Upland Software, Inc. 10-K

Item 7. 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 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. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Item 1A. Risk Factors.” This section and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. 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. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled “Item 1A. Risk Factors” above, which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. For a comparison of the years ended December 31, 2021 and 2020 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, 2021 filed with the SEC on February 24 , 2022. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended December 31 and the associated quarters of those fiscal years. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law. Overview 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, 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 software needs. Our revenue has grown from $149.9 million in the year ended December 31, 2018 to $317.3 million in the year ended December 31, 2022, representing a compound annual growth rate of 21%. During the year ended December 31, 2022, domestic revenue as a percent of total revenue decreased to 70% compared to 71% in the year ended December 31, 2021. 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, 2022, 2021 and 2020, our subscription and support revenue represented 94% , 95% and 95% of our total revenue, respectively. Historically, we have sold certain of our applications under perpetual licenses, which also are paid in advance. For the years ended December 31, 2022, 2021 and 2020, our perpetual license revenue accounted for 2% , 1% and 1% of our total revenue, respectively. The support agreements related to our perpetual licenses are one-year in duration and entitle the customer to support and unspecified upgrades. The revenue related to such support agreements is included as part of our subscription and support revenue. Professional services revenue consists of fees related to implementation, data extraction, integration and configuration and training on our applications. For each of the years ended December 31, 2022, 2021 and 2020, our professional services revenue accounted for 4% of our total revenue . To support continued growth, we intend to pursue acquisitions of complementary technologies, products and businesses. This will expand our product families, customer base and market access, resulting in increased benefits of scale. We will prioritize acquisitions within our current enterprise solution categories as described in “ Item 1. Business ” herein. Consistent with our growth strategy, we have completed a total of 31 acquisitions in the 11 years ending December 31, 2022. 33 Acquisitions completed during the years ended December 31, 2022, 2021 and 2020 include the following: Acquisitions 2022 Acquisitions • BA Insight - On February 22, 2022, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of BA Insight Inc., (“BA Insight”), a cloud-based enterprise knowledge management solution. Revenues recorded since the acquisition date through December 31, 2022 were approximately $7.6 million. • Objectif Lune - On January 7, 2022, the Company entered into an agreement to purchase the shares comprising the entire issued share capital of Objectif Lune Inc., a Quebec proprietary company (“Objectif Lune”), a cloud-based document workflow product. Revenues recorded since the acquisition date through December 31, 2022 were approximately $20.9 million. 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. • 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. • 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. 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. Sunset Assets During the fourth quarter of 2022, in connection with the periodic review of its business, the Company decided to sunset certain non-strategic product offerings and customer contracts (collectively referred to as “Sunset Assets”). Refer to “Adjusted Operating Measures” detail located in this section for further breakdown for adjusted amounts. 34 Components of Operating Results Revenue Subscription and support revenue . We derive our subscription revenue from fees paid to us by our customers for use of our cloud-based applications. We recognize the revenue associated with subscription agreements ratably over the term of the agreement as the customer receives and consumes the benefits of the cloud services through the contract period. Our subscription agreements typically have terms of one to three years. Our support revenue consists of maintenance fees associated with our perpetual licenses and hosting fees paid to us by our customers. Typically, when purchasing a perpetual license, a customer also purchases maintenance for which we charge a fee, priced as a percentage of the perpetual license fee. Maintenance agreements include the right to support and unspecified upgrades. We recognize the revenue associated with maintenance ratably over the term of the contract. In limited instances, at the customer’s option, we may host the software purchased by a customer under a perpetual license on systems at our third-party data centers. Perpetual license revenue . Perpetual license revenue reflects the revenue recognized from sales of perpetual licenses to new customers and additional perpetual licenses to existing customers. We generally recognize the license fee portion of the arrangement up-front at a point in time when the software is made available to the customer. Professional services revenue . Professional services revenue consists of fees related to implementation, data extraction, integration and configuration and training on our applications. We generally recognize the revenue associated with these professional services over time as 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. Cost of Revenue Cost of product revenue . Cost of product revenue consists primarily of hosting costs, personnel 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, amortization of acquired intangible assets, specifically developed technology, as a result of business combination purchase accounting adjustments 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. We intend to continue to invest additional resources in expanding the delivery capability of our applications. As we add hosting infrastructure capacity and support personnel in advance of anticipated growth, our cost of product revenue will increase, and if such anticipated revenue growth does not occur, our product gross profit will be adversely affected both in terms of absolute dollars and as a percentage of total revenues in any particular quarterly or annual period. Our cost of product revenue is generally expensed as the costs are incurred. Developed technology is valued using a cost-to-recreate approach and is generally amortized over a four- to nine-year period. Cost of professional services revenue . Cost of professional services revenue consists primarily of personnel related costs, including salaries, benefits, bonuses, payroll taxes, stock-based compensation and allocated overhead, as well as the costs of contracted third-party vendors and reimbursable expenses. As most of our personnel are employed on a full-time basis, our cost of professional services revenue is largely fixed in the short-term, while our professional services revenue may fluctuate, leading to fluctuations in professional services gross profit. We expect that cost of professional services as a percentage of total revenues could fluctuate from period to period depending on the growth of our professional services business, the timing of sales of applications, and any associated costs relating to the delivery of services. Our cost of professional services revenue is generally expensed as costs are incurred. Operating Expenses Our operating expenses are classified into six categories: sales and marketing, research and development, general and administrative, depreciation and amortization, acquisition-related expenses and impairment of goodwill. For each category, other than depreciation and amortization and impairment of goodwill, the largest expense component is primarily personnel 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. Operating expenses are generally recognized as incurred. 35 Sales and marketing . Sales and marketing expenses primarily consist of personnel related costs for our sales and marketing staff, including salaries, benefits, deferred commission amortization, bonuses, payroll taxes, stock-based compensation and allocated overhead, as well as costs of promotional events, corporate communications, online marketing, product marketing and other brand-building activities. Sales commissions earned by our sales force, and related payroll taxes, are considered incremental and recoverable costs of obtaining a contract with a customer. Deferred commissions and other costs for a particular customer agreement for initial contracts are amortized over the expected life of the customer relationships while deferred commissions related to contract renewals are amortized over average renewal term. Sales commissions, and related payroll taxes, are earned when the initial customer contract is signed and upon any renewal as our obligation to pay a sales commission arises at these times. Sales and marketing expenses may fluctuate as a percentage of total revenues for a variety of reasons including the timing of such expenses, in any particular quarter or annual period. Research and development . Research and development expenses primarily consist of personnel related costs of our research and development staff, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, allocated overhead and costs of certain third-party contractors. Research and development costs related to the development of our software applications are generally recognized as incurred. We have devoted our product development efforts primarily to enhancing the functionality, and expanding the capabilities, of our applications. 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 . General and administrative expenses primarily consist of personnel related costs for our executive, administrative, accounting and finance, information technology, legal, accounting and human resource staff, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, allocated overhead, professional fees and other corporate expenses. We have recently incurred, and expect to continue to incur, additional expenses as we grow our operations, including potentially higher legal, corporate insurance, accounting and auditing expenses and the additional costs of enhancing and maintaining our internal control environment. General and administrative expenses may fluctuate as a percentage of revenue, and overtime we expect that general and administrative expenses will decrease as a percent of revenue due to operational efficiencies. Depreciation and amortization . Depreciation and amortization expenses primarily consist of depreciation and amortization of acquired intangible assets, specifically customer relationships and trade names, as a result of business combination purchase accounting adjustments. 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 an income approach, which estimates fair value based on the earnings and cash flow capacity of the subject asset and are amortized over a seven to ten-year period. The value of the trade name intangibles are determined using a 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 and are amortized over mostly a three-year period. 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 six to nine months, to transform the acquired business into the Company’s UplandOne 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 these acquisition-related expenses should no longer be material if the Company has done no acquisitions after one year. Impairment of Goodwill . Goodwill impairment is recognized on a non-recurring basis when the Carrying Value (or GAAP basis book value) of our Company (which is our only reporting unit) exceeds the estimated fair value of our Company as determined by reference to a number of factors and assumptions, including the spot closing price of our Common Stock as of a certain reporting or measurement date. We assess Goodwill for impairment annually on October 1st, or more frequently when an event occurs which could cause the Carrying Value of our Company to exceed the estimated fair value of our Company. As a result of the decline of our stock price during the quarter ended December 31, 2022, we performed a Goodwill impairment evaluation as of December 31, 2022, which resulted in a Goodwill impairment of $12.5 million. See “ Note 5. Goodwill and Other Intangible Assets ” in the notes to our consolidated financial statements for more information regarding our fourth quarter 2022 Goodwill impairment. We will continue to evaluate Goodwill impairment in future periods. Total Other Expense Total other expense consists primarily of amortization of debt issuance costs over the term of the related term loan, revaluation of foreign subsidiaries, interest expense on outstanding debt, partially offset by interest income on our interest- 36 bearing cash balances held in money market accounts. We participate in interest rate swap agreements for the purpose of reducing variability in interest rate payments on the Company’s outstanding 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 Facility (as hereinafter defined in “ —Liquidity and Capital Resources—Credit Facility ”). In addition, 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. Income Taxes 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 and states in which loss carryforwards do not fully offset taxable income. The balance of the tax benefit for the years ended December 31, 2022, 2021 and 2020, outside of tax deductible goodwill and current taxes in separate filing states, is related to foreign income taxes, primarily operations of our subsidiaries in Australia, Canada, Ireland and the United Kingdom, 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. 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. In the event we have subsequent changes in ownership, the availability of net operating losses and research and development credit carryovers could be further limited. 37 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 (dollars in thousands, except share and per share data). Year Ended December 31, 2022 2021 2020 Amount Percent of Revenue Amount Percent of Revenue Amount Percent of Revenue Revenue: Subscription and support $ 297,887 94% $ 287,621 95% $ 277,504 95% Perpetual license 6,948 2% 2,150 1% 1,884 1% Total product revenue 304,835 96% 289,771 96% 279,388 96% Professional services 12,468 4% 12,245 4% 12,390 4% Total revenue 317,303 100% 302,016 100% 291,778 100% Cost of revenue: Subscription and support (1)(2) 93,948 30% 92,168 31% 89,880 31% Professional services and other 9,793 3% 7,285 2% 8,566 3% Total cost of revenue 103,741 33% 99,453 33% 98,446 34% Gross profit 213,562 67% 202,563 67% 193,332 66% Operating expenses: Sales and marketing (1) 59,416 19% 55,097 18% 46,077 16% Research and development (1) 46,187 15% 42,693 14% 39,002 13% General and administrative (1) 70,462 22% 76,901 25% 68,072 23% Depreciation and amortization 43,669 14% 41,315 14% 36,919 13% Acquisition-related expenses 21,556 6% 21,234 8% 27,075 9% Impairment of goodwill 12,500 4% — —% — —% Total operating expenses 253,790 80% 237,240 79% 217,145 74% Loss from operations (40,228) (13)% (34,677) (12)% (23,813) (8)% Other Expense: Interest expense, net (29,145) (9)% (31,626) (10)% (31,529) (11)% Other expense, net (781) —% (253) (1)% (111) —% Total other expense (29,926) (9)% (31,879) (11)% (31,640) (11)% Loss before benefit from income taxes (70,154) (22)% (66,556) (23)% (55,453) (19)% Benefit from income taxes 1,741 —% 8,344 4% 4,234 1% Net loss (68,413) (22)% (58,212) (19)% (51,219) (18)% Preferred stock dividends and accretion (1,846) (1)% — —% — —% Net loss attributable to common stockholders (3) $ (70,259) (22)% $ (58,212) (19)% $ (51,219) (18)% Net loss per common share: Loss from continuing operations per common share, basic and diluted (3) $ (2.23) $ (1.92) $ (1.92) Weighted-average common shares outstanding, basic and diluted (3) 31,528,881 30,295,769 26,632,116 38 (1) Includes stock-based compensation. See table below for stock-based compensation by operating expense line item. Year Ended December 31, 2022 2021 2020 (dollars in thousands) Stock-based compensation: Cost of revenue $ 1,984 $ 2,088 $ 1,951 Research and development 2,733 3,085 3,391 Sales and marketing 4,239 5,957 3,450 General and administrative 32,646 42,743 32,900 Total $ 41,602 $ 53,873 $ 41,692 (2) Includes depreciation and amortization of $12.5 million, $11.6 million and $10.2 million in the years ended December 31, 2022, 2021 and 2020, respectively. (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. Adjusted Operating Measures In the following discussion of results of operations, we refer to “Core Organic Revenue” and “Organic Revenue” as non-GAAP financial measures. We believe that, in addition to our financial results determined in accordance with GAAP, these non-GAAP financial measures are useful in evaluating our business, results of operations, and financial condition. However, our use of non-GAAP financial measures may vary from that of others in our industry. Non-GAAP financial measures should not be considered as an alternative to the performance measures derived in accordance with GAAP. There are limitations to the use of non-GAAP measures, as non-GAAP measures may not present complete financial results. We compensate for these limitations by using these non-GAAP financial measures along with other comparative tools, together with GAAP measurements, to assist in the evaluation of operating performance. Such GAAP measurements include revenue, gross profit, net loss, net loss per share and other performance measures. In evaluating these financial measures, you should be aware that in the future we may incur expenses similar to those eliminated in the presentation of our non-GAAP financial measures. Our presentation of non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. When evaluating our performance, you should consider these non-GAAP financial measures alongside other financial performance measures, including the most directly comparable GAAP measures set forth in the reconciliation tables below and our other GAAP results. See “—Non-GAAP Financial Measures” for the definitions of the non-GAAP financial measures included herein, as well as a statement disclosing the reasons management believes certain non-GAAP financial measures provide useful information to investors regarding the Company’s financial condition and results of operations. The following table presents a reconciliation of Total revenue to Core Organic Revenue for each of the periods indicated. 39 Years Ended December 31, 2022 2021 (dollars in thousands) Reconciliation of Total revenue to Core Organic Revenue: Total revenue $ 317,303 $ 302,016 Less: Subscription and support revenue from acquisitions not fully in the prior year comparative period (1) 49,624 24,943 Perpetual license revenue 6,948 2,150 Professional services revenue 12,468 12,246 Subscription and support revenue from Sunset Assets (2) 29,958 35,782 Overage Charges (3) 12,287 16,124 Political Revenue (4) — 980 Core Organic Revenue (5) $ 206,018 $ 209,791 (1) After the reduction of $5.5 million purchase accounting deferred revenue discount for the year ended December 31, 2022. (2) Subscription and support revenue from Sunset Assets is revenue related to Sunset Assets. This excludes Overage Charges, Professional services revenue, Perpetual license revenue and subscription and support revenue from acquisitions not fully in the prior year comparative period all shown separately. (3) Overage Charges are subscription and support revenue representing amounts paid to the Company by a customer (in addition to such customer’s contractual minimum payment commitments) as a result of such customer’s number of users or level of usage of services including text and e-mail messaging and third party pass-through costs exceeding the levels stipulated in such customer’s license or related purchase agreements with the Company. (4) Political Revenue is subscription and support usage revenue from US presidential campaigns. (5) Core Organic Revenue excludes revenues from acquisitions closed during or subsequent to the prior year comparable period, Perpetual license revenues, Professional services revenues, revenue from Sunset Assets, Overage Charges and Political Revenue. The following table presents a reconciliation of Subscription and support revenue to Core Organic Revenue for each of the periods indicated. Years Ended December 31, 2022 2021 (dollars in thousands) Reconciliation of Subscription and support revenue to Core Organic Revenue: Subscription and support revenue $ 297,887 $ 287,621 Less: Subscription and support revenue from acquisitions not fully in the prior year comparative period (1) 49,624 24,943 Subscription and support revenue from Sunset Assets (2) 29,958 35,782 Overage Charges (3) 12,287 16,124 Political Revenue (4) — 980 Core Organic Revenue (5) $ 206,018 $ 209,791 (1) After the reduction of $5.5 million purchase accounting deferred revenue discount for the year ended December 31, 2022 . (2) Subscription and support revenue from Sunset Assets is revenue related to Sunset Assets. This excludes Overage Charges, Professional services revenue, Perpetual license revenue and subscription and support revenue from acquisitions not fully in the prior year comparative period all shown separately. (3) Overage Charges are subscription and support revenue representing amounts paid to the Company by a customer (in addition to such customer’s contractual minimum payment commitments) as a result of such customer’s number of users or volume of usage including text and e-mail messaging and third party pass-through costs exceeding the levels stipulated in such customer’s license or related purchase agreements with the Company. (4) Political Revenue is subscription and support usage revenue from US presidential campaigns. (5) Core Organic Revenue excludes revenues from acquisitions closed during or subsequent to the prior year comparable period, revenue from Sunset Assets, Overage Charges and Political Revenue. 40 Comparison of Years Ended December 31, 2022 and December 31, 2021 Revenue Year Ended December 31, 2022 2021 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) Revenue: Subscription and support $ 297,887 94% $ 287,621 95% $ 10,266 4% Perpetual license 6,948 2% 2,150 1% 4,798 223% Total product revenue 304,835 96% 289,771 96% 15,064 5% Professional services 12,468 4% 12,245 4% 223 2% Total revenue $ 317,303 100% $ 302,016 100% $ 15,287 5% Total revenue was $317.3 million in the year ended December 31, 2022, compared to $302.0 million in the year ended December 31, 2021, an increase of $15.3 million, or 5%. Total revenue growth includes a negative impact of 2% from changes in foreign currency exchange rates. Our organic revenue excludes acquisitions closed during or subsequent to the prior year comparable period and business operations related to Sunset Assets (the “Organic Revenue”). The acquisitions not fully in the comparable period contributed $32.8 million to the increase in total revenue for the year ended December 31, 2022. Total revenue related to Perpetual license and Professional services related to our Organic Business decreased by $3.0 million. Subscription and support revenue related to Sunset Assets decreased by $5.8 million as a result of decreased sales and marketing focus on those Sunset Assets. Total revenues related to Overage Charges decreased by $3.8 million as a result of variable demand in the year ended December 31, 2022. The year ended December 31, 2021 included $1.0 million in Political Revenue, which did not repeat in the year ended December 31, 2022. Therefore, net of these non-core revenues, our Core Organic Revenue decreased by $3.8 million in the year ended December 31, 2022 compared to the year ended December 31, 2021. After removing the negative foreign currency exchange impact on our revenue, net of these non-core revenues, our Core Organic Revenue decreased by $2.6 million in the year ended December 31, 2022 compared to the year ended December 31, 2021. Subscription and support revenue was $297.9 million in the year ended December 31, 2022, compared to $287.6 million in the year ended December 31, 2021, an increase of $10.3 million, or 4%. Subscription and support revenue growth includes a negative impact of 2% from changes in foreign currency exchange rates. The acquisitions not fully in the comparable period contributed $24.7 million to the increase in subscription and support revenue in the year ended December 31, 2022. Subscription and support revenue related to our Sunset Assets decreased $5.8 million as a result of decreased sales and marketing focus on those Sunset Assets. Subscription and support revenues related to Overage Charges decreased by $3.8 million as a result of variable demand in the year ended December 31, 2022. The year ended December 31, 2021 included $1.0 million of subscription and support Political Revenues which did not repeat in the year ended December 31, 2022. Therefore, net of these non-core revenues, our Core Organic Revenue decreased by $3.8 million in the year ended December 31, 2022 compared to the year ended December 31, 2021. After removing the negative foreign currency exchange impact on our revenue, net of these non-core revenues, our Core Organic Revenue decreased by $2.6 million in the year ended December 31, 2022 compared to the year ended December 31, 2021. 41 Perpetual license revenue was $6.9 million in the year ended December 31, 2022, compared to $2.2 million in the year ended December 31, 2021, an increase of $4.7 million, or 223%. The acquisitions not fully in the comparable period contributed $5.0 million to the increase in perpetual license revenue in the year ended December 31, 2022. Perpetual license revenue related to our Sunset Assets was nil. Therefore, perpetual license revenue from our Organic Business decreased by $0.3 million in the year ended December 31, 2022 compared to the year ended December 31, 2021. Professional services revenue was $12.5 million in the year ended December 31, 2022, compared to $12.2 million in the year ended December 31, 2021, an increase of $0.3 million, or 2%. The acquisitions not fully in the comparable period contributed $3.1 million to the increase in professional services revenue in the year ended December 31, 2022. Professional services revenue related to our Sunset Assets decreased by $0.1 million. Therefore, professional services revenue from our Organic Business decreased by $2.7 million in the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily related to our discipline around not accepting unprofitable professional services projects. Cost of Revenue and Gross Profit Margin Year Ended December 31, 2022 2021 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) Cost of revenue: Subscription and support (1) $ 93,948 30% $ 92,168 31% $ 1,780 2% Professional services 9,793 3% 7,285 2% 2,508 34% Total cost of revenue 103,741 33% 99,453 33% 4,288 4% Gross profit $ 213,562 67% $ 202,563 67% $ 10,999 5% (1) Includes depreciation and amortization expense as follows: Depreciation $ 8 —% $ 30 —% $ (22) (73)% Amortization $ 12,469 4% $ 11,583 4% $ 886 8% Cost of subscription and support revenue was $93.9 million in the year ended December 31, 2022, compared to $92.2 million in the year ended December 31, 2021, an increase of $1.7 million, or 2%. The acquisitions not fully in the comparable period contributed $5.4 million to the increase to cost of subscription and support revenue, primarily related to costs associated with the delivery of the BA Insight, Objectif Lune and Panviva products. Cost of subscription and support revenue related to our Sunset Assets decreased $2.6 million, primarily related to hosting and infrastructure costs. Therefore, cost of subscription and support revenue for our Organic Business decreased by $1.1 million mainly due to decreased messaging costs. Cost of professional services revenue was $9.8 million in the year ended December 31, 2022, compared to $7.3 million in the year ended December 31, 2021, an increase of $2.5 million, or 34%. The acquisitions not fully in the comparable period contributed $3.2 million to the increase to cost of professional services revenue, primarily related to an increase in personnel and related costs. Therefore, cost of professional services revenue for our Organic Business decreased by $0.7 million primarily related to a decrease in personnel related costs. 42 Operating Expenses Sales and Marketing Expense Year Ended December 31, 2022 2021 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) Sales and marketing $ 59,416 19% $ 55,097 18% $ 4,319 8% Sales and marketing expense was $59.4 million in the year ended December 31, 2022, compared to $55.1 million in the year ended December 31, 2021, an increase of $4.3 million, or 8%. The acquisitions not fully completed in the comparable period contributed $6.6 million to the increase in sales and marketing expense, primarily consisting of increased headcount and personnel related costs in the year ended December 31, 2022. Sales and marketing expense for our Sunset Assets decreased by $1.1 million primarily as a result of decreased personnel related costs. Sales and marketing expense for our Organic Business decreased by $1.2 million, primarily as a result of a reduction in personnel related costs which were partially offset by increased commission costs. We expect to see an increase in sales and marketing expense in 2023 as we increase our go to market investments. Research and Development Expense Year Ended December 31, 2022 2021 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) Research and development $ 46,187 15% $ 42,693 14% $ 3,494 8% Research and development expense was $46.2 million in 2022, compared to $42.7 million in 2021, an increase of $3.5 million, or 8%. The acquisitions not fully in the comparable period contributed $7.5 million to the increase in research and development expense primarily consisting of personnel related costs. Research and development expense related to our Sunset Assets decreased by $0.7 million primarily due to reductions in personnel related costs. Therefore, research and development expense for our Organic Business decreased by $3.3 million primarily related to a decrease in non-cash stock compensation expense coupled with lower outsourced technology services costs as we shift more resources to our India Center of Excellence. We expect to see an increase in research and development expenses in 2023 due to increased product investments. General and Administrative Expense Year Ended December 31, 2022 2021 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) General and administrative $ 70,462 22% $ 76,901 25% $ (6,439) (8)% General and administrative expense was $70.5 million in 2022, compared to $76.9 million in 2021, a decrease of $6.4 million, or 8%. General and administrative expense for our Organic Business decreased by $9.8 million, which was driven primarily by lower non-cash stock compensation expense due primarily to lower grant date fair values in 2022 as well as the absence of a one-time non-cash stock compensation charge taken in 2021 of $6.3 million related to the departure of a former executive. General and administrative expense for our Sunset Assets decreased by $0.9 million. This was partially offset by an increase in general administrative expense of $4.3 million due to costs related to the acquisitions not fully in the comparable period, which consisted primarily of higher personnel related costs and administrative expenses. Depreciation and Amortization Expense 43 Year Ended December 31, 2022 2021 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) Depreciation and amortization: Depreciation $ 1,529 1% $ 1,968 1% $ (439) (22)% Amortization 42,140 13% 39,347 13% 2,793 7% Total depreciation and amortization $ 43,669 14% $ 41,315 14% $ 2,354 6% Depreciation and amortization expense was $43.7 million in 2022, compared to $41.3 million in 2021, an increase of $2.4 million, or 6%. The acquisitions not fully in the comparable period increased depreciation and amortization expense by $6.0 million, primarily related to acquired intangible assets such as customer relationships and tradenames. Therefore, depreciation and amortization expense for our Organic Business decreased by $3.6 million in the comparative periods due to assets becoming fully depreciated or amortized during the period. Acquisition-related Expense Year Ended December 31, 2022 2021 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) Acquisition-related expense $ 21,556 6% $ 21,234 8% $ 322 2% 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. 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. Absent new acquisition activity, acquisition-related expenses are no longer material if the Company has done no acquisitions after one year. Acquisition-related expense was $21.6 million in 2022, compared to $21.2 million for 2021, a marginal increase of $0.4 million, or 2%. The Company had two acquisitions in 2022 compared to three acquisitions in 2021. The 2022 acquisitions were larger and had complex organizational and tax structures, which resulted in slightly higher acquisition-related expenses compared to 2021. Impairment of goodwill Year Ended December 31, 2022 2021 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) Impairment of goodwill $ 12,500 4% $ — —% $ 12,500 NA Goodwill impairment is recognized on a non-recurring basis when the Carrying Value (or GAAP basis book value) of our Company (which is our only reporting unit) exceeds the estimated fair value of our Company as determined by reference to a number of factors and assumptions, including the spot closing price of our Common Stock as of a certain reporting or measurement date. We assess Goodwill for impairment annually on October 1st, or more frequently when an event occurs which could cause the Carrying Value of our Company to exceed the estimated fair value of our Company. As a result of the decline of our stock price during the quarter ended December 31, 2022, we performed a Goodwill impairment evaluation as of December 31, 2022, which resulted in a Goodwill impairment of $12.5 million. See “ Note 5. Goodwill and Other Intangible Assets ” in the notes to our consolidated financial statements for more information regarding our fourth quarter 2022 Goodwill impairment. 44 Other Expense, net Year Ended December 31, 2022 2021 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) Other Expense: Interest expense, net $ (29,145) (9)% $ (31,626) (10)% $ 2,481 (8)% Other expense, net (781) —% (253) (1)% (528) 209% Total other expense $ (29,926) (9)% $ (31,879) (11)% $ 1,953 (6)% Interest expense, net was $29.1 million in 2022, compared to $31.6 million for 2021, a decrease of $2.5 million, or 8%, due primarily to higher interest income on our interest-bearing cash balances as well as a decrease in outstanding borrowings on our Credit Facility. Other expense, net was $0.8 million in 2022, compared to other expense of $0.3 million in 2021, an increase of $0.5 million, or 209%. The difference in other expense is primarily due to an increase in foreign currency exchange losses compared to 2021. Benefit from Income Taxes Year Ended December 31, 2022 2021 Change Amount Percent of Revenue Amount Percent of Revenue Amount % Change (dollars in thousands) Loss before provision for income taxes (70,154) (22)% (66,556) (23)% (3,598) (5)% Benefit from (provision for) income taxes $ 1,741 —% $ 8,344 4% $ (6,603) (79)% Effective income tax rate (2.5) % (12.5) % Benefit from income taxes was $1.7 million in 2022, compared to a benefit for income taxes of $8.3 million in 2021, a decrease in the benefit from income taxes of $6.6 million, or 79%. This decrease was due primarily to 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. 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. Realization of any of our domestic deferred tax assets depends upon 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 Code and similar state provisions. Refer to “ Note 6. 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, 2021 and December 31, 2020 For a comparison of the years ended December 31, 2021 and 2020 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, 2021 filed with the SEC on February 24 , 2022. 45 Non-GAAP Financial Measures Key Metrics In addition to the GAAP and non-GAAP financial measures described in “ —Results of Operations ” above, 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 percentages): As of December 31, 2022 2021 2020 Other Financial Data (unaudited): Annualized recurring revenue value at year-end $ 266,278 $ 257,056 $ 220,535 Annual net dollar retention rate 95 % 94 % 94 % Adjusted EBITDA (1) $ 97,105 $ 96,657 $ 99,903 (1) Adjusted EBITDA is presented for the years ended December 31, 2022, 2021 and 2020. Annualized recurring revenue value at year-end We define annualized recurring revenue (“ARR”) as the value as of December 31 that equals the monthly value of our recurring revenue under support and subscription contracts excluding month-to-month contracts measured as of December 31 multiplied by 12. This measure excludes the revenue value of uncontracted overage fees, on-demand or monthly usage service fees and Sunset Assets. As a metric, ARR mitigates fluctuations in revenue recognition due to certain factors, including contract term and the sales mix of recurring revenue contracts and perpetual licenses. ARR does not have any standardized meaning and may not be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenues and deferred revenues and is not intended to be combined with or to replace either of those elements of our financial statements. ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our clients. Refer to “ Note 3 Acquisitions ” and “ Note 5 Goodwill and Other Intangible Assets ” in the notes to the consolidated financial statements for further discussion. Our ARR was $266.3 million, $257.1 million and $220.5 million as of December 31, 2022, 2021 and 2020. Annual net dollar retention rate We measure our ability to grow and retain ARR from existing clients using a metric we refer to as our annual net dollar retention rate. We define annual net dollar retention rate as of December 31 as the aggregate ARR as of 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. Our annual net dollar retention rate was 95%, 94% and 94% as of December 31, 2022, 2021 and 2020. Adjusted EBITDA We monitor Adjusted EBITDA to help us evaluate the effectiveness and efficiency of our operations. We define Adjusted EBITDA as net income (loss), calculated in accordance with GAAP, adjusted for depreciation and amortization expense, net interest expense, loss on debt extinguishment, net other expense, benefit from income taxes, stock-based compensation expense, acquisition-related expense, purchase accounting deferred revenue discount and impairment of goodwill. Adjusted EBITDA is a non-GAAP financial measure that our management believes 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 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; 46 • 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; and • 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: • 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. • Impairment of goodwill and depreciation and amortization are non-cash charges, and the assets being depreciated or amortized, which contribute to the generation of revenue, 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 relates to amortization of acquired intangible assets as well as the goodwill 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. 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. The following table presents a reconciliation of Net loss from continuing operations to Adjusted EBITDA for each of the periods indicated (in thousands). Year Ended December 31, 2022 2021 2020 Net loss $ (68,413) $ (58,212) $ (51,219) Depreciation and amortization expense 56,146 52,928 47,164 Interest expense, net 29,145 31,626 31,529 Other expense, net 781 253 111 Benefit from income taxes (1,741) (8,344) (4,234) Stock-based compensation expense 41,602 53,873 41,692 Acquisition-related expense 21,556 21,234 27,075 Non-recurring litigation costs 33 — — Purchase accounting deferred revenue discount 5,496 3,299 7,785 Impairment of goodwill 12,500 — — Adjusted EBITDA $ 97,105 $ 96,657 $ 99,903 Core Organic Revenue Core Organic Revenue is defined as total revenue, less revenue from acquisitions closed during or subsequent to the prior year comparable period, Perpetual license revenues, Professional services revenues, revenue from Sunset Assets, Overage Charges and Political Revenue. For reconciliations of total revenue to Core Organic Revenue and subscription and support revenue to Core Organic Revenue, see “ —Results of Operations—Adjusted Operating Measures. ” 47 48 Liquidity and Capital Resources To date, we have financed our operations primarily through the raising of capital including sales of our common stock and preferred stock or our convertible preferred stock, cash from operating activities and borrowings under our Credit Facility (as hereinafter defined). We believe that current cash and cash equivalents, cash flows from operating activities and availability under our existing Credit Facility 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. We do not intend to offer for sale any common stock at current market prices. The following table summarizes our liquidity for the periods indicated: Year Ended December 31, 2022 2021 (dollars in thousands) Cash and cash equivalents $ 248,653 $ 189,158 Available borrowings from our Revolving Credit Facility 60,000 60,000 Total Liquidity $ 308,653 $ 249,158 The $59.5 million increase in cash and cash equivalents from December 31, 2021 to December 31, 2022 includes $110.4 million in cash proceeds related to our Series A Preferred Stock, net of issuance costs which closed in August 2022. This was partially offset by $62.4 million in cash paid for our two acquisitions closed in January and February 2022, net of $0.7 million in cash acquired. Non-cash acquisition date consideration to be paid in future periods related to these acquisitions includes $5.9 million in holdback payments and that are due within 12 to 18 months of the closing dates of the underlying acquisitions. Our cash and cash equivalents held by our foreign subsidiaries was $34.8 million as of December 31, 2022. If these funds held by our foreign subsidiaries are needed for our domestic operations, we would be required to accrue and pay U.S. taxes to repatriate these funds to the U.S. 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 December 31, 2022 and 2021, we had a working capital surplus of $170.1 million and $106.5 million, respectively. Series A Preferred Stock The Series A Preferred Stock as discussed in “ Note 12. Series A Preferred Stock ” provided us an additional $115.0 million in liquidity during the year ended December 31, 2022, which we intend to use for (a) for general corporate purposes and (b) for transaction-related fees and expenses. As of December 31, 2022, the Series A Preferred Stock Issuance Costs totaled $4.6 million. The holders of Series A Convertible Preferred Stock are entitled to dividends (i) at the rate of 4.5% per annum until but excluding the seven year anniversary of the closing, and (ii) at the rate of 7.0% per annum on and after the seven year anniversary of the closing, and are also entitled to fully participate in any dividends or other distributions declared or paid on our common stock on an as-converted basis. Dividends will be payable quarterly in arrears, and may be paid, at our option, in cash or by paying dividends in kind . Our ability to pay cash dividends is subject to the restrictions under the Credit Facility (as defined below). The Series A Preferred Stock had accrued unpaid dividends of $1.8 million as of December 31, 2022. The Series A Preferred Stock ranks senior to our common stock with respect to distribution rights and rights upon our liquidation, dissolution or winding up (“Liquidation”), on parity with any class or series of our capital stock expressly designated as ranking on parity with the Series A Preferred Stock with respect to distribution rights and rights upon Liquidation, junior to any class or series of our capital stock expressly designated as ranking senior to the Series A Preferred Stock with respect to distribution rights and rights upon Liquidation and junior in right of payment to our existing and future indebtedness, including the Credit Facility. Credit Facility Our facility is comprised of $540.0 million in original principal term loans and a $60.0 million revolving credit facility. 49 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, 2022. The Credit Facility replaced our previous credit facility. 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. 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 December 31, 2022, we were in compliance with all covenants under the Credit Facility. See “ Note 7. Debt ” in the notes to the consolidated financial statements for more information regarding our Credit Facility and outstanding debt as of December 31, 2022. On February 21, 2023, the Company entered into an amendment to its Credit Facility. The amendment amended the interest rate benchmark from LIBOR to SOFR. Other than the foregoing, the material terms of the Credit Agreement remains unchanged. 2022 S-3 On October 21, 2022 we filed a resale registration statement on Form S-3 (File No. 333-267973) (the “2022 S-3”), on behalf of the Purchaser and pursuant to the Registration Rights Agreement, which became effective on November 1, 2022 and covers (i) the issued Series A Preferred Stock and (ii) the number of shares of the Company’s common stock issuable upon conversion of such Series A Preferred Stock, which amount includes and assumes that dividends on the Series A Preferred Stock are paid by increasing the Liquidation Preference of the Series A Preferred Stock for a period of sixteen dividend payment periods from the initial issuance date. See “ Note 12. Series A Preferred Stock ” for further details. The following table summarizes our cash flows for the periods indicated: Year Ended December 31, 2022 2021 (dollars in thousands) Consolidated Statements of Cash Flow Data: Net cash provided by operating activities $ 29,979 $ 41,738 Net cash used in investing activities (63,222) (93,532) Net cash provided by (used in) financing activities 94,151 (8,180) Effect of exchange rate fluctuations on cash (1,413) (897) Change in cash and cash equivalents 59,495 (60,871) Cash and cash equivalents, beginning of period 189,158 250,029 Cash and cash equivalents, end of period $ 248,653 $ 189,158 Cash Flows from Operating Activities Cash 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 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 UplandOne platform. Additionally, operating cash flows includes the impact of 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. The volume of professional services rendered, the volume and timing of customer bookings and contract renewals, and the related timing of collections and renewals on those bookings, 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. 50 Cash provided by operating activities was $30.0 million for 2022 compared to $41.7 million for 2021, a decrease of $11.8 million. This decrease in operating cash flow is generally attributable to the working capital uses of cash outweighing the working capital sources of cash outlined below. Working capital uses of cash for the year ended December 31, 2022 included a $14.0 million decrease in accrued expenses, a decrease of $7.2 million in accounts payable related to timing of payments, a $2.7 million increase in prepaids and other related primarily to an increase in deferred sales commission and a decrease of $5.0 million in deferred revenue. Working capital sources of cash for 2022 included a decrease of $9.7 million decrease in accounts receivable related to the timing of collections. 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 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. 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 2022, cash used in investing activities consisted of $62.4 million associated with the Company’s 2022 acquisitions, and the purchases of property and equipment of $0.9 million. Cash used in investing activities decreased $30.3 million in 2022 compared to 2021 primarily as a result of closing two acquisitions during the period compared to three acquisition in the comparable prior year period. 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 increased $102.3 million in 2022 compared to 2021. The increase in cash provided by financing activities relates primarily to a $110.4 million in cash proceeds related to our Series A Preferred Stock, net of issuance costs, partially offset by a $7.4 million increase in additional consideration paid to sellers (i.e. holdbacks) and a $0.6 million increase in net share employee payroll tax settlement payments compared to the same period in 2021. Contractual Payment Obligations The following table summarizes our future contractual obligations as of December 31, 2022 (in thousands): Next 12 Months Beyond 12 Months Total Debt Obligations (1) $ 5,400 $ 517,050 $ 522,450 Interest on Debt Obligations (2) 28,335 72,644 100,979 Operating Lease Obligations (3) 3,711 5,872 9,583 Purchase Commitments (4) 23,158 18,262 41,420 Total $ 60,604 $ 613,828 $ 674,432 (1) Consists of contractual principal payments on our Credit Facility. See “ —Liquidity and Capital Resources ” above for further discussion regarding our Credit Facility. (2) Future interest on debt obligations is calculated using the interest rate effective as of December 31, 2022. 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 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 $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—Interest Rate Risk ” for further discussion. 51 (3) We lease office space under operating leases that expire between 2023 and 2028. Operating lease obligations above do not include the impact of future rental income related to agreements we have entered into to sublet excess office space as a result of our transformation activities. (4) We define a purchase commitment as an agreement that is enforceable and legally binding and that specifies all significant terms, including: fixed or minimum services to be used; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included. In addition, purchase orders are not included as they represent authorizations to purchase rather than binding agreements. 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. Critical Accounting Policies and the Use of Estimates We prepare our consolidated financial statements in accordance with 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. 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. While our significant accounting policies are more fully described in “ Note 2. Basis of Presentation and 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 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. 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. 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 we are 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 14. 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 the prior year. Sales commissions paid on renewal contracts are deferred and amortized over the average renewal term, which was determined to 52 be approximately 18 months, consistent with the 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 14. 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 commissions. Income Taxes We are subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in evaluating and estimating our provision for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. The Tax Act has provisions that require additional guidance on specific interpretations of the tax law changes. Our provision for income taxes could be adversely affected by our earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and geographies and changes to our existing businesses, acquisitions and investments, changes in our deferred tax assets and liabilities including changes in our assessment of valuation allowances, changes in the relevant tax laws or interpretations of these tax laws, and developments in current and future tax examinations. The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities will be recognized in the period that includes the enactment date. We make significant estimates in determining the value of our deferred tax assets. These estimates include, but are not limited to, the expected reversal periods of deferred tax assets and liabilities, the availability of net operating losses and other carryovers and consideration of the future ability to generate taxable income. These estimates are inherently uncertain and unpredictable, and if different estimates were used, it would impact the value of our deferred tax assets and the income tax benefit recognized in fiscal 2022 and in future periods when the deferred taxes are realized. A valuation allowance is established against our deferred tax assets to reduce their carrying value to an amount that is more likely than not to be realized. As of December 31, 2022 we recorded a valuation allowance of $20.5 million against our deferred tax assets. 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. The Company’s policy is to account for interest and penalties as a component of income tax expense. Business Combinations 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. Estimated fair values of acquired assets and assumed liabilities that are separately identifiable from goodwill are generally based on available historical information, future expectations, available market data, and assumptions determined to be reasonable, but inherently uncertain, with respect to future events, including economic conditions, competition, technological obsolescence, the useful life of the acquired assets, and other factors. 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. 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 53 circumstances) customer renewals, new customers, ARR growth, forecasted bookings, forecasted churn and other factors. See “ Note 2. Basis of Presentation and 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 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 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, 2022, 2021, and 2020 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. Goodwill and Other Intangibles Goodwill We assess Goodwill for impairment annually on October 1st, or more frequently when an event occurs which could cause the Carrying Value (or GAAP basis book value) of our Company to exceed the estimated fair value of our Company. The Company adopted ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment during the first quarter of 2018. As we operate as one reporting unit, the Goodwill impairment evaluation is performed at the consolidated entity level by comparing the estimated fair value of the Company to its Carrying Value. We 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. Based on the qualitative assessment, if it is determined that it is more likely than not that the Company's fair value is less than its Carrying Value, then we perform a quantitative analysis using a fair-value-based approach to determine if the fair value of our reporting unit is less than its Carrying Value. See “ Note 5. Goodwill and Other Intangible Assets ” for more information regarding our fourth quarter 2022 Goodwill impairment. Identifiable intangible assets Identifiable intangible assets consist of customer relationships, marketing-related intangible assets and developed technology. Intangible assets with definite lives are amortized over their estimated useful lives on a straight-line basis. The straight-line method of amortization represents our best estimate of the distribution of the economic value of the identifiable intangible assets. 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. Recent Accounting Pronouncements For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, refer to “ Note 2. Basis of Presentation and 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.