1.0 million decrease in deferred tax liabilities.

The goodwill of ~~$154.5~~$154.3 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 $6.2 million.

Total transaction related expenses incurred with respect to acquisition activity during the three months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 were ~~$0.2~~$0.0 million and ~~$3.6~~$2.2 million, respectively, and during the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 were $3.5 million and ~~$4.0~~$6.2 million, respectively. Transaction related expenses, excluding transformation costs, include expenses such as banker fees, legal and professional fees, insurance costs, and deal bonuses.

Other Acquisitions and Divestitures

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

In the fourth quarter of 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 recognized a $2.0 million 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.~~operations. 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 of liabilities, primarily ~~consisting of~~ 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 December 31, 2019, the Company ~~has~~had 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 of 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 sheets.

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

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


		Fair Value Measurements at June 30, 2020															Fair Value Measurements at September 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		$	—	$	32,632	$	—	$	32,632
Interest rate swap liabilities										Interest rate swap liabilities	$	0	$	33,073	$	0	$	33,073


		Fair Value Measurements at December 31, 2019															Fair Value Measurements at December 31, 2019
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
Assets:	Assets:									Assets:
Interest rate swap asset		$	—	$	2,424	$	—	$	2,424
Interest rate swap assets										Interest rate swap assets	$	0	$	2,424	$	0	$	2,424
Liabilities:	Liabilities:									Liabilities:
Earnout consideration liability	Earnout consideration liability	$	—	$	—	$	4,394	$	4,394	Earnout consideration liability	$	0	$	0	$	4,394	$	4,394

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) (unaudited):


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

Remeasurement adjustments:
Gain included in earnings	155



Acquisitions and settlements:

Acquisitions	1,000

Settlements ⁽¹⁾	(5,549)
Balance at ~~June~~September 30, 2020	$	—0

(1) Includes payments of $1.0 million and $4.5 million for the outstanding balance of earnout liabilities related to the acquisition of Localytics and InGenius, respectively, as describe in Note 2. Acquisitions.

~~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 ~~June~~September 30, 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 ~~June~~September 30, 2020 and December 31, 2019 are ~~$536.0~~$534.6 million and $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 ~~six~~nine months ended ~~June~~September 30, 2020 are summarized in the table below (in thousands):


Balance at December 31, 2019	$	346,134
Acquired in business combinations	39,646

Adjustment related to prior year business combinations	(996)
Adjustment related to finalization of current year business combinations	~~463~~273
Foreign currency translation adjustment	~~(5,761)~~(1,721)
Balance at ~~June~~September 30, 2020	$	~~379,486~~383,336

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

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


		Estimated Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount			Estimated Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
June 30, 2020:
September 30, 2020:									September 30, 2020:
Customer relationships	Customer relationships	1-10	$	308,385	$	69,974	$	238,411	Customer relationships	1-10	$	312,603	$	79,161	$	233,442
Trade name	Trade name	1.5-10	8,966		4,255		4,711		Trade name	1.5-10	9,093		4,495		4,598
Developed technology	Developed technology	4-9	76,800		27,989		48,811		Developed technology	4-9	77,807		30,821		46,986
Non-compete agreements	Non-compete agreements	3	1,148		765		383		Non-compete agreements	3	1,148		862		286
Total intangible assets	Total intangible assets		$	395,299	$	102,983	$	292,316	Total intangible assets		$	400,651	$	115,339	$	285,312


	Estimated Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
December 31, 2019:
Customer relationships	1-10	$	283,005	$	53,984	$	229,021
Trade name	1.5-10	8,827		3,884		4,943
Developed technology	4-9	71,522		23,333		48,189
Non-compete agreements	3	1,148		574		574
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. During the ~~six~~nine months ended ~~June~~September 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 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 of certain customer relationship assets included in the 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 ~~June~~September 30, 2020 and ~~June~~September 30, 2019 was $11.2 million and ~~$7.2~~$8.0 million, respectively, and the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 was ~~$22.4~~$33.6 million and ~~$14.0~~$22.1 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~~changed 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~~As of September 30, 2020, the 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 2020	Remainder of 2020	$	22,079	Remainder of 2020	$	10,933
2021	2021	42,822		2021	42,822
2022	2022	40,290		2022	40,290
2023	2023	38,244		2023	38,244
2024	2024	35,603		2024	35,603
2025 and thereafter	2025 and thereafter	113,278		2025 and thereafter	117,420
Total	Total	$	292,316	Total	$	285,312

5. Income Taxes

The Company’s income tax benefit from (provision for) the three and ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 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 $1.1 million and benefit of ~~$0.7 million and $5.0~~$3.8 million recorded for the three and ~~six~~nine months ended ~~June~~September 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.~~carryforwards, and an increase in net deferred tax liabilities in the UK associated with the change in the applicable UK tax rate. 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~~$4.2 million during the nine months ended September 30, 2020 that had previously been offset by a valuation allowance. ~~Approximately $0.5~~An adjustment reducing the benefit by approximately $0.2 million ~~of this benefit~~ was recognized ~~for~~during the three months ended ~~June~~September 30, 2020.

The tax provision of $0.5 million and tax benefit of ~~$6.1 million and $6.7~~$6.2 million recorded for the three and ~~six~~nine months ended ~~June~~September 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. This entire benefit was recognized for the ~~three~~nine month period ended ~~June~~September 30, 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 ~~June~~September 30, 2020 and ~~June~~September 30, 2019, respectively. As of ~~June~~September 30, 2020, Upland had ~~$353~~$351 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 the estimated net operating losses acquired in the current year via acquisitions based on information available as of ~~June~~September 30, 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. The Company and its subsidiaries file tax returns in the U.S. federal jurisdiction and in several state and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years ending before December 31, 2016 and is no longer subject to state and local or foreign income tax examinations by tax authorities 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 2016 remain open to adjustment until the statute of limitations closes for the tax year in which the net operating losses are utilized.

6. Debt

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


		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019
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
Senior secured loans (includes unamortized discount of $12,076 and $13,576 based on an imputed interest rate of 5.8% and 5.8%, at September 30, 2020 and December 31, 2019, respectively)						Senior secured loans (includes unamortized discount of $12,076 and $13,576 based on an imputed interest rate of 5.8% and 5.8%, at September 30, 2020 and December 31, 2019, respectively)	$	522,524	$	525,074

Less current maturities	Less current maturities	(3,184)		(3,193)		Less current maturities	(3,185)		(3,193)
Total long-term debt	Total long-term debt	$	520,155	$	521,881	Total long-term debt	$	519,339	$	521,881

Credit Facility

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

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

Payment terms

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

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

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

Interest rate swaps

On August 6, 2019, the Company 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.~~Facility. 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 ~~June~~September 30, 2020, the fair value of the interest rate swap was ~~$32.6~~$33.1 million liability as a result of a ~~decline~~

decline in short term interest rates. In the next twelve months, the Company estimates that ~~$5.4~~$5.8 million will be reclassified from Accumulated other comprehensive income (loss) and recorded as an increase to Interest expense.


		Three Months Ended June 30, 2020		Six Months Ended June 30, 2020			Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020
(Loss) gain recognized in Other comprehensive income on derivative financial instruments	(Loss) gain recognized in Other comprehensive income on derivative financial instruments	$	(3,655)	$	(35,056)	(Loss) gain recognized in Other comprehensive income on derivative financial instruments	$	(441)	$	(35,497)
(Loss) gain reclassified from Other comprehensive income to Interest expense	(Loss) gain reclassified from Other comprehensive income to Interest expense	$	1,520	$	1,454	(Loss) gain reclassified from Other comprehensive income to Interest expense	$	2,013	$	3,467
Total Interest expense in which the effects of cash flow hedges are recorded	Total Interest expense in which the effects of cash flow hedges are recorded	$	5,794	$	13,191	Total Interest expense in which the effects of cash flow hedges are recorded	$	5,362	$	18,553

Revolver

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

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

Covenants

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

•Incur additional indebtedness or guarantee indebtedness of others;

•Create liens on their assets;

•Make investments, including certain acquisitions;

•Enter into mergers or consolidations;

•Dispose of assets;

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

•Enter into transactions with affiliates; and

•Prepay indebtedness or make changes to certain agreements.

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

In addition, the Credit Facility contains customary events of default subject to customary cure periods for certain defaults that include, among others, non-payment defaults, inaccuracy of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness, change in control, bankruptcy and insolvency defaults and material judgment defaults. The occurrence of an event of default could result in the acceleration of Term Loans and Revolver and a right by the agent and lenders to exercise remedies. At the election of the lenders, a default interest rate shall apply on all obligations during an event of default, at a rate per annum equal to 2.00% above the applicable interest rate. The Term Loan and Revolver are secured by substantially all of the Company's assets. As of ~~June~~September 30, 2020 the Company was in compliance with all covenants under the Credit Facility.

Cash interest costs averaged 5.4% and 6.0% for the ~~six~~nine months ended ~~June~~September 30, 2020 and for the year ended December 31, 2019, respectively. In addition, as of ~~June~~September 30, 2020 and December 31, 2019 the Company had ~~$12.6~~$12.1 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.

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

Numerator:	Numerator:									Numerator:
Net Loss	Net Loss	$	(14,159)	$	(5,369)	$	(34,240)	$	(13,199)	Net Loss	$	(11,310)	$	(12,307)	$	(45,550)	$	(25,506)

Denominator:	Denominator:									Denominator:
Weighted–average common shares outstanding, basic and diluted	Weighted–average common shares outstanding, basic and diluted	25,032,996		22,619,805		25,057,715		21,531,216		Weighted–average common shares outstanding, basic and diluted	27,220,134		24,568,483		25,725,495		22,550,232
Net loss per common share, basic and diluted	Net loss per common share, basic and diluted	$	(0.57)	$	(0.24)	$	(1.37)	$	(0.61)	Net loss per common share, basic and diluted	$	(0.42)	$	(0.50)	$	(1.77)	$	(1.13)

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


		June 30,				September 30,
		2020	2019		2020	2019

Stock options	Stock options	320,840	345,792	Stock options	314,310	330,590
Restricted stock awards	Restricted stock awards	197,623	773,860	Restricted stock awards	168,124	709,444
Restricted stock units	Restricted stock units	1,778,557	891,329	Restricted stock units	1,744,595	903,643
Performance restricted stock units	Performance restricted stock units	66,297	—	Performance restricted stock units	66,297	0
Total anti–dilutive common share equivalents	Total anti–dilutive common share equivalents	2,363,317	2,010,981	Total anti–dilutive common share equivalents	2,293,326	1,943,677

8. Commitments and Contingencies

Purchase Commitments

The Company has purchase commitments related to hosting services, third-party technology used in the Company's solutions and for other services the Company purchases as part of normal operations. In certain cases these arrangements require a minimum annual purchase commitment. As of June 30, 2020, the remaining aggregate minimum purchase commitment under these arrangements was approximately $8.3 million through 2024. Obligations under contracts that we can cancel without a significant penalty are not included.

~~In addition, the~~The Company purchased software development services pursuant to a technology services agreement with DevFactory FZ-LLC for the three months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 totaling $1.8 million and $1.2 million, respectively, and for the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 were approximately ~~$3.7~~$5.5 million and ~~$2.5~~$3.7 million, respectively. The remaining purchase obligation after ~~June~~September 30, 2020 through December 31, 2020 is ~~$3.7~~$1.8 million. See Note ~~12.~~11. 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~~negotiations related to the amount of an earnout. Gain contingencies related to indemnification claims are not recognized in our condensed consolidated financial statements until realized.

9. 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”~~“2018 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 2018 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.

On August 10, 2020, we filed an additional registration statement on Form S-3 (File No. 333-243728) (the “2020 S-3”). Upon the effectiveness date of the 2020 S-3, the offering of the $90.6 million remaining unsold securities under the 2018 S-3 was deemed terminated. On August 14, 2020, we completed a registered underwritten public offering pursuant to the 2020 S-3 of 3,500,000 shares of the Company's $0.0001 par value common stock for an offering price to the public of $34.00 per share. In addition, on August 27, 2020 we closed the sale of an additional 525,000 shares issuable pursuant to a fully exercised option to purchase additional shares granted to the underwriters of the offering. The total net proceeds of the offering, including shares issued pursuant to the fully exercised option, of $130.1 million, net of issuance costs of $6.8 million, will be used for general business purposes, including the funding of future acquisitions.

Accumulated Other Comprehensive Income (Loss)

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

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


		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019
Foreign currency translation adjustment	Foreign currency translation adjustment	$	(6,770)	$	(4,530)	Foreign currency translation adjustment	$	(4,036)	$	(4,530)
Unrealized translation gain (loss) on foreign currency denominated intercompany loans		(6,298)		883
Unrealized translation gain (loss) on intercompany loans with foreign subsidiaries						Unrealized translation gain (loss) on intercompany loans with foreign subsidiaries	(2,371)		883
Unrealized gain (loss) on interest rate swaps	Unrealized gain (loss) on interest rate swaps	(32,632)		2,424		Unrealized gain (loss) on interest rate swaps	(33,073)		2,424
Total accumulated other comprehensive loss	Total accumulated other comprehensive loss	$	(45,700)	$	(1,223)	Total accumulated other comprehensive loss	$	(39,480)	$	(1,223)

~~Income~~The unrealized translation loss on intercompany loans with foreign subsidiaries as of September 30, 2020 is net of income tax expense of $0.8 million. The income tax expense/benefit allocated to each component of other comprehensive income (loss) for all other periods and components is not material. The Company reclassifies taxes from AOCI to earnings as the items to which the tax effects relate are similarly reclassified.

The functional currency of our foreign subsidiaries are primarily the local currencies. Results of operations for foreign subsidiaries are translated in United 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~~had foreign currency denominated intercompany loans that were used to fund the acquisitions of foreign subsidiaries. As of April 1, 2020 the Company amended the loan agreements to be denominated in U.S dollars. Due to the long-term nature of the ~~loan,~~loans, the ~~foreign currency~~unrealized translation gains (losses) resulting from re-measurement are recognized as a component of accumulated other comprehensive income (loss). ~~As of April 1, 2020 the Company amended the loan agreements to be denominated in U.S dollar.~~

Stock-Based Compensation

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

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Cost of revenue	$	624	$	250	$	1,512	$	763
Research and development	1,005		683		2,639		1,637
Sales and marketing	968		508		2,415		1,012
General and administrative	8,366		5,746		24,697		15,304
Total	$	10,963	$	7,187	$	31,263	$	18,716

Restricted Stock Units

Beginning in 2019, the Company 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 ~~six~~nine months ended ~~June~~September 30, 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, 2019	Unvested balances at December 31, 2019	790,807	$	39.55	Unvested balances at December 31, 2019	790,807	$	39.55
Units granted	Units granted	1,281,523	40.30		Units granted	1,320,041	40.24
Units vested	Units vested	(205,053)	40.55		Units vested	(268,449)	39.77
Awards forfeited	Awards forfeited	(88,720)	42.09		Awards forfeited	(97,804)	41.60
Unvested balances at June 30, 2020		1,778,557	$	39.85
Unvested balances at September 30, 2020					Unvested balances at September 30, 2020	1,744,595	$	39.93

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~~nine months ended ~~June~~September 30, 2020 was as follows:


		Number of PRSUs Outstanding	Weighted-Average Grant Date Fair Value (1)			Number of PRSUs Outstanding	Weighted-Average Grant Date Fair Value (1)
Unvested balances at December 31, 2019	Unvested balances at December 31, 2019	—	$	—	Unvested balances at December 31, 2019	0	$	0
Units granted	Units granted	66,297	79.72		Units granted	66,297	79.72

Unvested balances at June 30, 2020		66,297	$	79.72
Unvested balances at September 30, 2020					Unvested balances at September 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~~nine months ended ~~June~~September 30, 2020 are as follows:


			~~June~~September 30, 2020
Expected volatility			45.1%
Risk-free interest rate			1.3%
Remaining performance period (in years)			1.35
Dividend yield			—0

Restricted Stock Awards

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


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

Awards vested	Awards vested	(149,590)	27.20		Awards vested	(179,089)	27.47
Awards forfeited	Awards forfeited	(24,004)	28.45		Awards forfeited	(24,004)	28.45
Unvested balances at June 30, 2020		197,623	$	29.03
Unvested balances at September 30, 2020					Unvested balances at September 30, 2020	168,124	$	29.08

Stock Option Activity

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


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

Options exercised	Options exercised	(8,712)	6.13		Options exercised	(15,169)	5.77

Options expired	Options expired	(146)	1.79		Options expired	(219)	1.79
Outstanding at June 30, 2020		320,840	$	8.64
Outstanding at September 30, 2020					Outstanding at September 30, 2020	314,310	$	8.71

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.

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 1 to 3 years in length. Amounts that have been invoiced are recorded in accounts receivable and deferred revenues or subscription and support 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 subscription and support revenue at the end of each month and is invoiced concurrently. Subscription and support revenue includes revenue related to the Company’s digital engagement application which provides short code connectivity for its two-way short message service (“SMS”) programs and campaigns. As discussed further in the “Principal vs. Agent Considerations” section below, the Company recognizes revenue related to these messaging-related subscription contracts on a gross basis.

Perpetual License 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 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~~records individual performance obligations separately if they are distinct by allocating the contract's total transaction price to each performance obligation in an amount based on the relative standalone selling price ~~or SSP,~~(“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~~Principal vs. Agent Considerations

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

their use to create the combined output. The Company's control is evidenced by its involvement in the integration of the good or service on its platform before it is transferred to its customers, and is further supported by the Company being primarily responsible to its customers and having a level of discretion in establishing pricing. While none of the factors individually are considered presumptive or determinative, in reaching conclusions on gross versus net revenue recognition, the Company places the most weight on the analysis of whether or not it is the primary obligor in the arrangement.

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

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

Contract Balances

The timing of revenue recognition, billings and cash collections can result in billed accounts receivable, unbilled receivables, and deferred revenues. Billings scheduled to occur after the performance obligation has been satisfied and revenue recognition has occurred result in unbilled receivables, which are expected to be billed during the succeeding twelve-month period and are recorded in Unbilled receivables in our condensed consolidated balance sheets. A contract liability results when we receive prepayments or deposits from customers in advance for implementation, maintenance and other services, as well as subscription fees. Customer prepayments are generally applied against invoices issued to customers when services are performed and billed. We recognize contract liabilities as 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.

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

~~Contract Balances~~

The timing of revenue recognition, billings and cash collections can result in billed accounts receivable, unbilled receivables, and deferred revenues. Billings scheduled to occur after the performance obligation has been satisfied and revenue recognition has occurred result in unbilled receivables, which are expected to be billed during the succeeding twelve-month period and are recorded in 'Unbilled receivables' in our condensed consolidated balance sheets. A contract liability results when we receive prepayments or deposits from customers in advance for implementation, maintenance and other services, as well as subscription fees. Customer prepayments are generally applied against invoices issued to customers when services are performed and billed. We recognize contract liabilities as 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~~invoiced in arrears and for which the Company believes it has an unconditional right to payment. As of ~~June~~September 30, 2020 and December 31, 2019, unbilled receivables were ~~$5.5~~$6.9 million and $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 new customer 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~~management’s estimate in a pattern similar to how revenue is recognized. Commissions paid on renewal contracts are not commensurate with commissions paid on new customer contracts, as such, deferred commissions related to renewals are capitalized and amortized over the estimated 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 ~~six~~nine months ended ~~June~~September 30, 2020.

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


Balance at December 31, 2019	$	11,822


Capitalized deferred commissions	~~4,388~~7,284
Amortization of deferred commissions	~~(1,900)~~(3,089)
Balance at ~~June~~September 30, 2020	$	~~14,310~~16,017

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 ~~six~~nine months ended ~~June~~September 30, 2020, we recognized ~~$51.1~~$63.3 million and ~~$2.3~~$2.6 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 ~~six~~nine months ended ~~June~~September 30, 2020 we recognized ~~$3.3~~$4.4 million in revenue that was included in the acquired deferred revenue balance of our 2020 acquisition as disclosed in Note 2.2, Acquisitions.

Remaining Performance Obligations

As of ~~June~~September 30, 2020, approximately ~~$242.8~~$234.5 million of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately ~~70%~~71% 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 June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2020		2019		2020		2019
Revenues:	Revenues:									Revenues:
Subscription and support:	Subscription and support:									Subscription and support:
United States	United States	$	50,619	$	34,436	$	96,590	$	64,275	United States	$	53,356	$	36,503	$	149,946	$	100,778
United Kingdom	United Kingdom	9,350		9,432		19,346		18,748		United Kingdom	9,518		9,334		28,864		28,082
Canada	Canada	3,360		1,348		7,942		3,732		Canada	3,318		2,501		11,260		6,233
Other International	Other International	4,370		3,499		7,712		6,943		Other International	4,800		2,721		12,512		9,664
Total subscription and support revenue	Total subscription and support revenue	67,699		48,715		131,590		93,698		Total subscription and support revenue	70,992		51,059		202,582		144,757
Perpetual license:	Perpetual license:									Perpetual license:
United States	United States	222		484		504		1,052		United States	345		830		849		1,882
United Kingdom	United Kingdom	—		8		16		17		United Kingdom	0		20		16		37
Canada	Canada	36		15		57		57		Canada	14		37		71		94
Other International	Other International	233		68		275		106		Other International	52		88		327		194
Total perpetual license revenue	Total perpetual license revenue	491		575		852		1,232		Total perpetual license revenue	411		975		1,263		2,207

Professional services:	Professional services:									Professional services:
United States	United States	2,197		2,555		4,907		4,535		United States	1,865		2,229		6,773		6,764
United Kingdom	United Kingdom	375		693		1,189		1,184		United Kingdom	432		525		1,621		1,709
Canada	Canada	96		172		234		292		Canada	137		114		371		406
Other International	Other International	457		303		575		565		Other International	347		163		921		728
Total professional service revenue	Total professional service revenue	3,125		3,723		6,905		6,576		Total professional service revenue	2,781		3,031		9,686		9,607
Total revenue	Total revenue	$	71,315	$	53,013	$	139,347	$	101,506	Total revenue	$	74,184	$	55,065	$	213,531	$	156,571

~~12.~~11. 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 2020 for software development services pursuant to this agreement in the amount of $7.3 million. For years after 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 2020 total revenues increase by 10% as compared to 2019 total revenues, then the 2021 purchase commitment will increase by approximately $0.8 million from the 2020 purchase commitment amount to approximately $8.1 million. The Company purchased software development services pursuant to this agreement with DevFactory of $1.8 million and $1.2 million during the three months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, respectively, and for the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 were approximately ~~$3.7~~$5.5 million and ~~$2.5~~$3.7 million, respectively. As of ~~June~~September 30, 2020 and December 31, 2019 amounts included in accounts payable owed to this company totaled ~~$1.8~~$0.0 million and $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 ~~June~~September 30, 2020 and ~~June~~September 30, 2019 of approximately ~~$1.4~~$1.2 million and ~~$0.9~~$0.8 million, respectively, and for the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 were approximately ~~$2.5~~$3.7 million and ~~$1.9~~$2.7 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 2020. As of ~~June~~September 30, 2020 and December 31, 2019 amounts included in accounts payable and accrued liabilities owed to this company totaled ~~$1.4~~$1.1 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~~approximately 26.18% interest in Visionael. The Company received fees from this arrangement of $15,000 ~~and $15,000 during~~for each of the three months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, respectively, and ~~$30,000 and $30,000~~$45,000 for each of the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, respectively. In connection with its arrangement with Visionael, the Company has provided advances to Visionael to help cover short term working capital needs. As of September 30, 2020 and December 31, 2019 advances to Visionael included in Prepaid and other on the Company’s condensed consolidated balance sheets totaled $0.5 million and $0.3 million, respectively.

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, 2019, filed on March 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. These forward-looking statements include, but are not limited to, statements concerning the following:

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

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

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

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

•our expectations with regard to revenue from perpetual licenses and 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, 2019, filed with the SEC on March 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 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 and our four cloud offerings are as follows:

•Customer Experience Management Cloud. The Upland Customer Experience Management Cloud or (“CXM ~~Cloud,~~Cloud”), enables organizations to manage the complete customer lifecycle from awareness to acquisition to advocacy across multiple channels - including email, short message service ~~or SMS,~~(“SMS”), multimedia messaging service ~~or MMS,~~(“MMS”), web, social, and mobile apps.

•Enterprise Sales and Marketing Cloud. The Upland Enterprise Sales and Marketing Cloud or (“ESM ~~Cloud,~~Cloud”) enables sales and marketing organizations to optimize sales activities, digital content production, automate key proposal and reference processes, and track key metrics to more effectively and predictably drive revenue retention and growth.

•Project and IT Management Cloud. The Upland Project and IT Management Cloud or (“PITM ~~Cloud,~~Cloud”) enables professional services and information technology (“IT”) organizations to better manage services delivery, project portfolios, enterprise knowledge sharing and spending across projects and IT/telecom infrastructure.

•Document Workflow Cloud. The Upland Document Workflow Cloud or (“DW ~~Cloud,~~Cloud) enables enterprises to manage and automate document intensive business processes with data security through scan and fax platforms, data monitoring and breach prevention capabilities, and the automated routing of content to its final destination.

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 corporations and government agencies to small- and medium-sized businesses. We have more than ~~9,000~~10,000 customers with over 1,000,000 users across a broad range of industries, including financial services, retail, technology, manufacturing, legal, education, consumer goods, media, telecommunications, government, non-profit, food and beverage, healthcare and life sciences.

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 $222.6 million in 2019 (and to ~~$139.3~~$213.5 million for the ~~six~~nine months ended ~~June~~September 30, 2020), representing an approximate 878% growth rate between 2012 and 2019. During the ~~six~~nine months ended ~~June~~September 30, 2020 foreign revenue as a percent of total revenue decreased to ~~27%~~26% compared to 30% during the year ended December 31, 2019. See Note 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~~decided 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 2.2, Acquisitions and Note 4.4, 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-six acquisitions from February 2012 through ~~June~~September 30, 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%~~96% 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~~nine months ended ~~June~~September 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~~fourth quarter of 2020 as a result of the ~~pandemic, which may be partially mitigated~~pandemic. To date in 2020, the impact to new bookings and churn attributable to Covid-19 has been more than offset 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~~

During the ~~pace~~second and third quarters of 2020 we paused our acquisition activity ~~until, at least, the fourth quarter of 2020 while we continue~~in order to gauge the overall economic impact of the pandemic and focus on evaluating our pipeline of opportunities. AsThis resulted in a ~~result, we anticipate~~steady decrease in acquisition related ~~costs to continue to decrease for~~expenses over this period. When acquisition activity picks up in future quarters, this downward trend in quarterly acquisition related expenses could flatten and potentially increase depending upon the ~~remainder~~size, timing and complexity of ~~2020.~~future acquisitions.

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 (benefit from) income taxes, stock-based compensation expense, acquisition-related expenses, and purchase accounting adjustments for deferred revenue.

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


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

		(dollars in thousands)															(dollars in thousands)
Reconciliation of net loss to Adjusted EBITDA:	Reconciliation of net loss to Adjusted EBITDA:									Reconciliation of net loss to Adjusted EBITDA:
Net loss	Net loss	$	(14,159)	$	(5,369)	$	(34,240)	$	(13,199)	Net loss	$	(11,310)	$	(12,307)	$	(45,550)	$	(25,506)
Add:	Add:									Add:

Depreciation and amortization expense	Depreciation and amortization expense	11,658		7,765		23,395		15,152		Depreciation and amortization expense	11,696		8,570		35,091		23,722
Interest expense, net	Interest expense, net	7,873		5,246		15,516		10,362		Interest expense, net	8,078		5,517		23,594		15,879

Loss on debt extinguishment										Loss on debt extinguishment	—		2,317		—		2,317
Other expense (income), net	Other expense (income), net	15		692		1,417		1,453		Other expense (income), net	(598)		228		819		1,681
Benefit from income taxes		(673)		(6,101)		(4,960)		(6,713)
Provision for (benefit from) income taxes										Provision for (benefit from) income taxes	1,149		547		(3,811)		(6,166)
Stock-based compensation expense	Stock-based compensation expense	10,980		6,901		20,300		11,529		Stock-based compensation expense	10,963		7,187		31,263		18,716
Acquisition-related expense	Acquisition-related expense	5,781		9,264		20,939		16,987		Acquisition-related expense	3,574		7,457		24,513		24,444

Purchase accounting deferred revenue discount	Purchase accounting deferred revenue discount	2,272		685		5,973		1,282		Purchase accounting deferred revenue discount	1,408		1,176		7,381		2,458
Adjusted EBITDA	Adjusted EBITDA	$	23,747	$	19,083	$	48,340	$	36,853	Adjusted EBITDA	$	24,960	$	20,692	$	73,300	$	57,545

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.

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 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.


	Three Months Ended September 30,								Nine Months Ended September 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	$	70,992	96	%	$	51,059	93	%	$	202,582	95	%	$	144,757	92	%
Perpetual license	411		1	%	975		2	%	1,263		1	%	2,207		1	%
Total product revenue	71,403		97	%	52,034		95	%	203,845		96	%	146,964		93	%
Professional services	2,781		3	%	3,031		5	%	9,686		4	%	9,607		7	%
Total revenue	74,184		100	%	55,065		100	%	213,531		100	%	156,571		100	%
Cost of revenue:
Subscription and support (1)(3)	23,562		32	%	14,678		27	%	64,701		30	%	42,574		27	%
Professional services (1)	2,021		2	%	1,995		3	%	6,755		3	%	5,470		4	%
Total cost of revenue	25,583		34	%	16,673		30	%	71,456		33	%	48,044		31	%
Gross profit	48,601		66	%	38,392		70	%	142,075		67	%	108,527		69	%
Operating expenses:
Sales and marketing (1)	11,760		16	%	8,709		16	%	34,511		16	%	23,680		15	%
Research and development (1)	10,400		14	%	7,434		14	%	30,308		14	%	20,840		13	%
Refundable tax credits	(433)		(1)	%	(133)		—	%	(929)		—	%	(304)		—	%
General and administrative (1)(2)	16,864		23	%	12,196		22	%	51,195		24	%	34,232		22	%
Depreciation and amortization	9,117		12	%	6,427		12	%	27,425		13	%	17,430		11	%
Acquisition-related expenses	3,574		5	%	7,457		12	%	24,513		11	%	24,444		16	%
Total operating expenses	51,282		69	%	42,090		76	%	167,023		78	%	120,322		77	%
Loss from operations	(2,681)		(3)	%	(3,698)		(6)	%	(24,948)		(11)	%	(11,795)		(8)	%
Other Expense:
Interest expense, net	(8,078)		(11)	%	(5,517)		(10)	%	(23,594)		(11)	%	(15,879)		(10)	%
Loss on debt extinguishment	—		—	%	(2,317)		(4)	%	—		—	%	(2,317)		(1)	%
Other income (expense), net	598		1	%	(228)		(1)	%	(819)		—	%	(1,681)		(2)	%
Total other expense	(7,480)		(10)	%	(8,062)		(15)	%	(24,413)		(11)	%	(19,877)		(13)	%
Loss before provision for income taxes	(10,161)		(13)	%	(11,760)		(21)	%	(49,361)		(22)	%	(31,672)		(21)	%
Benefit from (provision for) income taxes	(1,149)		(2)	%	(547)		(1)	%	3,811		1	%	6,166		5	%


Net loss	$	(11,310)	(15)	%	$	(12,307)	(22)	%	$	(45,550)	(21)	%	$	(25,506)	(16)	%





Net loss per common share, basic and diluted	$	(0.42)			$	(0.50)			$	(1.77)			$	(1.13)
Weighted-average common shares outstanding, basic and diluted	27,220,134				24,568,483				25,725,495				22,550,232

(1) Includes stock-based compensation detailed under Share-based Compensation in Note 9 — Stockholders' Equity.
(2) Includes General and administrative stock-based compensation of $8.4 million and $5.7 million for the three months September 30, 2020 and September 30, 2019, respectively, and $24.7 million and $15.3 million for the nine months ended September 30, 2020 and September 30, 2019, respectively. General and administrative expense excluding stock-based compensation as a percentage of total revenues was 11% and 12% for the three months ended September 30, 2020 and September 30, 2019, respectively, and 12% and 12% for the nine months ended September 30, 2020 and September 30, 2019, respectively..


(3) Includes depreciation and amortization of $2.6 million and $2.1 million for the three months ended September 30, 2020 and September 30, 2019, respectively, and $7.7 million and $6.3 million for the nine months ended September 30, 2020 and September 30, 2019, respectively.

Table of Contents

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

Revenue


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

		(dollars in thousands)																															(dollars in thousands)
Revenue:	Revenue:																	Revenue:
Subscription and support	Subscription and support	$	67,699		$	48,715		39	%	$	131,590		$	93,698		40	%	Subscription and support	$	70,992		$	51,059		39	%	$	202,582		$	144,757		40	%
Perpetual license	Perpetual license	491			575			(15)	%	852			1,232			(31)	%	Perpetual license	411			975			(58)	%	1,263			2,207			(43)	%
Total product revenue	Total product revenue	68,190			49,290			38	%	132,442			94,930			40	%	Total product revenue	71,403			52,034			37	%	203,845			146,964			39	%
Professional services	Professional services	3,125			3,723			(16)	%	6,905			6,576			5	%	Professional services	2,781			3,031			(8)	%	9,686			9,607			1	%
Total revenue	Total revenue	$	71,315		$	53,013		35	%	$	139,347		$	101,506		37	%	Total revenue	$	74,184		$	55,065		35	%	$	213,531		$	156,571		36	%

Percentage of revenue:	Percentage of revenue:																	Percentage of revenue:
Subscription and support	Subscription and support	95		%	92		%			94		%	92		%			Subscription and support	96		%	93		%			95		%	92		%
Perpetual license	Perpetual license	1		%	1		%			1		%	1		%			Perpetual license	1		%	2		%			1		%	1		%
Total product revenue	Total product revenue	96		%	93		%			95		%	93		%			Total product revenue	97		%	95		%			96		%	93		%
Professional services	Professional services	4		%	7		%			5		%	7		%			Professional services	3		%	5		%			4		%	7		%
Total revenue	Total revenue	100		%	100		%			100		%	100		%			Total revenue	100		%	100		%			100		%	100		%

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

Total revenue was ~~$71.3~~$74.2 million in the three months ended ~~June~~September 30, 2020, compared to ~~$53.0~~$55.1 million in the three months ended ~~June~~September 30, 2019, an increase of ~~$18.3~~$19.1 million, or 35%. The acquisitions not fully in the comparative period contributed ~~$17.2~~$14.6 million to the increase after the reduction of ~~$2.2~~$1.4 million purchase accounting deferred revenue discount in the three months ended ~~June~~September 30, 2020. Total revenue related to Sunset Assets declined by ~~$1.1~~$1.2 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 our Organic Business increased by ~~$2.2~~$5.7 million , or 5%11%. The increase in revenue from our Organic Business was primarily driven by an increase in CXM usage ~~across verticals~~ from US election-year ~~political campaigns and advocacy to media and retail.~~presidential campaigns.

Subscription and support revenue was ~~$67.7~~$71.0 million in the three months ended ~~June~~September 30, 2020, compared to ~~$48.7~~$51.1 million in the three months ended ~~June~~September 30, 2019, an increase of ~~$19.0~~$19.9 million, or 39%. The acquisitions not fully in the comparative period contributed ~~$16.6~~$14.1 million to the increase in subscription and support revenue after the reduction of ~~$2.2~~$1.4 million purchase accounting deferred revenue discount in the three months ended ~~June~~September 30, 2020. Subscription and support revenue related to our Sunset Assets decreased ~~$0.9~~$1.1 million as a result of decreased sales and marketing focus on those Sunset Assets. Therefore, subscription and support revenue for our Organic Business increased by ~~$3.3~~$6.9 million, or 8%14%. The increase in subscription and support revenue from our Organic Business was primarily driven by an increase in CXM usage from US election-year presidential campaigns.

Perpetual license revenue was ~~$0.5~~$0.4 million in the three months ended ~~June~~September 30, 2020, compared to ~~$0.6~~$1.0 million in the three months ended ~~June~~September 30, 2019, a decrease of ~~$0.1~~$0.6 million, or ~~15%~~58%. The entire decrease relates to our Organic Business, as we continue to focus on growth in subscription and support revenue.

Professional services revenue was $2.8 million in the three months ended September 30, 2020, compared to $3.0 million in the three months ended September 30, 2019, a decrease of $0.2 million, or 8%. The acquisitions not fully in the comparative period contributed ~~no perpetual license revenue in the three months ended June 30, 2020. Therefore, perpetual license revenue for our Organic Business decreased by $0.1 million, or 15%.~~

Professional services revenue was $3.1 million in the three months ended June 30, 2020, compared to $3.7 million in the three months ended June 30, 2019, a decrease of $0.6 million, or 16%. The acquisitions not fully in the comparative period contributed $0.6$0.5 million to the increase in professional services revenue in the three months ended ~~June~~September 30, 2020. Professional services revenue related to our Sunset Assets decreased ~~$0.2~~$0.1 million as a result of decreased sales and marketing focus on those Sunset Assets. Therefore, professional services revenue for our Organic Business decreased by ~~$1.0~~$0.6 million, or ~~31%.~~23%, due primarily to a reduction in on-site professional service work as a result of COVID-19 related travel impacts and restrictions.

Table of Contents

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

Total revenue was ~~$139.3~~$213.5 million in the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$101.5~~$156.6 million in the ~~six~~nine months ended ~~June~~September 30, 2019, an increase of ~~$37.8~~$56.9 million, or ~~37%~~36%. The acquisitions not fully in the comparative period contributed ~~$35.4~~$49.8 million to the increase after the reduction of ~~$5.9~~$7.4 million purchase accounting deferred revenue discount in the ~~six~~nine months ended ~~June~~September 30, 2020. Total Revenue related to Sunset Assets ~~declined~~decreased by ~~$2.0~~$3.2 million as a result of decreased sales and marketing focus on those Sunset Assets. Therefore, total revenue for the Organic Business increased by ~~$4.4~~$10.3 million, or 5%7%. The increase in revenue from our Organic Business was primarily driven by an increase in CXM usage ~~across verticals~~ from US election-year ~~political campaigns and advocacy to media and retail.~~presidential campaigns.

Subscription and support revenue was ~~$131.6~~$202.6 million in the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$93.7~~$144.8 million in the ~~six~~nine months ended ~~June~~September 30, 2019, an increase of ~~$37.9~~$57.8 million, or 40%. The acquisitions not fully in the comparative period contributed ~~$33.7~~$47.9 million to the increase in subscription and support revenue after the reduction of ~~$5.9~~$7.4 million purchase accounting deferred revenue discount in the ~~six~~nine months ended ~~June~~September 30, 2020. Subscription and support revenue related to our Sunset Assets decreased ~~$1.7~~$2.9 million as a result of decreased sales and marketing focus on those Sunset Assets. Therefore, subscription and support revenue ~~for the~~from our Organic Business increased by ~~$5.9~~$12.8 million, or 7%10%. The increase in subscription and support revenue from our Organic Business was primarily driven by an increase in CXM usage from US election-year presidential campaigns.

Perpetual license revenue was ~~$0.9~~$1.3 million in the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$1.2~~$2.2 million in the ~~six~~nine months ended ~~June~~September 30, 2019, a decrease of ~~$0.3~~$1.0 million, or ~~31%~~43%. The entire decrease relates to our Organic Business, as we continue to focus on growth in subscription and support revenue.

Professional services revenue was $9.7 million in the nine months ended September 30, 2020, compared to $9.6 million in the nine months ended September 30, 2019, an increase of $0.1 million, or 1%. The acquisitions not fully in the comparative period contributed ~~no perpetual license revenue in the six months ended June 30, 2020. Therefore, perpetual license revenue for the Organic Business decreased by $0.3 million, or 31%.~~

Professional services revenue was $6.9 million in the six months ended June 30, 2020, compared to $6.6 million in the six months ended June 30, 2019, an increase of $0.3 million, or 5%. The acquisitions not fully in the comparative period contributed $1.7$1.9 million to the increase in professional services revenue in the ~~six~~nine months ended ~~June~~September 30, 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~~from our Organic Business decreased by ~~$1.1~~$1.5 million, or 18%., due primarily to COVID-19 related travel impacts.

Cost of Revenue and Gross Profit Percentage


		Three Months Ended June 30,														Six Months Ended June 30,														Three Months Ended September 30,					Nine Months Ended September 30,
		2020			2019			% Change		2020			2019			% 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⁾	$	21,200		$	14,622		45	%	$	41,139		$	27,896		47	%	Subscription and support (1)	$	23,562		$	14,678		61	%	$	64,701		$	42,574		52	%
Professional services	Professional services	2,472			1,961			26	%	4,734			3,475			36	%	Professional services	2,021			1,995			1	%	6,755			5,470			23	%
Total cost of revenue	Total cost of revenue	23,672			16,583			43	%	45,873			31,371			46	%	Total cost of revenue	25,583			16,673			53	%	71,456			48,044			49	%
Gross profit	Gross profit	$	47,643		$	36,430		31	%	$	93,474		$	70,135		33	%	Gross profit	$	48,601		$	38,392				$	142,075		$	108,527

Percentage of total revenue:	Percentage of total revenue:																	Percentage of total revenue:
Subscription and support ⁽¹⁾	Subscription and support ⁽¹⁾	30		%	28		%			30		%	27		%			Subscription and support (1)	32		%	27		%			30		%	27		%
Professional services	Professional services	3		%	3		%			3		%	4		%			Professional services	2		%	3		%			3		%	4		%
Total cost of revenue	Total cost of revenue	33		%	31		%			33		%	31		%			Total cost of revenue	34		%	30		%			33		%	31		%
Gross profit	Gross profit	67		%	69		%			67		%	69		%			Gross profit	66		%	70		%			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	$	45		$	238				$	116		$	519				Depreciation	$	37		$	197				$	153		$	716
Amortization	Amortization	$	2,576		$	1,783				$	4,971		$	3,630				Amortization	$	2,542		$	1,946				$	7,513		$	5,576
Stock Compensation	Stock Compensation	$	570		$	353				$	888		$	513				Stock Compensation	$	624		$	250				$	1,512		$	763

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

Cost of subscription and support revenue was ~~$21.2~~$23.6 million in the three months ended ~~June~~September 30, 2020, compared to ~~$14.6~~$14.7 million in the three months ended ~~June~~September 30, 2019, an increase of ~~$6.6~~$8.9 million, or ~~45%~~61%. The acquisitions not fully in the

Table of Contents

comparative period contributed ~~$5.4~~$4.5 million to the increase to cost of subscription and support revenue, primarily related to costs associated with the delivery of the ~~Postup,~~CIMPL, InGenius, Altify, and Localytics products. Cost of subscription and support

~~Table of Contents~~

revenue related to our Sunset Assets ~~remained flat in the comparative periods.~~decreased $0.1 million. Therefore, cost of subscription and support revenue for our Organic Business increased by ~~$1.2~~$4.5 million, primarily related to an increase in telecom messaging costs related to an increase in CXM usage ~~across verticals~~ from US election-year ~~political campaigns and advocacy to media and retail.~~presidential campaigns.

Cost of professional services revenue ~~was $2.5 million in the three months ended June 30, 2020, compared to~~remained flat at $2.0 million infor the ~~three months ended June 30, 2019, an increase of $0.5 million, or 26%.~~comparable periods. The acquisitions not fully in the comparative period ~~contributed $0.6~~resulted in a $0.3 million toincrease in the ~~increase to~~ cost of professional services revenue, primarily related to ~~an increase in~~ personnel and related ~~costs in the three months ended June 30, 2020.~~costs. Therefore, cost of professional services revenue for our Organic Business decreased by ~~$0.1~~$0.3 million, primarily related to personnel and related expenses, most of which were the result of our planned operating efficiencies.

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

Cost of subscription and support revenue was ~~$41.1~~$64.7 million in the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$27.9~~$42.6 million in the ~~six~~nine months ended ~~June~~September 30, 2019, an increase of ~~$13.2~~$22.1 million, or ~~47%~~52%. The acquisitions not fully in the comparative period contributed ~~$10.4~~$14.9 million to the increase to cost of subscription and support revenue, primarily related to costs associated with the delivery of the ~~Postup, Kapost,~~ CIMPL, InGenius, Altify, and Localytics products. Cost of subscription and support revenue related to our Sunset Assets decreased $0.3 million primarily related to hosting and infrastructure costs. Therefore, cost of subscription and support revenue for the organic portion of our business increased by ~~$3.1~~$7.5 million, primarily related to an increase in messaging costs related to an increase in CXM usage ~~across verticals~~ from US election-year ~~political campaigns and advocacy to media and retail.~~presidential campaigns.

Cost of professional services revenue was ~~$4.7~~$6.8 million in the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$3.5~~$5.5 million in the ~~six~~nine months ended ~~June~~September 30, 2019, an increase of ~~$1.2~~$1.3 million, or ~~36%~~23%. The acquisitions not fully in the comparative period contributed ~~$1.3~~$1.4 million to the increase to cost of professional services revenue, primarily related to an increase in personnel and related ~~costs in the six months ended June 30, 2020.~~costs. Therefore, cost of professional services revenue for our Organic Business decreased by $0.1 million.

Operating Expenses

Sales and Marketing Expense


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

		(dollars in thousands)																															(dollars in thousands)
Sales and marketing ⁽¹⁾	Sales and marketing ⁽¹⁾	$	11,820		$	7,989		48	%	$	22,751		$	14,971		52	%	Sales and marketing (1)	$	11,760		$	8,709		35	%	$	34,511		$	23,680		46	%
Percentage of total revenue	Percentage of total revenue	17		%	15		%			16		%	15		%			Percentage of total revenue	16		%	16		%			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	$	898		$	365				$	1,447		$	504				Stock Compensation	$	968		$	508				$	2,415		$	1,012

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

Sales and marketing expense was $11.8 million in the three months ended ~~June~~September 30, 2020, compared to ~~$8.0~~$8.7 million in the three months ended ~~June~~September 30, 2019, an increase of ~~$3.8~~$3.1 million, or ~~48%~~35%. The acquisitions not fully in the comparative period contributed ~~$4.0~~$2.9 million to the increase in sales and marketing expense, primarily consisting of personnel and related costs. Sales and marketing expense related to our Sunset Assets decreased by $0.1 million primarily due to reductions in personnel costs. Therefore, sales and marketing expense for our Organic Business increased $0.3 million in the comparative periods, primarily attributable to personnel and related costs associated with our new and ongoing go-to-market investments.

Table of Contents

For the Nine Months Ended September 30, 2020

Sales and marketing expense was $34.5 million in the nine months ended September 30, 2020, compared to $23.7 million in the nine months ended September 30, 2019, an increase of $10.8 million, or 46%. The acquisitions not fully in the comparative period contributed $10.9 million to the increase in sales and marketing expense, primarily consisting of personnel and related costs in the ~~three~~nine months ended ~~June~~September 30, 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 comparative periods.~~

~~Table of Contents~~

~~For the Six Months Ended June 30, 2020~~

Sales and marketing expense was $22.8 million in the six months ended June 30, 2020, compared to $15.0 million in the six months ended June 30, 2019, an increase of $7.8 million, or 52%. The acquisitions not fully in the comparative period contributed $7.9 million to the increase in sales and marketing expense, primarily consisting of personnel and related costs in the six months ended June 30, 2020. Sales and marketing expense related to our Sunset Assets decreased by $0.4$0.5 million primarily due to reductions in personnel costs. Therefore, sales and marketing expense for the organic portion of our business increased by ~~$0.3~~$0.4 million, primarily ~~related~~attributable to personnel and related ~~costs.~~costs associated with our new and ongoing go-to-market investments.

Research and Development Expense


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

		(dollars in thousands)																															(dollars in thousands)
Research and development ⁽¹⁾	Research and development ⁽¹⁾	$	10,488		$	7,008		50	%	$	19,908		$	13,406		49	%	Research and development (1)	$	10,400		$	7,434		40	%	$	30,308		$	20,840		45	%
Refundable tax credits	Refundable tax credits	(194)			(85)			128	%	(496)			(171)			190	%	Refundable tax credits	(433)			(133)			226	%	(929)			(304)			206	%
Total research and development	Total research and development	$	10,294		$	6,923		49	%	$	19,412		$	13,235		47	%	Total research and development	$	9,967		$	7,301		37	%	$	29,379		$	20,536		43	%

Percentage of total revenue:	Percentage of total revenue:																	Percentage of total revenue:
Research and development	Research and development	15		%	13		%			14		%	13		%			Research and development	14		%	14		%			14		%	13		%
Refundable tax credits	Refundable tax credits	—		%	—		%			—		%	—		%			Refundable tax credits	(1)		%	—		%			—		%	—		%
Total research and development	Total research and development	15		%	13		%			14		%	13		%			Total research and development	13		%	14		%			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	$	1,019		$	632				$	1,634		$	953				Stock Compensation	$	1,005		$	683				$	2,639		$	1,637

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

Research and development expense was ~~$10.5~~$10.4 million in the three months ended ~~June~~September 30, 2020, compared to ~~$7.0~~$7.4 million in the three months ended ~~June~~September 30, 2019, an increase of ~~$3.5~~$3.0 million, or ~~50%~~40%. The acquisitions not fully in the comparative period contributed ~~$3.2~~$2.3 million to the increase in research and development expense primarily consisting of personnel and related ~~costs in the three months ended June 30, 2020.~~costs. 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 our Organic Business increased by ~~$0.4~~$0.8 million primarily related to an increase in non-cash stock compensation ~~expense.~~

~~Refundable tax credits were $0.2 million in the three months ended June 30, 2020, compared to $0.1 million in the three months ended June 30, 2019.~~expense and outsourced technology services costs.

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

Research and development expense was ~~$19.9~~$30.3 million in the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$13.4~~$20.8 million in the ~~six~~nine months ended ~~June~~September 30, 2019, an increase of ~~$6.5~~$9.5 million, or ~~49%~~45%. The acquisitions not fully in the comparative period contributed ~~$5.9~~$8.5 million to the increase in research and development expense primarily consisting of personnel and related ~~costs in the six months ended June 30, 2020.~~costs. Research and development expense related to our Sunset Assets decreased by ~~$0.1~~$0.2 million primarily due to reductions in personnel costs. Therefore, research and development costs for our Organic Business increased by ~~$0.7~~$1.2 million primarily related to an increase in non-cash stock compensation ~~expense.~~

~~Refundable Canadian tax credits were $0.5 million in the six months ended June 30, 2020, compared to $0.2 million in the six months ended June 30, 2019.~~expense and outsourced technology services costs.

Table of Contents

General and Administrative Expense


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

		(dollars in thousands)																															(dollars in thousands)
General and administrative ⁽¹⁾	General and administrative ⁽¹⁾	$	17,655		$	12,042		47	%	$	34,331		$	22,036		56	%	General and administrative (1)	$	16,864		$	12,196		38	%	$	51,195		$	34,232		50	%
Percentage of total revenue	Percentage of total revenue	25		%	23		%			25		%	22		%			Percentage of total revenue	23		%	22		%			24		%	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	$	8,493		$	5,551				$	16,331		$	9,559				Stock Compensation	$	8,366		$	5,746				$	24,697		$	15,304

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

General and administrative expense was ~~$17.7~~$16.9 million in the three months ended ~~June~~September 30, 2020, compared to ~~$12.0~~$12.2 million in the three months ended ~~June~~September 30, 2019, an increase of ~~$5.7~~$4.7 million, or ~~47%~~38%. An increase in general administrative expense of ~~$0.6~~$0.3 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 June 30, 2020.~~expenses. Therefore, general and administrative expense for our Organic Business increased by ~~$5.1~~$4.4 million, which was driven primarily by increased non-cash stock compensation expense, and also includes investment in our new go-to-market leadership team and other personnel related expenses, and costs incurred related to the implementation of our new enterprise resource ~~management~~planning (“ERP”) system.

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

General and administrative expense was ~~$34.3~~$51.2 million in the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$22.0~~$34.2 million in the ~~six~~nine months ended ~~June~~September 30, 2019, an increase of ~~$12.3~~$17.0 million, or ~~56%~~50%. An increase in general administrative expense of $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 six months ended June 30, 2020.~~expenses. Therefore, general and administrative expense for our Organic Business increased by ~~$10.7~~$15.4 million, which was driven primarily by increased non-cash stock compensation expense, and also includes investment in our new go-to-market leadership team and other personnel related expenses, and costs incurred related to the implementation of our new ERP system.

Depreciation and Amortization Expense


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

		(dollars in thousands)																															(dollars in thousands)
Depreciation and amortization:	Depreciation and amortization:																	Depreciation and amortization:
Depreciation	Depreciation	$	453		$	323		40	%	$	914		$	592		54	%	Depreciation	$	437		$	361		21	%	$	1,351		$	953		42	%
Amortization	Amortization	8,584			5,421			58	%	17,394			10,411			67	%	Amortization	8,680			6,066			43	%	26,074			16,477			58	%
Total depreciation and amortization	Total depreciation and amortization	$	9,037		$	5,744		57	%	$	18,308		$	11,003		66	%	Total depreciation and amortization	$	9,117		$	6,427		42	%	$	27,425		$	17,430		57	%

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

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

Depreciation and amortization expense was ~~$9.0~~$9.1 million in the three months ended ~~June~~September 30, 2020, compared to ~~$5.7~~$6.4 million in the three months ended ~~June~~September 30, 2019, an increase of ~~$3.3~~$2.7 million, or 42%. The acquisitions not fully in the comparative period increased depreciation and amortization expense by $2.9 million, primarily related to acquired intangible assets such as customer relationships, developed technology and tradenames. Therefore, depreciation and amortization expense for our Organic Business decreased by $0.2 million in the comparative periods.

Table of Contents

For the Nine Months Ended September 30, 2020

Depreciation and amortization expense was $27.4 million in the nine months ended September 30, 2020, compared to $17.4 million in the nine months ended September 30, 2019, an increase of $10.0 million, or 57%. The acquisitions not fully in the comparative period increased depreciation and amortization expense by ~~$3.4~~$10.2 million, ~~in the three months ended June 30, 2020.~~primarily related to acquired intangible assets such as customer relationships, developed technology and tradenames. . Therefore, depreciation and amortization expense for our Organic Business decreased by ~~$0.1~~$0.2 million in the comparative periods.

~~Table of Contents~~

~~For the Six Months Ended June 30, 2020~~

Depreciation and amortization expense was $18.3 million in the six months ended June 30, 2020, compared to $11.0 million in the six months ended June 30, 2019, an increase of $7.3 million, or 66%. The acquisitions not fully in the comparative period increased depreciation and amortization expense by $7.3 million in the six months ended June 30, 2020.

Acquisition-related Expenses


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

		(dollars in thousands)																															(dollars in thousands)
Acquisition-related expenses	Acquisition-related expenses	$	5,781		$	9,264		(38)	%	$	20,939		$	16,987		23	%	Acquisition-related expenses	$	3,574		$	7,457		(52)	%	$	24,513		$	24,444		—	%
Percentage of total revenue	Percentage of total revenue	7		%	17		%			15		%	16		%			Percentage of total revenue	5		%	12		%			11		%	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. Generally, without new acquisition activity, acquisition related expenses decline in subsequent sequential quarters and are no longer incurred after the first anniversary of the last closed acquisition.

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

Acquisition-related expense was ~~$5.8~~$3.6 million in the three months ended ~~June~~September 30, 2020, compared to ~~$9.3~~$7.5 million in the three months ended ~~June~~September 30, 2019, a decrease of ~~$3.5~~$3.9 million, or ~~38%~~52%. During the three months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 transaction related expenses were ~~$0.2~~$0.0 million and ~~$3.6~~$2.2 million, respectively, and transformational expenses were ~~$5.6~~$3.6 million and ~~$5.7~~$5.3 million, respectively. Transaction costs decreased compared to the same period in 2019 as a result of a slowdown in our new acquisition activity in 2020 as a result of the COVID-19 pandemic. We closed no transactions during the three months ended ~~June~~September 30, 2020 compared to ~~two transactions~~one transaction during the same period in prior year. The transformational expenses in both the current and year ago periods were primarily related to temporary transitional personnel and related costs along with accelerated rent related expenses incurred in conjunction with the closures of offices of our acquired companies as we consolidate and integrate these acquisitions. These accelerated rent related expenses increased $0.5 million to $0.8 million during the three months ended September 30, 2020 from $0.3 million during the same period in 2019.

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

Acquisition related expense was ~~$20.9~~$24.5 million in the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$17.0~~$24.4 million in the ~~six~~nine months ended ~~June~~September 30, 2019 an increase of ~~$3.9~~$0.1 million, or ~~23%~~0%. During the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019 transaction related expenses were $3.5 million and ~~$4.0~~$6.2 million, respectively, and transformational expenses were ~~$17.4~~$20.9 million and ~~$13.0~~$18.2 million, respectively. ~~Transformational~~The transformational expenses ~~for~~in both the ~~six months ended June 30, 2020 includes approximately $2.8 million of~~current and year ago periods were primarily related to temporary transitional personnel and related costs along with accelerated rent ~~expense~~related expenses incurred in conjunction with the closures of offices ~~related to recently~~of our acquired companies as we ~~continue to~~ consolidate and integrate these acquisitions.

~~Other Income (Expense)~~

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 % Change 2020 2019 % Change
(dollars in thousands)
Other expense:
Interest expense, net $ (7,873) $ (5,246) 50 % $ (15,516) $ (10,362) 50 %
Other income (expense), net (15) (692) (98) % (1,417) (1,453) (2) %
Total other expense $ (7,888) $ (5,938) 33 % $ (16,933) $ (11,815) 43 %
Percentage of total revenue:
Interest expense, net (11) % (10) % (11) % (10) %
Other income (expense), net — % (1) % (1) % (2) %
Total other expense (11) % (11) % (12) % (12) %
These accelerated rent related expenses increased $3.4 million to $4.0 million during the nine months ended September 30, 2020 from $0.6 million during the same period in 2019.

Table of Contents

Other Income (Expense)


	Three Months Ended September 30,								Nine Months Ended September 30,
	2020			2019			% Change		2020			2019			% Change

	(dollars in thousands)
Other expense:
Interest expense, net	$	(8,078)		$	(5,517)		46	%	$	(23,594)		$	(15,879)		49	%
Loss on debt extinguishment	—			(2,317)			(100)		—			(2,317)			(100)
Other income (expense), net	598			(228)			(362)	%	(819)			(1,681)			(51)	%
Total other expense	$	(7,480)		$	(8,062)		(7)	%	$	(24,413)		$	(19,877)		23	%

Percentage of total revenue:
Interest expense, net	(11)		%	(10)		%			(11)		%	(10)		%
Loss on debt extinguishment	—		%	(4)		%			—		%	(1)		%
Other income (expense), net	1		%	(1)		%			—		%	(2)		%
Total other expense	(10)		%	(15)		%			(11)		%	(13)		%

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

Interest expense was ~~$7.9~~$8.1 million in the three months ended ~~June~~September 30, 2020, compared to ~~$5.2~~$5.5 million in the three months ended ~~June~~September 30, 2019, an increase in interest expense of ~~$2.7~~$2.6 million, or ~~50%~~46%. The increase is primarily attributable to increased borrowing under our ~~new~~ credit facility used to fund our acquisitions. As of September 30, 2020 debt outstanding under our credit facility was $534.6 million compared to $350.0 million in debt outstanding as of September 30, 2019.

During the three months ended September 30, 2019, we recorded a $2.3 million loss on debt extinguishment related to the successful completion of our new credit facility, which resulted in the write-off of the remaining deferred debt offering costs from our previous credit facility. See the “Liquidity and Capital Resources” section herein for further discussion regarding our new credit facility.

Other income was $0.6 million in the three months ended September 30, 2020, compared to other expense of $0.2 million in the three months ended September 30, 2019. Other income recognized in the three months ended September 30, 2020 was due primarily to foreign currency exchange gains in our UK entities.

For the Nine Months Ended September 30, 2020

Interest expense was $23.6 million in the nine months ended September 30, 2020, compared to $15.9 million in the nine months ended September 30, 2019, an increase in interest expense of $7.7 million, or 49%. The increase is primarily attributable to increased borrowing under our credit facility used to fund our acquisitions. As of September 30, 2020 debt outstanding under our credit facility was $534.6 million compared to $350.0 million in debt outstanding as of September 30, 2019.

During the nine months ended September 30, 2019, we recorded a $2.3 million loss on debt extinguishment related to the successful completion of our new credit facility, which resulted in the write-off of the remaining deferred debt offering costs from our previous credit facility. See the “Liquidity and Capital Resources” section herein for further discussion regarding our new credit facility.

Other expense was ~~$0.0~~$0.8 million in the ~~three~~nine months ended ~~June~~September 30, 2020, compared to other expense of ~~$0.7~~$1.7 million in the ~~three~~nine months ended ~~June~~September 30, 2019. Other expense recognized in the ~~three~~nine months ended ~~June 30, 2019 was due primarily to foreign currency exchange losses related primarily to our UK entities.~~

~~For the Six Months Ended June 30, 2020~~

Interest expense was $15.5 million in the six months ended June 30, 2020, compared to $10.4 million in the six months ended June 30, 2019, an increase in interest expense of $5.1 million, or 50%. The increase is attributable to increased borrowing under our expanded term loan used to fund our acquisitions. Our interest rate swap, which fixes our interest rate at 5.4%, accounted for $1.5 million of the interest expense for the period as a result of the decrease in market interest rates resulting from the economic impact of the COVID-19 pandemic during the six months ended June 30, 2020.

Other expense was $1.4 million in the six months ended June 30, 2020, compared to other expense of $1.5 million in the six months ended June 30, 2019. Other expense was recognized in the six months ended JuneSeptember 30, 2020 and ~~June~~September 30, 2019 related primarily to foreign currency exchange losses ~~from~~in our UK entities.

Table of Contents

Benefit from (Provision for) Income Taxes


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

		(dollars in thousands)																															(dollars in thousands)
Benefit from income taxes		$	673		$	6,101		(89)	%	$	4,960		$	6,713		(26)	%
Benefit from (provision for) income taxes																		Benefit from (provision for) income taxes	$	(1,149)		$	(547)		110	%	$	3,811		$	6,166		(38)	%
Percentage of total revenue	Percentage of total revenue	1		%	11		%			3		%	7		%			Percentage of total revenue	(2)		%	(1)		%			1		%	5		%

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

~~Benefit from~~Provision for income taxes was ~~$0.7~~$1.1 million in the three months ended ~~June~~September 30, 2020, compared to a provision for income taxes of $0.5 million in the three months ended September 30, 2019, an increase of $0.6 million. The change in provision was due primarily to the increase in deferred tax liabilities in our UK entities associated with the change in the applicable UK tax rate.

For the Nine Months Ended September 30, 2020

The benefit from income taxes was $3.8 million in the nine months ended September 30, 2020, compared to a benefit from income taxes of ~~$6.1~~$6.2 million in the ~~three~~nine months ended ~~June~~September 30, 2019, a decrease of ~~$5.4~~$2.4 million. ~~The change in provision~~This decrease was due primarily to ~~the~~an increase in deferred tax ~~benefit~~liabilities during the current period in our UK entities associated with the change in the applicable UK tax rate, and decreased benefits recognized during the current period attributable to the release of valuation ~~allowance attributable to~~allowances associated with acquisitions of domestic entities with deferred tax liabilities that, upon acquisition, ~~allowed~~allow us to recognize certain deferred tax assets that had previously been offset by a valuation ~~allowance.~~allowances.

~~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 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. 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 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 ~~June~~September 30, 2020, we had cash and cash equivalents of ~~$87.9~~$233.0 million, $60.0 million of available borrowings under our credit facility, as discussed below, and ~~$536.0~~$534.6 million of borrowings outstanding under our credit facility. As of December 31, 2019, we had cash and cash equivalents of $175.0 million, $60.0 million of available borrowings under our Credit Facility, and $538.7 million of borrowings outstanding under our ~~previous~~ credit facility. The ~~$87.1~~$57.9 million ~~decrease~~increase in cash and cash equivalents from December 31, 2019 to ~~June~~September 30, 2020 includes $130.1 million in proceeds from our August 2020 secondary stock offering and a $67.7 million cash payment for an acquisition in ~~the period.~~February 2020. Our cash and cash equivalents held by our foreign subsidiaries was ~~$26.2~~$26.0 million as of ~~June~~September 30, 2020. If these funds held by our foreign subsidiaries are needed for our domestic operations, a repatriation of these funds would require us to accrue and pay dividend withholding taxes in the foreign jurisdictions where applicable and accrue and pay U.S. taxes to the extent such dividend income exceeds our ability to utilize net operating losses. However, our intent is to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate them to fund our domestic operations. We do not provide for federal income taxes on the undistributed earnings of our foreign subsidiaries.

As of ~~June~~September 30, 2020 and December 31, 2019, we had a working capital surplus of ~~$37.1~~$178.8 million and surplus of $109.5 million, respectively, which ~~included $81.0~~includes $78.5 million and $76.6 million of deferred revenue recorded as a current liability as of ~~June~~September 30, 2020 and December 31, 2019, respectively. This deferred revenue will be recognized as revenue in future periods in accordance with our revenue recognition policy.

Credit Facility

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

Table of Contents

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 ~~June~~September 30, 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 ~~June~~September 30, 2020.

Registration ~~Statement~~Statements

On December 12, 2018, the Company filed a registration statement on Form S-3 (File No. 333-228767) (the ~~“S-3”~~“2018 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.

~~Table of Contents~~

OnIn May 13, 2019, we completed a registered underwritten public offering pursuant to the 2018 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 ~~June~~September 30, 2020 an aggregate amount of up to $90.6 million of Upland securities remain available for issuance under the S-3.

On August 14, 2020, we completed a registered underwritten public offering pursuant to the 2020 S-3 of 3,500,000 shares of the Company's $0.0001 par value common stock for an offering price to the public of $34.00 per share. In addition, on August 27, 2020 we closed the sale of an additional 525,000 shares issuable pursuant to a fully exercised option to purchase additional shares granted to the underwriters of the offering. The total net proceeds of the offering, including shares issued pursuant to the fully exercised option, of $130.1 million, net of issuance costs of $6.8 million, will be used for general business purposes, including the funding of future acquisitions.

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


		Six Months Ended June 30,							Nine Months Ended September 30,
		2020		2019			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 (used in) operating activities		$	(4,504)	$	5,396
Net cash provided by operating activities						Net cash provided by operating activities	$	14,152	$	5,054
Net cash used in investing activities	Net cash used in investing activities	(68,548)		(83,188)		Net cash used in investing activities	(68,685)		(106,932)
Net cash provided by (used in) financing activities		(14,604)		168,617
Net cash provided by financing activities						Net cash provided by financing activities	112,077		198,144
Effect of exchange rate fluctuations on cash	Effect of exchange rate fluctuations on cash	542		798		Effect of exchange rate fluctuations on cash	404		302
Change in cash and cash equivalents	Change in cash and cash equivalents	(87,114)		91,623		Change in cash and cash equivalents	57,948		96,568
Cash and cash equivalents, beginning of period	Cash and cash equivalents, beginning of period	175,024		16,738		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	$	87,910	$	108,361	Cash and cash equivalents, end of period	$	232,972	$	113,306

Cash Flows from Operating Activities

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

Table of Contents

volume of professional services rendered, the volume and timing of customer bookings and contract renewals, and the related timing of collections on those bookings and renewals, as well as the timing of spending commitments and payments of our accounts payable, accrued expenses, accrued payroll and related benefits, all affect these account balances.

~~Our cash~~Cash provided by operating activities was $14.2 million for the ~~six~~nine months ended ~~June~~September 30, 2020 ~~primarily reflects our~~compared to $5.1 million for the nine months ended September 30, 2019, an increase of $9.1 million. This increase in operating cash flow is generally attributable to the Company’s increased size and scale. This year-over-year increase in operating cash flow is in spite of net ~~loss~~working capital uses of ~~$34.2~~cash of $8.9 million ~~which includes $20.9~~for the nine months ended September 30, 2020 compared to $6.7 million of acquisition-related expenses, and includes non-cash items comprised of $23.4 million of depreciation and amortization expense, $20.3 million of non-cash stock compensation expense, $1.9 million of amortization of deferred commissions, and $1.1 million of non-cash interest and other expense, and $0.5 million of foreign currency re-measurement losses which were partially offset by $5.0 million of deferred income taxes.for the same period in 2019. Working capital sources of cash for the nine months ended September 30, 2020 included a ~~$5.2~~$13.1 million decrease in accounts receivable ~~and a $2.4 million increase in deferred revenue which was~~ related ~~primarily~~ to the timing of collections. Working capital uses of cash for the nine months ended September 30, 2020 included a ~~$6.7~~$10.1 million increase in prepaids and other related primarily to ~~payments of annual software/hosting fees,~~an increase in capitalized commissions related to our acquisitions, a ~~$6.3~~$1.8 million decrease in accounts payable, a $1.4 million decrease in deferred revenue, and a ~~$7.1~~$8.8 million decrease in accrued expenses, which is attributable primarily to the payment of the Company’s annual bonus at the beginning of the year and ~~severance payments related to acquisitions completed in prior periods.~~timing differences.

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

Cash Flows from Investing Activities

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

For the ~~six~~nine months ended ~~June~~September 30, 2020, cash used in investing activities consisted of $67.7 million associated with the acquisition of Localytics which closed during the ~~six~~nine months ended ~~June~~September 30, 2020, the purchases of property and equipment of ~~$0.7~~$0.8 million, and the purchase of customer relationships of $0.2 million.

~~Table~~ Cash used in investing activities decreased $38.2 million for the nine months ended September 30, 2020 compared to the same period in 2019 primarily as a result of ~~Contents~~

a pause in acquisition activity in 2020 due to the COVID-19 pandemic.

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

Cash Flows from Financing Activities

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

Cash provided by financing activities decreased $86.1 million for the nine months ended September 30, 2020 compared to the same period in 2019. During the ~~six~~nine months ended ~~June~~September 30, 2020, we made net payments on our notes payable balance of ~~$2.7~~$4.2 million compared to a net increase in our notes payable balance of $59.1 million in 2019 as a result of the paydown of our previous credit facility and entry into our new expanded credit facility. During the nine months ended September 30, 2020, we received net proceeds from the issuance of common stock of $130.2 million compared to $151.5 million in 2019. During the nine months ended September 30, 2020, we paid ~~$9.6~~$11.7 million in additional consideration to sellers of acquired businesses related to holdback and earnout payments compared to $5.9 million in 2019. During the nine months ended September 30, 2020, we paid $2.1 million in taxes on behalf of employees related to net share settlements of restricted stock vesting events ~~and~~which decreased from the $6.1 million in net share settlement payments in 2019 as a result of the election in 2020 to sell shares to cover employee taxes on stock compensation vestings. During the nine months ended September 30, 2020, we made principal payments of $0.1 million on finance ~~leases.~~leases compared to $0.5 million in 2019 as a result of certain finance leases expiring in 2020.

~~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, 2019 filed with the SEC on March 2, 2020.~~

Off-Balance Sheet Arrangements

During the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 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,~~November 6, 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 ~~six~~nine months ended ~~June~~September 30, 2020, as presented herein and in Item 1 to this Quarterly Report on Form 10-Q, ~~reflects~~reflect no material changes in our critical accounting policies and estimates as set forth in our Annual report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 9,2, 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.

Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements and the impact of these pronouncements on our condensed consolidated financial statements, refer to Note 1. Significant Accounting Policies to our condensed consolidated financial statements.

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~~the lender under our Credit Facility. To date, we have not used derivative instruments to mitigate the impact of our market risk exposures. We also have not used, nor do we intend to use, derivatives for trading or speculative purposes.

Interest Rate Risk

Our exposure to market risk for changes in interest rates primarily relates to our cash equivalents and any variable rate indebtedness. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This objective is accomplished currently by making diversified investments, consisting only of money market mutual funds and certificates of deposit. In conjunction with our ~~new~~ $350 million, 7 year, term loan, and subsequent entry into an additional $190 million in incremental term loans under the Credit Facility, we entered into interest rate hedge 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 ~~June~~September 30, 2020, we had a principal balance of ~~$536.0~~$534.6 million under our Credit ~~Agreement.~~Facility. As there was no debt outstanding under our revolving credit facility as of ~~June~~September 30, 2020, a hypothetical change of 100 basis points would result in ~~a maximum potential~~no change to interest ~~expense of $0.0 million annually.~~expense.

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 ~~$3.2~~$4.6 million for the ~~six~~nine months ended ~~June~~September 30, 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 loans that were used to fund the acquisition of a foreign subsidiaries during the years ended December 31, 2019 and December 31, 2018. Due to the long-term nature of these loans, the foreign currency gains (losses) resulting from remeasurement are recognized as a component of accumulated other comprehensive income (loss).

Inflation

We do not believe that inflation 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 ~~June~~September 30, 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 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~~September 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.

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 2019 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. With the exception of the risk factor included below, there have been no material changes during 2020 to the risk factors that were included in the Company's Form 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.

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: ~~August 7,~~November 6, 2020			/s/ Michael D. Hill
			Michael D. Hill
			Chief Financial Officer


	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