What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-02-25 · 175 added, 256 removed, 437 unchanged (50% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K.

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes theret o included elsewhere in this Annual Report on Form 10-K.

The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.

25 unchanged sentences

Digital marketing, e-commerce and customer service teams use our applications to interact with consumers across multiple channels to acquire new customers, drive product and service utilization, resolve issues, and build brand loyalty.

Our applications deliver value to CX-focused organizations across a variety of use cases including mobile messaging, mobile application marketing, VoC, email marketing, knowledge management and call center productivity.

Our teams bring deep industry experience in orchestrating campaigns and interactions that consumers want and value.

Our applications deliver value to CXM-focused organizations across a variety of use cases including mobile messaging, mobile application marketing, VoC, email marketing, knowledge management and call center productivity.

We also offer customer data platform, or CDP, solutions that provide organizations the ability to unify customer data stored across diverse systems to drive more personalized omnichannel campaigns.

Sales teams employ our applications to drive growth through deeper customer engagement, reduced sales cycle times, and overall improved collaboration between sales, marketing, and other customer-facing functions.

4 unchanged sentences

Upland also offers products that improve call center agent productivity by providing more direct access to knowledge and to customer sentiment thereby improving both inbound call outcomes and proactive outbound success.

We also provide products that deliver knowledge-based, guided workflows for customer service environments supporting complex products in strict regulatory requirements.

Additional solutions help call center leadership to manage agent performance and measure real-time performance relative to call resolution and customer sentiment, improve performance through gamification, and gather agent feedback to keep employee engagement high.

9 unchanged sentences

Upland solutions in this area range from supply chain collaboration and factory management, back office document and vendor management, to applications that improve sales responsiveness.

In addition, our products help operations team compose, automate and exchange documents based on content from existing back-office systems to produce interactive business communications, while maintaining compliance and reducing production costs.

• Human Resources and Legal .

9 unchanged sentences

We service customers ranging from large global corporations and government agencies to small- and medium-sized businesses.

We have more than 10,000 customers with over 1,000,000 users across a broad range of industries, including financial services, consulting services, technology, manufacturing, media, telecommunications, government and political, non-profit, healthcare and life sciences, retail, and hospitality.

We have more than 10,000 customers with over 1,000,000 users across a broad range of industries, including financial services, consulting services, technology, manufacturing, media, telecommunications, government, political, non-profit, healthcare, life sciences, retail and hospitality.

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 $98.0 million in 2017 to $302.0 million in 2021, representing a cumulative annual growth rate of 33%.

During the year ended December 31, 2020 domestic revenue as a percent of total revenue increased to 74% compared to 70% during the year ended December 31, 2019.

See Note 13 Revenue Recognition in the notes to consolidated financial statements for more information regarding our revenue as it relates to domestic and foreign operations.

During the year ended December 31, 2021 domestic revenue as a percent of total revenue decreased to 71% compared to 74% during the year ended December 31, 2020.

See “Note 13 Revenue Recognition” in the notes to the consolidated financial statements for more information regarding our revenue as it relates to domestic and foreign operations.

Our operating results in a given period can fluctuate based on the mix of subscription and support, perpetual license and professional services revenue.

For the years ended December 31, 2020, 2019 and 2018, our subscription and support revenue accounted for 95%, 92%, and 91%, respectively of our total revenue.

For the years ended December 31, 2021, 2020 and 2019, our subscription and support revenue represented 95% , 95% and 92%, respectively of our total revenue.

Historically, we have sold certain of our applications under perpetual licenses, which also are paid in advance.

8 unchanged sentences

Business” herein.

Consistent with our growth strategy, we have made a total of 26 acquisitions from February 2012 through December 31, 2020.

Consistent with our growth strategy, we have completed a total of 29 acquisitions in the 10 years ending December 31, 2021.

Acquisitions completed during the years ended December 31, 2021, 2020 and 2019 include the following:

2021 Acquisitions

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

Revenue recorded since the acquisition date through December 31, 2021 were approximately $3.9 million.

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

Revenue recorded since the acquisition date through December 31, 2021 were approximately $12.6 million.

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

Revenue recorded since the acquisition date through December 31, 2021 were approximately $10.2 million.

2020 Acquisitions

• 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 December 31, 2020 were approximately $16.3 million.

2019 Acquisitions

4 unchanged sentences

• Altify - On October 4, 2019, the Company’s wholly owned subsidiary, PowerSteering Software Limited, a limited company incorporated under the laws of England and Wales (“PowerSteering UK”), entered into an agreement to purchase the shares comprising the entire issued share capital of Altify Ireland Limited, a private company limited by shares organized and existing under the laws of Ireland (“Altify”), a customer revenue optimization (CRO) cloud solution for sales and the extended revenue teams.

2018 Acquisitions

• Interfax - On March 21, 2018, the Company’s wholly owned subsidiary, PowerSteering Software Limited, a limited liability company organized and existing under the laws of England and Wales (“PowerSteering UK”), completed its purchase of the shares comprising the entire issued share capital of Interfax Communications Limited (“Interfax”), an Irish-based software company providing secured cloud-based messaging solutions, including enterprise cloud fax and secure document distribution.

In connection with this acquisition, the Company also acquired certain assets related to Interfax’s business from a United States based reseller of Interfax’s products.

• RO Innovation - On June 27, 2018, the Company completed its purchase of RO Innovation, Inc.

(“RO Innovation”), a cloud-based customer reference solution for creating, deploying, managing, and measuring customer reference and sales enablement content.

• Rant & Rave - On October 3, 2018, the Company’s wholly owned subsidiary, PowerSteering UK, completed its purchase of the shares comprising the entire issued share capital of Rapide Communication LTD, a private company limited by shares organized and existing under the laws of England and Wales doing business as Rant & Rave (“Rant & Rave”), a leading provider of cloud-based customer engagement solutions.

• Adestra - On December 12, 2018, the Company completed its purchase of Adestra Ltd.

(“Adestra”), a leading provider of enterprise-grade email marketing, transaction and automation software.

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 software applications are offered as subscription-based services, 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 at least the first half of 2021.

As approximately 95% of our revenue is associated with recurring revenue, with minimal organic growth assumptions, the disruptions related to the pandemic did not have a material adverse impact on our financial results for the year ended December 31, 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.

The continued impacted to bookings and churn is uncertain.

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 and strong sales into political campaigns in the US, which will decrease in 2021.

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which has created significant economic uncertainty across the globe 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.

As a result, beginning in the second quarter of 2020, we paused our acquisition activity in order to gauge the overall economic impact of the pandemic and focus on evaluating our pipeline of opportunities.

This resulted in a steady decrease in acquisition related expenses during 2020.

The ongoing spread of COVID-19 remains a global pandemic, compounded with the discovery of new COVID-19 variants (such as the Delta and Omicron).

However, with the gradual easing of COVID-19 lockdown restrictions globally and progress made in the development and distribution of vaccines and boosters, stability in the markets have continued to improve.

As such, the Company gradually picked up acquisition activity in 2021, with the acquisitions of Second Street, BlueVenn and Panviva.

In addition, acquisition-related expenses picked up again starting in the first quarter of 2021.

These acquisition related expenses will vary quarter to quarter in proportion to the size, timing and complexity of current and future acquisitions.

While we generally 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 continued impact to new bookings and churn in 2021, which we attribute to COVID-19.

The persistence of COVID-19 and the preventative measures implemented to help limit the spread of the illness, have impacted, and will continue to impact, our ability to operate our business and may materially and adversely impact our business, financial condition, and results of operations.

We support the health and well-being of our employees, customers, partners and communities.

As such, we are continuing our remote working arrangements and limiting non-essential business travel for our employees.

We are currently evaluating our plans to reopen our facilities and resume business travel for our employees.

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.

During the second, third and fourth quarters of 2020 we paused our acquisition activity in order to gauge the overall economic impact of the pandemic and focus on evaluating our pipeline of opportunities.

This resulted in a steady decrease in acquisition related expenses over this period.

With acquisition activity picking up again in the first quarter of 2021, including the acquisition of Second Street in January 2021, these quarterly acquisition related expenses will increase in proportion to the size, timing and complexity of future acquisitions.

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 (in thousands of dollars, except %):

In addition to the GAAP financial measures described in “—Components of Operating Results” below, 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 (in thousands, except %):

Year Ended December 31,

8 unchanged sentences

(1) Annualized recurring revenue value at year-end .

The value as of December 31 equals the monthly value of our recurring revenue contracts measured as of December 31 multiplied by 12.

We define annualized recurring revenue value (“ARR”) as the value as of December 31 that equals the monthly value of our recurring revenue contracts measured as of December 31 multiplied by 12.

This measure excludes the revenue value of uncontracted overage fees, on-demand service fees and certain divested and/or sunseted minor non-strategic customer contracts and related website management and analytics assets (collectively referred to as the “Sunset Assets”).

Refer to Note 3, Acquisitions and Note 5, Goodwill and Other Intangible Assets in our consolidated financial statements for further discussion.

Refer to “Note 3 Acquisitions” and “Note 5 Goodwill and Other Intangible Assets” in the notes to the consolidated financial statements for further discussion.

(2) Annual net dollar retention rate .

We define annual net dollar retention rate as of December 31 as the aggregate annualized recurring revenue value at December 31 from those customers that were also customers as of December 31 of the prior fiscal year, divided by the aggregate annualized recurring revenue value from all customers as of December 31 of the prior fiscal year.

We define annual net dollar retention rate as of December 31 as the aggregate ARR at December 31 from those customers that were also customers as of December 31 of the prior fiscal year, divided by the aggregate ARR value from all customers as of December 31 of the prior fiscal year.

This measure excludes the revenue value of uncontracted overage fees, on-demand service fees and our Sunset Assets.

(3) Adjusted EBITDA .

We monitor our Adjusted EBITDA to help us evaluate the effectiveness and efficiency of our operations.

We monitor 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, loss on debt extinguishment, provision for income taxes, stock-based compensation expense, acquisition-related expenses, non-recurring litigation costs, and purchase accounting adjustments for deferred revenue.

We define Adjusted EBITDA as net income (loss), calculated in accordance with GAAP, plus depreciation and amortization expense, interest expense, net, loss on debt extinguishment, other expense, net, benefit from income taxes, stock-based compensation expense, acquisition-related expense and purchase accounting deferred revenue discount.

Non-GAAP Financial Measures

Adjusted EBITDA

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

The following table presents a reconciliation of GAAP Net loss from continuing operations to Adjusted EBITDA for each of the periods indicated (in thousands).

Year Ended December 31,

11 unchanged sentences

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;

• Adjusted EBITDA is widely used by our 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;

29 unchanged sentences

Cost of product revenue .

Cost of product revenue consists primarily of personnel and related costs of our customer success and cloud operations teams, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, and allocated overhead, as well as software license fees, hosting costs, Internet connectivity, and depreciation expenses directly related to delivering our applications.

Cost of product revenue consists primarily of hosting costs, personnel and related costs of our customer success and cloud operations teams, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, and allocated overhead, as well as software license fees, internet connectivity, depreciation expenses and pass-through costs directly related to delivering our applications.

We expect that cost of revenues may increase in the future depending on the growth rate of our new customers and billings and our need to support the implementation, hosting and support of those new customers.

10 unchanged sentences

sales and marketing, research and development, general and administrative, depreciation and amortization and acquisition-related expenses.

For each category, other than depreciation and amortization, the largest expense component is personnel and related costs, which includes salaries, employee benefit costs, bonuses, commissions, stock-based compensation, and payroll taxes.

For each category, other than depreciation and amortization, the largest expense component is primarily personnel and related costs, which includes salaries, employee benefit costs, bonuses, commissions, stock-based compensation, and payroll taxes.

Operating expenses also include allocated overhead costs for facilities, which are allocated to each department based on relative department headcount.

10 unchanged sentences

For example, we are parties to a technology services agreement pursuant to which we generally recognize expenses for services as they are received.

See Note 16 Related Party Transactions, in the notes to consolidated financial statements for more information regarding how expenses under such agreement are recognized.

See “Note 16 Related Party Transactions”, in the notes to the consolidated financial statements for more information regarding how expenses under such agreement are recognized.

We have devoted our product development efforts primarily to enhancing the functionality, and expanding the capabilities, of our applications.

Investment tax credits are accounted for as a reduction of research and development costs.

Credits are accrued in the year in which the research and development costs of the capital expenditures are incurred, provided that we are reasonably certain that the credits will be received.

The investment tax credit must be examined and approved by the tax authorities, and it is possible that the amounts granted will differ from the amounts recorded.

Investment tax credits are included as a reduction of research and development costs.

Inves tment tax credits are recorded in the year in which the research and development costs of the capital expenditures are incurred, provided that we are reasonably certain that the credits will be received.

The investment tax credit must be examined and approved by the tax authorities, and it is possible that the amounts granted will differ fro m the amounts recorded.

General and administrative .

9 unchanged sentences

Acquisition-related expenses .

Acquisition-related expenses are 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.

Acquisition-related expenses are typically incurred for up to four quarters after each acquisition, with the majority of these costs being incurred within six to nine 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.

1 unchanged sentence

These acquisition-related expenses also include transformational expenses such as severance, compensation for transitional personnel, office lease terminations and vendor cancellations.

If the Company ceased acquisition activity today, within a year these acquisition-related expenses would no longer be incurred.

Generally, if the Company ceased acquisition activity today, within a year, these acquisition-related expenses should no longer be incurred.

Total Other Expense

Total other expense consists primarily of amortization of deferred financing costs over the term of the related loan facility, revaluation of contingent consideration, and interest expense on outstanding debt, including amortization of debt issuance costs.

Total other expense consists primarily of amortization of debt issuance costs over the term of the related term loan, revaluation of contingent consideration, and interest expense on outstanding debt, including amortization of debt issuance costs.

We participate in interest rate swap agreements for the purpose of reducing variability in interest rate payments the Company’s term loans.

These interest rate swaps fix the Company's interest rate (including the hedge premium) at 5.4% for the term of the Credit Agreement.

In addition, gains/losses on divested assets that meet the definition of a business under ASC 805-10 are included in Total other expense.

These interest rate swaps fix the Company's interest rate (including the hedge premium) at 5.4% for the term of the Credit Facility (as hereinafter defined in “—Liquidity and Capital Resources—Credit Facility”).

gains/losses on divested assets that meet the definition of a business under ASC 805-10, Business Combination—Overall , are included in Total other expense.

Because we have not generated domestic net income in any period to date, we have recorded a full valuation allowance against our domestic net deferred tax assets, exclusive of tax deductible goodwill.

We have historically not recorded any material provision for federal or state income taxes, other than deferred taxes related to tax deductible goodwill and current taxes in certain separate company filing states.

The balance of the tax provision for the years ended December 31, 2020, 2019, and 2018, outside of tax deductible goodwill and current taxes in separate filing states, is related to foreign income taxes, primarily operations of our Canadian, UK, and Ireland subsidiaries, and to the release of valuation allowances associated with acquisitions of domestic entities with deferred tax liabilities.

Realization of any of our domestic deferred tax assets depends upon future earnings, the timing and amount of which are uncertain.

The balance of the tax benefit for the years ended December 31, 2021, 2020 and 2019, outside of tax deductible goodwill and current taxes in separate filing states, is related to foreign income taxes, primarily operations of our Australian, Canadian, Ireland, and United Kingdom subsidiaries, and to the release of valuation allowances associated with acquisitions of domestic entities with deferred tax liabilities.

Realization of any of our domestic deferred tax assets depends u pon future earnings, the timing and amount of which are uncertain.

Based on analysis of acquired net operating losses, utilization of our net operating losses will be subject to annual limitations due to the ownership change rules under the Internal Revenue Code of 1986, as amended, or the Code, and similar state provisions.

14 unchanged sentences

Subscription and support (1)(2) 92,168 31% 89,880 31% 61,465 28%

Professional services 8,566 3% 7,652 3% 5,708 3%

Professional services and other 7,285 2% 8,566 3% 7,652 3%

Total cost of revenue 99,453 33% 98,446 34% 69,117 31%

20 unchanged sentences

(1) Includes stock-based compensation.

See tables below for stock based compensation by operating expense line item.

See table below for stock-based compensation by operating expense line item.

(2) Includes depreciation and amortization of $11.6 million, $10.2 million and $8.7 million in 2021, 2020 and 2019, respectively.

(3) See Note 8 Net Loss Per Share, in the notes to consolidated financial statements included elsewhere in this 10-K for a discussion and reconciliation of historical net loss attributable to common stockholders and weighted average shares outstanding for historical basic and diluted net loss per share calculations.

The following tables present stock-based compensation included in the respective line items in our Consolidated Statement of Operations:

(3) See “Note 8 Net Loss Per Share”, in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discu ssion and a reconciliation of historical net loss attributable to common stockholders and weighted average shares outstanding for historical basic and diluted net loss per share calculations.

Stock-based compensation

The following tables present stock-based compensation included in the respective line items on our Consolidated Statement of Operations:

Year Ended December 31,

8 unchanged sentences

Comparison of Years Ended December 31, 2021 and December 31, 2020

Year Ended December 31,

2021 2020 Change

10 unchanged sentences

Our organic business excludes acquisitions closed during or subsequent to the prior year comparable period and business operations related to Sunset Assets (the “Organic Business”).

Therefore, total revenue for the Organic Business increased by $14.3 million.

The increase in revenue from our Organic Business was primarily driven by an increase in mobile messaging usage from US election-year presidential campaigns.

Therefore, total revenue for the Organic Business decreased by $16.2 million.

The year ended December 31, 2020 included $18.2 million of CXM usage revenue from US election-year presidential campaigns in 2020 which did not repeat in 2021.

Subscription and support revenue was $287.6 million in 2021, compared to $277.5 million in 2020, an increase of $10.1 million, or 4%.

1 unchanged sentence

Subscription and support revenue related to our Sunset Assets decreased $1.3 million as a result of decreased sales and marketing focus on those Sunset Assets.

Therefore, subscription and support revenue from our Organic Business increased by $20.0 million.

The increase in subscription and support revenue from our Organic Business was primarily driven by an increase in mobile messaging usage from US election-year presidential campaigns.

Perpetual license revenue was $1.9 million in 2020, compared to $5.7 million in 2019, a decrease of $3.8 million, or 67%.

The acquisitions we closed after January 1, 2019 contributed no perpetual license revenue.

The entire decrease relates to our Organic Business, as we continue to focus on growth in subscription and support revenue.

Subscription and support revenue for our Organic Business decreased to $243.9 million from a basis of $258.6 million for the year ended December 31, 2020.

The year ended December 31, 2020 included $18.2 million of CXM usage revenue from US election-year presidential campaigns in 2020 which did not repeat in 2021.

Perpetual license revenue was $2.2 million in 2021, compared to $1.9 million in 2020, an increase of $0.3 million.

Professional services revenue was $12.2 million in 2021, compared to $12.4 million in 2020, a decrease of $0.2 million, or 1%.

The acquisitions not fully in the comparative period contributed to a $1.7 million increase in professional services revenue in 2021.

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 from our Organic Business decreased by $1.9 million due primarily to COVID-19 related travel impacts and a higher proportion of expansion bookings versus new bookings which tend to have more professional services associated with them.

Cost of Revenue and Gross Profit Margin

Year Ended December 31,

2021 2020 Change

10 unchanged sentences

Cost of subscription and support revenue was $92.2 million in 2021, compared to $89.9 million in 2020, an increase of $2.3 million, or 3%.

The acquisitions not fully in the comparative period contributed $17.6 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.

The acquisitions not fully in the comparative period contributed $8.7 million to the increase to cost of subscription and support revenue, primarily related to costs associated with the delivery of the Localytics, Second Street, BlueVenn and Panviva products.

Cost of subscription and support revenue related to our Sunset Assets decreased $0.8 million, primarily related to hosting and infrastructure costs.

Therefore, cost of subscription and support revenue for our Organic Business increased by $11.2 million, primarily related to an increase in messaging costs related to an increase in mobile messaging usage from US election-year presidential campaigns.

Cost of professional services revenue was $8.6 million in 2020, compared to $7.7 million in 2019, an increase of $0.9 million, or 12%.

Therefore, cost of subscription and support revenue for our Organic Business decreased by $5.6 million, primarily related to a year over year reduction in pass-through telecom messaging costs associated with the CXM usage revenue from US election-year presidential campaigns in 2020 which did not repeat in 2021, partially offset by an increase in infrastructure and hosting costs.

Cost of professional services revenue was $7.3 million in 2021, compared to $8.6 million in 2020, a decrease of $1.3 million, or 15%.

The acquisitions not fully in the comparative period contributed $0.9 million to the increase to cost of professional services revenue, primarily related to an increase in personnel and related costs.

Cost of professional services revenue related to our Sunset Assets decreased $0.2 million.

Therefore, cost of professional services revenue for our Organic Business decreased by $2.2 million which corresponds with the reduction in professional services revenue as a result of COVID-19 related travel impacts.

1 unchanged sentence

Sales and Marketing Expense

Year Ended December 31,

2021 2020 Change

3 unchanged sentences

Sales and marketing expense was $55.1 million in 2021, compared to $46.1 million in 2020, an increase of $9.0 million, or 20%.

The acquisitions not fully in the comparative period contributed $11.8 million to the increase in sales and marketing expense, primarily consisting of personnel and related costs in 2020.

Sales and marketing expense related to our Sunset Assets decreased by $0.7 million primarily due to reductions in personnel costs.

Therefore, sales and marketing expense for our Organic Business decreased by $0.2 million, primarily as a result of decreased travel and discretionary marketing expenses which were partially offset by a $1.0 million increase in personnel costs associated with additional headcount related to our new and ongoing go-to-market investments.

Sales and marketing expense for our Organic Business increased by $5.4 million, primarily as a result of increased commission costs which were partially offset by decreased travel and discretionary marketing expenses.

In addition, the acquisitions not fully in the comparative period contributed $3.6 million to the increase in sales and marketing expense, primarily consisting of personnel and related costs in 2021.

Research and Development Expense

Year Ended December 31,

2021 2020 Change

6 unchanged sentences

Therefore, research and development costs for our Organic Business increased by $0.3 million primarily related to an increase in non-cash stock compensation expense and outsourced technology services costs.

Refundable tax credits were $1.2 million in 2020, compared to $0.4 million in 2019, an increase of $0.8 million.

This increase was predominately driven by tax credits related to our newly acquired companies.

General and Administrative Expense

Year Ended December 31,

2021 2020 Change

3 unchanged sentences

General and administrative expense was $76.9 million in 2021, compared to $68.1 million in 2020, an increase of $8.8 million, or 13%.

An increase in general administrative expense of $6.9 million was due to the acquisitions not fully in the comparative period, which consisted primarily of personnel and related costs and administrative expenses.

Therefore, general and administrative expense for our Organic Business increased by $13.1 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 planning (“ERP”) system.

General and administrative expense for our Organic Business increased by $6.2 million, which was driven primarily by increased non-cash stock compensation expense largely due to the issuance of restricted stock units in 2021 and a one-time increase in non-cash stock compensation expense related to the departure of our former co-President and Chief Operating Officer in March 2021.

In addition, an increase in general administrative expense of $2.6 million was due to the acquisitions not fully in the comparative period, which consisted primarily of personnel and related costs and administrative expenses.

Depreciation and Amortization Expense

Year Ended December 31,

2021 2020 Change

9 unchanged sentences

Acquisition-related Expense

Year Ended December 31,

2021 2020 Change

2 unchanged sentences

Acquisition-related expense $ 21,234 8% $ 27,075 9% $ (5,841) (22)%

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.

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 six to nine 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.

1 unchanged sentence

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.

Absent new acquisition activity, acquisition-related expenses decline in subsequent, sequential quarters and are generally no longer incurred after the first anniversary of the last closed acquisition.

Acquisition-related expense was $21.2 million in 2021, compared to $27.1 million for 2020, a decrease of $5.9 million, or 22%.

During the twelve months ended December 31, 2020 and December 31, 2019 transaction related expenses were $4.3 million and $11.3 million, respectively, and transformational expenses were $22.8 million and $28.4 million, respectively.

Transformational and transaction costs decreased in 2020 as a result of the Company temporarily pausing its acquisition activity due to the COVID-19 pandemic.

As a result, we completed one acquisition in 2020 compared to 5 acquisitions in 2019.

The transformational expenses in both the 2020 and 2019 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 $3.5 million to $4.3 million during 2020 from $0.8 million during 2019.

The decrease was primarily attributable to a $4.5 million gain recognized in 2021 related to a decrease in the fair value of earnout liabilities due to sellers related to our 2021 acquisitions and a reduction in holdback liabilities subsequent to the closing of purchase accounting.

In addition, we completed one acquisition in 2020 and incurred the majority of its transformational expense in 2021.

This is in contrast to the five acquisitions completed in 2019 for which the majority of transformational expenses were incurred in 2020.

Other Expense, net

Year Ended December 31,

2021 2020 Change

3 unchanged sentences

Interest expense, net $ (31,626) (10)% $ (31,529) (11)% $ (97) —%

Loss on debt extinguishment — —% (2,317) (1)% 2,317 NA

Other expense, net (253) (1)% (111) —% (142) 128%

Total other expense $ (31,879) (11)% $ (31,640) (11)% $ (239) 1%

Interest expense was $31.5 million in 2020, compared to $22.3 million for 2019, an increase of $9.2 million, or 41%.

The increase is primarily attributable to increased average borrowing under our credit facility used to fund our acquisitions.

During 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 $0.1 million in 2020, compared to other expense of $3.2 million in 2019, a decrease of $3.1 million, or 97%.

The difference in other expense is primarily due to a decrease in foreign currency exchange losses compared to 2019 and the 2019 non-cash loss of $2.0 million on divestiture of Sunset Assets which consisted primarily of non-cash expense for deferred sales commissions.

Interest expense, net was $31.6 million in 2021, compared to $31.5 million for 2020, an increase of $0.1 million, or 0%.

The marginal increase in interest expense was primarily attributable to the average borrowing on our Credit Facility being largely unchanged.

Other expense, net was $0.3 million in 2021, compared to other expense of $0.1 million in 2020, an increase of $0.2 million, or 128%.

The difference in other expense is primarily due to an increase in foreign currency exchange losses compared to 2020.

Benefit from Income Taxes

Year Ended December 31,

2021 2020 Change

4 unchanged sentences

Effective income tax rate (12.5) % (7.6) %

Benefit from income taxes was $4.2 million in 2020, compared to a benefit for income taxes of $6.8 million in 2019, a decrease in the benefit from income taxes of $2.6 million, or 38%.

This decrease was due primarily to an decrease in deferred tax liabilities during the year in our foreign entities associated with the amortization of acquired intangibles and losses generated from continuing operations at certain UK and Canada entities, and decreased benefits recognized during the year attributable to the release of valuation allowances associated with acquisitions of domestic entities with deferred tax liabilities

that, upon acquisition, allow us to recognize certain deferred tax assets that had previously been offset by a valuation allowances.

Benefit from income taxes was $8.3 million in 2021, compared to a benefit for income taxes of $4.2 million in 2020, an increase in the benefit from income taxes of $4.1 million, or 97%.

This increase was due primarily to increased benefits recognized during the year attributable to the release of valuation allowances associated with acquisitions of domestic entities with deferred tax liabilities that, upon acquisition, allow us to recognize certain deferred tax assets that had previously been offset by a valuation allowances.

Because we have not generated domestic net income in any period to date, we have recorded a full valuation allowance against our domestic net deferred tax assets, exclusive of any remaining tax deductible goodwill after application of indefinite life deferred tax assets.

2 unchanged sentences

Refer to “Note 6.

Income Taxes in the notes to consolidated financial statements for more information regarding our income taxes as they relate to foreign and domestic operations.

Income Taxes”, in the notes to the consolidated financial statements for more information regarding our income taxes as they relate to foreign and domestic operations.

Comparison of Years Ended December 31, 2020 and December 31, 2019

For a comparison of years ended December 31, 2019 and December 31, 2018 refer to “Item 7.

Management’s Discussion and Analysis” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed on March 2, 2020.

For a comparison of years ended December 31, 2020 and 2019 refer to “Item 7.

Management’s Discussion and Analysis” in the Company’s Annual Report on Form 10-K for the years ended December 31, 2020 filed with the SEC on February 25 , 2021 (the “2020 Annual Report”).

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.

To date, we have financed our operations primarily through the raising of capital including sales of our common stock, cash from operating activities, borrowings 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 Credit Facility (as hereinafter defined), and the ability to offer and sell securities pursuant to our registration statement, as discussed under “—Registration Statement” 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 December 31, 2020, we had cash and cash equivalents of $250.0 million, $60.0 million of available borrowings under our Credit Facility, as discussed below, and $533.3 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 Credit Facility.

The $75.0 million increase in cash and cash equivalents from December 31, 2019 to December 31, 2020 includes $130.1 million in net proceeds from our August 2020 secondary stock offering partially offset by a $67.7 million cash payment for an acquisition in February 2020.

The following table summarizes our liquidity for the periods indicated:

Year Ended December 31,

(dollars in thousands)

Cash and cash equivalents $ 189,158 $ 250,029

Available borrowings from our Credit Facility 60,000 60,000

Total Liquidity $ 249,158 $ 310,029

The $60.9 million decrease in cash and cash equivalents from December 31, 2020 to December 31, 2021 includes $97.7 million in cash paid for our three acquisitions completed during 2021, net of $1.2 million in cash acquired, which was partially offset by a $5.2 million settlement in total consideration for Localytics related to a representation and warranty insurance settlement.

Non-cash acquisition date consideration to be paid in future periods related to these acquisitions includes $10.9 million in holdback payments and $4.2 million in earnout payments that are due within 12 to 18 months of the closing dates of the underlying acquisitions.

The earnouts are subject to attainment of future performance-based conditions.

Our cash and cash equivalents held by our foreign subsidiaries was $24.8 million as of December 31, 2021.

6 unchanged sentences

Credit Facility

Our facility is comprised of $540.0 million in term loans and a $60.0 million revolving credit facility.

Our facility is comprised of $540.0 million in original principal term loans and a $60.0 million revolving 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 December 31, 2021.

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 in an aggregate principal amount of $190 million (the “2019 Incremental Term Loan”) which is in addition to the existing $350 million term loans outstanding under the Credit Agreement and the $60 million Revolver under the Credit Agreement.

All outstanding balances under our previous credit facility were paid off using proceeds from our 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 Facility i n an aggregate principal amount of $190 million (the “2019 Incremental Term Loan”) which is in addition to the existing $350 million Term Loan outstanding und er the Credit Facility and the $60 million Revolver under t he 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.

2 unchanged sentences

As of December 31, 2021, we were in compliance with all covenants under the Credit Facility.

Debt for more information regarding our Credit Facility and outstanding debt as of December 31, 2020.

Debt” in the notes to the consolidated financial statements for more information regarding our Credit Facility and outstanding debt as of December 31, 2021.

Registration Statement

On December 12, 2018, we filed a registration statement on Form S-3 (File No.

333-228767) (the “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 Form S-3 we withdrew our previous registration statement filed on May 12, 2017.

On 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.

On August 10, 2020, we filed a registration statement on Form S-3 (File No.

On August 10, 2020, the Company filed a registration statement on Form S-3 (File No.

333-243728) (the “2020 S-3”), which became effective automatically upon its filing and covers an unlimited amount of securities.

3 unchanged sentences

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.

There are no outstanding security offerings at this time.

There are no open outstanding security offerings at this time.

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

5 unchanged sentences

Net cash used in investing activities (93,532) (68,970) (217,761)

Net cash provided by financing activities 107,899 363,768 149,923

Net cash provided by (used in) financing activities (8,180) 107,899 363,768

Effect of exchange rate fluctuations on cash (897) 456 203

5 unchanged sentences

Included in net cash provided by operations are one-time acquisition related expenses incurred for up to four quarters after each acquisition to transact and transform the acquired business into the Company's unified operating platform.

Additionally, operating cash flows includes the impact of earn-outs payments in excess of original purchase accounting estimates.

Additionally, operating cash flows includes the impact o f earnout payments in excess of original purchase accounting estimates.

Our working capital consists primarily of cash, receivables from customers, prepaid assets, unbilled professional services, deferred commissions, accounts payable, accrued compensation and other accrued expenses, acquisition related earnout and holdback liabilities, lease liabilities and deferred revenues.

1 unchanged sentence

Cash provided by operating activities was $41.7 million for 2021 compared to $35.6 million for 2020, an increase of $6.1 million.

This increase in operating cash flow is generally attributable to the Company’s increased size and scale and a $12.6 million decrease in acquisition-related expenses in 2020 as a result of a slow down in acquisition related activity due to the COVID-19 pandemic.

This year-over-year increase in operating cash flow is in spite of net working capital uses of cash of $2.3 million for 2020 compared to $2.7 million for 2019.

Working capital sources of cash for 2020 included a $10.4 million decrease in accounts receivable and a $6.8 million increase in deferred revenue related to the timing of collections and billings.

Working capital uses of cash for 2020 included a $8.6 million increase in prepaids and other related primarily to an increase in capitalized commissions, a $3.1 million decrease in accounts payable, and a $7.8 million decrease in accrued expenses, which is attributable primarily to the payment of acquisition related expenses accrued in 2019 and paid in 2020.

This increase in operating cash flow is generally attributable to the Company’s increased size and scale.

Working capital sources of cash for 2021 included an increase of $10.9 million in accounts payable related to timing of payments, and an increase of $5.6 million in deferred revenue.

Working capital uses of cash for the twelve months ended December 31, 2021 included a $1.7 million increase in accounts receivable related to the timing of collections, a $7.5 million increase in prepaids and other related primarily to an increase in deferred sales commissions, and a $9.7 million decrease in accrued expenses.

A substantial source of cash is invoicing for subscriptions and support fees in advance, which is recorded as deferred revenue, and is included on our consolidated balance sheet 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.

Deferred revenue consists of the unearned portion of booked fees for our software subscriptions and support and for professional services, 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.

2 unchanged sentences

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 2020, cash used in investing activities consisted of $67.7 million associated with the acquisition of Localytics which closed in February 2020, the purchases of property and equipment of $1.1 million, and the purchase of customer relationships of $0.2 million.

Cash used in investing activities decreased $148.8 million in 2020 compared to 2019 primarily as a result of a pause in acquisition activity in 2020 due to the COVID-19 pandemic.

For 2021, cash used in investing activities consisted of $97.7 million associated with the Company’s 2021 acquisitions, and the purchases of property and equipment of $1.1 million, partially offset by a $5.2 million settlement in total consideration for Localytics related to a representation and warranty insurance settlement.

Cash used in investing activities increased $24.6 million in 2021 compared to 2020 primarily as a result of closing three acquisitions during the period compared to one acquisition in the comparable prior year period.

Cash Flows from Financing Activities

1 unchanged sentence

Cash provided by financing activities decreased $116.1 million in 2021 compared to 2020.

During 2020, we received net proceeds from the issuance of common stock, including proceeds from the exercise of employee stock options, of $130.5 million compared to $151.6 million in 2019.

During 2020, we made net payments on our notes payable balance of $5.7 million compared to a net increase in our notes payable balance of $242.1 million in 2019 as a result of the paydown of our previous credit facility and entry into our new expanded credit facility.

During 2020, we paid $14.7 million in additional consideration to sellers of acquired businesses related to holdback and earnout payments compared to $16.7 million in 2019.

During 2020, we paid $2.1 million in taxes on behalf of employees related to net share settlements of restricted stock vesting events which decreased from the $12.7 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 2020, we made principal payments of $0.1 million on finance leases compared to $0.5 million in 2019 as a result of certain finance leases expiring in 2020.

The decrease relates primarily to a decrease in cash generated from issuance of our common stock as the Company received net proceeds of $130.1 million related to a secondary stock offering completed in August 2020.

This decrease in cash provided by financing activities was partially offset by a $12.8 million decrease in additional consideration paid to sellers (i.e.

holdbacks and earnouts) compared to 2020.

In addition, net share employee payroll tax settlement payments decreased $1.2 million during 2021 compared to 2020 as a result of the payroll tax election in mid-2020 to sell shares to cover employee payroll taxes on stock compensation vestings.

Contractual Payment Obligations

The following table summarizes our future contractual obligations as of December 31, 2021 (in thousands):

Payment Due by Period

Less than 1 Year 1-3 Years >3-5 Years More Than 5 Years

Next 12 Months Beyond 12 Months Total

Debt Obligations (1)

2 unchanged sentences

28,628 100,979 129,607

Financing Lease Obligations (3)

$ 7 $ 9 $ — $ —

Operating Lease Obligations (3)

7 unchanged sentences

We have entered into floating-to-fixed interest rate swap agreements to limit exposure to interest rate risk related to our debt.

These interest rate swaps effectively converted the entire balance of the Company's $540 million term loans from variable interest payments to fixed interest rate payments, based on an annualized fixed rate of 5.4%, for the 7 year term of the debt.

In conjunction with our new $350 million, 7 year, term credit facility and our $190 million 2019 Incremental Term Loan 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, undrawn revolving credit facility remains floating.

These interest rate swaps effectively converted the entire balance of the Company's $540 million original principal term loans from variable interest payments to fixed interest rate payments, based on an annualized fixed rate of 5.4%, for the 7 year term of the debt.

In conjunction with our new $350 million, 7 year, Credit Facility and our $190 million 2019 Incremental Term Loan, 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 $60 million, 5 year, undrawn Revolver remains floating.

See “Item 7A.

Quantitative and Qualitative Disclosures About Market Risk” for further discussion.

(3) We lease office equipment under capital leases that expire between 2021 and 2023.

Quantitative and Qualitative Disclosures About Market Risk— Interest Rate Risk ” for further discussion.

(3) We lease office space under operating leases that expire between 2022 and 2027.

8 unchanged sentences

In certain cases these arrangements require a minimum annual purchase commitment.

We have an outstanding purchase commitment in 2021 for software development services from DevFactory FZ-LLC (“DevFactory”) pursuant to a technology services agreement in the amount of $9.6 million.

Related Party Transactions, in the notes to consolidated financial statements for more information regarding our purchase commitment to this related party.

Off-Balance Sheet Arrangements

During the years ended December 31, 2020, 2019, and 2018, 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.

Includes an outstanding purchase commitment in 2022 for software development services from DevFactory FZ-LLC (“DevFactory”) pursuant to a technology services agreement in the amount of $10.0 million.

The agreement provides for annual renewal by either party to the contract.

See “Note 16.

Related Party Transactions” in the notes to consolidated financial statements for more information regarding this purchase commitment.

Critical Accounting Policies and the Use of Estimates

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States.

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”).

The preparation of 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.

2 unchanged sentences

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.

Our significant accounting policies are described in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, and 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;

• deferred sales commissions and sales commission expense;

• stock-based compensation;

• income taxes;

• 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 February 25, 2021, the date of issuance of this Annual Report on Form 10-K.

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.

While our significant accounting policies are more fully described in “Note 2.

Summary of Significant Accounting Policies” in the notes to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K , 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.

Revenue Recognition

Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services over the term of the agreement.

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-generating activities consist of subscription and support, perpetual licenses, and professional services revenues within a single operating segment.

Subscription and Support Revenues

Our 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 our 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 our 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, we recognize revenue related to these messaging-related subscription contracts on a gross basis.

Perpetual License Revenues

We 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.

Our 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.

Our 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.

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.

We recognize revenues based on the five-step model in accordance with ASC 606, Revenue from Contracts with Customers .

We derive our revenues primarily from subscription and support revenues.

Other revenue-generating activities include perpetual licenses and professional services revenues.

Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.

We have 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, we record individual performance obligations separately if they are distinct by allocating the contract's total transaction price to each performance obligation in an amount based on the relative standalone selling price, (“SSP”), of each distinct good or service in the contract.

We only include estimated amounts of variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.

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.

In addition, significant judgments are made when determining the standalone selling price (“SSP”) in situations where we have a contract that have multiple performance obligations.

We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, historical standalone sales, customer demographics, geographic locations, and the number and types of users within our contracts.

Principal vs.

Agent Considerations

We evaluate whether we are the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis) for vendor reseller agreements and messaging-related agreements.

Where we are the principal, we first obtain control of the inputs to the specific good or service and direct their use to create the combined output.

Our control is evidenced by our 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 our customers and having a level of discretion in establishing pricing.

Revenues provided from agreements in which we are an agent are immaterial.

While none of the factors individually are considered presumptive or determinative, in reaching conclusions on gross versus net revenue recognition, we place the most weight on the analysis of whether or not it is the primary obligor in the arrangement.

Generally, we report 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 we are primarily obligated in our messaging-related subscription contracts, have latitude in establishing prices associated with our messaging program management services, are responsible for fulfillment of the transaction, and have credit risk, we have concluded it is appropriate to record revenue on a gross basis with related telecom messaging costs incurred from third parties recorded as cost of revenues.

Revenues provided from agreements in which we are 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 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 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 or services and customer types, we require payment before the products or services are delivered to the customer.

Deferred Sales 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 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, 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 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.

Stock-Based Compensation

We measure all share-based payments, including grants of options to purchase common stock and the issuance of restricted stock or restricted stock units to employees, service providers and board members, using the fair-value at grant date.

We record forfeitures as they occur.

The cost of services received from employees and non-employees in exchange for awards of equity instruments is recognized in the consolidated statement of operations based on the estimated fair value of those awards on the grant date and amortized on a straight-line basis over the requisite service period.

We value restricted stock and restricted stock units at the closing price of our common stock on the grant date.

We value stock option awards using the Black-Scholes option-pricing model.

For the years ended December 31, 2020, 2019, and 2018 stock-based compensation awards consisted primarily of restricted stock and restricted stock units.

From time to time, we grant restricted stock units that also include performance or market-based conditions (“PRSUs”).

For PRSUs granted with a market condition, we use a Monte Carlo simulation analysis to value the award.

Compensation expense for awards with marked-based conditions is recognized over the required service period of the grant based on the grant date fair value of the award and is not subject to fluctuation due to achievement of the underlying market-based condition.

For revenue generated from arrangements that involve vendor reseller agreements and messaging-related subscription agreements, there is significant judgment in evaluating whether we are the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis).

In this assessment, we consider if we obtain control of the specified goods or services before they are transferred to the customer.

In reaching conclusions on gross versus net revenue recognition, we place the most weight on the analysis of whether or not it is the primary obligor in the arrangement.

Generally, we report revenue from vendor reseller agreements on a gross basis, meaning the amounts billed to customers are recorded as revenue, and expenses incurred are recorded as cost of revenue.

See “Note 13.

Revenue Recognition” in the notes to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for a detailed description of our revenue recognition policy.

Deferred Commissions

Sales commissions 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, consistent with prior year.

Sales commissions paid on renewal contracts are deferred and amortized over the average renewal term, which was determined to be approximately 18 months, consistent with prior year.

Determining the period of expected life of customer relationships and average renewal term requires judgment for which we take into consideration our customer contracts, our technology life cycle and other factors.

See “Note 13.

Revenue Recognition—Deferred Commissions” in the notes to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for a detailed description of our deferred commission.

We are subject to income taxes in the United States and several foreign jurisdictions.

12 unchanged sentences

As of December 31, 2021 we recorded a valuation allowance of $28.6 million against our deferred tax assets.

If, in the future, we evaluate that our deferred tax assets are not likely to be realized, an increase in the related valuation allowance could result in a material income tax expense in the period such determination is made.

If, in the future, we evaluate that our deferred tax assets are not more likely than not to be realized, an increase in the related valuation allowance could result in a material income tax expense in the period such determination is made.

The Company has adopted an indefinite reinvestment position whereby foreign earnings for foreign subsidiaries are expected to be reinvested and future earnings are not expected to be repatriated.

As a result of this policy, no deferred tax liability has been accrued in anticipation of future dividends from foreign subsidiaries.

The Company accounts for the uncertainty of income taxes based on a “more likely than not” threshold for the recognition and derecognition of tax positions, which includes the accounting for interest and penalties as a component of income tax expense.

The Company accounts for the uncertainty of income taxes based on a “more likely than not” threshold for the recognition and derecognition of tax positions.

The Company’s policy is to account for interest and penalties as a component of income tax expense.

Business Combinations

We apply the provisions of ASC 805, Business Combinations, in accounting for our acquisitions which requires the acquisition purchase price to be allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition dates.

The allocation of the purchase price in a business combination requires management to make significant estimates in determining the fair value of acquired assets and assumed liabilities, especially with respect to intangible assets.

The excess of the purchase price over these estimated fair values is recorded to goodwill.

Significant estimates and assumptions, including fair value estimates, are used to determine the fair value of assets acquired, liabilities assumed, and contingent consideration transferred as well as the useful lives of long-lived assets acquired.

During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill based on changes to our initial estimates and assumptions.

Upon conclusion of the measurement period or final determination of the values of assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments are recorded to acquisition related expenses in our consolidated statement of operations.

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 income approach, which estimates fair value based on the earnings and cash flow capacity of the subject asset.

Developed technology and trade names are valued using the relief-from-royalty method, which estimates fair value based on the value the owner of

the asset receives from not having to pay a royalty to use the asset.

The purchase price transferred in our acquisitions often contain holdback and contingent consideration provisions.

Holdbacks are subject to reduction for indemnification claims and are typically payable within 12 to 18 months of the acquisition date and are recorded in due to sellers in our consolidated balance sheets.

Contingent consideration typically includes earnout payments payable within 6 to 18 months of the date of acquisition based on attainment of certain performance goals.

The estimated fair value of contingent consideration related to potential earnout payments is calculated utilizing a binary option model, and this amount is recorded in due to sellers in the consolidated balance sheets.

The fair value of contingent consideration is estimated on a quarterly basis through a collaborative effort by our sales and finance departments.

Changes in the fair value of contingent consideration subsequent to the purchase price finalization are recorded as acquisition related expenses or other income (expense) in our consolidated statements of operations based on management’s assessment of the nature of the liability.

The valuation of identifiable intangible assets reflects management’s estimates based on, among other factors, use of established valuation methods, including, but not limited to, the multi-period excess earnings method income approach method and the relief-from-royalty method.

The purchase price transferred in our acquisitions often contain purchase price holdback and contingent consideration provisions, such as earnout payments.

The Company utilizes a third-party valuation specialist to estimate the acquisition date fair value of potential earnout payments.

Subsequent remeasurements of potential earnout payments require significant judgements and estimates including, but not limited to, (and if applicable in the circumstances) customer renewals, new customers, ARR growth, forecasted bookings, forecasted churn and other factors.

Summary of Significant Accounting Policies—Business Combinations” in the notes to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for a detailed description of business combinations.

Stock-Based Compensation

We record forfeitures as they occur.

The cost of services received from employees and non-employees in exchange for awards of equity instruments is recognized on our consolidated statement of operations based on the estimated fair value of those awards on the grant date and amortized on a straight-line basis over the requisite service period.

We value restricted stock and restricted stock units at the closing price of our common stock on the grant date.

We value stock option awards using the Black-Scholes option-pricing model.

For the years ended December 31, 2021, 2020, and 2019 stock-based compensation awards consisted primarily of restricted stock and restricted stock units.

From time to time, we grant restricted stock units that also include performance or market-based conditions (“PRSUs”).

For PRSUs granted with a market condition, we use a Monte Carlo simulation analysis to value the award.

Goodwill and Other Intangibles

The Company’s indefinite lived intangible assets consist entirely of goodwill, which is evaluated for impairment annually in October or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable.

The events and circumstances considered by the Company include the business climate, legal factors, operating performance indicators and competition.

As we operate as one reporting unit, the impairment test is performed at the consolidated entity level by comparing the estimated fair value of the Company to the its carrying value.

We have elected to first assess qualitative factors to determine whether it is more likely than not that the fair value of our single reporting unit is less than its carrying value.

We further estimate the fair value of the reporting unit using a fair-value-based approach based on market capitalization to determine if it is more likely than not that the fair value of our reporting unit is less than its carrying amount.

Determining the fair value of goodwill is subjective in nature and often involves the use of estimates and assumptions including, without limitation, use of estimates of future prices and volumes for our products, capital needs, economic trends and other factors which are inherently difficult to forecast.

If actual results, or the plans and estimates used in future impairment analyses are lower than the original estimates used to assess the recoverability of these assets, we could incur impairment charges in a future period.

We have historically performed our annual goodwill and indefinite-lived intangible asset impairment test as of October 31st.

During the first quarter of 2020, we changed the date of our annual impairment test to the first day of its fourth fiscal quarter, October 1st.

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, we also performed a qualitative assessment as of October 31, 2020 to ensure the change did not result in the delay, acceleration or avoidance of an impairment charge.

No impairment of goodwill was identified during the years ended December 31, 2020, 2019, or 2018.

Goodwill is evaluated for impairment annually in October or more frequently when a triggering event occurs or circumstances change that indicate the carrying value may not be recoverable.

We assess goodwill for impairment by comparing the estimated fair value of the Company to the its carrying value.

If the fair value of the reporting unit is less than its carrying amount, we recognize an impairment loss equal to that excess amount.

We apply both qualitative and quantitative assessments to determine whether it is more likely than not that the fair value of our single reporting unit is less than its carrying value.

Although several fair value methodologies are allowed, we use the fair-value-based approach based on market capitalization, which generates the best evidence of fair value since the approach uses quoted market prices (a Level 1 fair-value hierarchy).

Identifiable intangible assets

Identifiable intangible assets consist of customer relationships, marketing-related intangible assets and developed technology.

4 unchanged sentences

For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, refer to “Note 2.

Significant Accounting Policies to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.

Summary of Significant Accounting Policies” in the notes to the consolidated financial statements included in “Part II—Item 8.

Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis