Upland Software, Inc. 10-Q

Item 1. Financial Statements June 30, 2023 December 31, 2022 ASSETS (unaudited) Current assets: Cash and cash equivalents $ 262,556 $ 248,653 Accounts receivable (net of allowance of $ 565 and $ 1,158 at June 30, 2023 and December 31, 2022, respectively) 34,434 47,594 Deferred commissions, current 10,697 10,961 Unbilled receivables 3,615 5,313 Prepaid expenses and other current assets 12,167 8,774 Total current assets 323,469 321,295 Tax credits receivable 1,977 2,411 Property and equipment, net 1,674 1,830 Operating lease right-of-use asset 3,676 5,719 Intangible assets, net 215,946 248,851 Goodwill 352,571 477,043 Deferred commissions, noncurrent 13,611 13,794 Interest rate swap assets 40,919 41,168 Other assets 2,135 1,348 Total assets $ 955,978 $ 1,113,459 LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 13,797 $ 14,939 Accrued compensation 7,535 7,393 Accrued expenses and other current liabilities 7,395 10,644 Deferred revenue 102,291 106,465 Liabilities due to sellers of businesses — 5,429 Operating lease liabilities, current 2,243 3,205 Current maturities of notes payable (includes unamortized discount of $ 2,306 and $ 2,264 at June 30, 2023 and December 31, 2022, respectively) 3,094 3,136 Total current liabilities 136,355 151,211 Notes payable, less current maturities (includes unamortized discount of $ 4,187 and $ 5,203 at June 30, 2023 and December 31, 2022, respectively) 510,163 511,847 Deferred revenue, noncurrent 3,637 4,707 Operating lease liabilities, noncurrent 3,213 4,947 Noncurrent deferred tax liability, net 18,610 18,416 Other long-term liabilities 1,281 1,170 Total liabilities 673,259 692,298 Mezzanine Equity Series A Convertible Preferred stock, $ 0.0001 par value; 5,000,000 shares authorized; 115,000 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively 114,935 112,291 Stockholders’ equity: Common stock, $ 0.0001 par value; 75,000,000 and 50,000,000 shares authorized as of June 30, 2023 and December 31, 2022, respectively ; 32,654,615 and 32,221,855 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively 3 3 Additional paid-in capital 616,556 606,755 Accumulated other comprehensive income 15,415 11,110 Accumulated deficit ( 464,190 ) ( 308,998 ) Total stockholders’ equity 167,784 308,870 Total liabilities, convertible preferred stock and stockholders’ equity $ 955,978 $ 1,113,459 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 Upland Software, Inc. Condensed Consolidated Statements of Operations (unaudited) (in thousands, except for share and per share information) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Revenue: Subscription and support $ 70,494 $ 75,017 $ 143,408 $ 148,644 Perpetual license 1,252 1,858 2,823 3,636 Total product revenue 71,746 76,875 146,231 152,280 Professional services 2,751 3,352 5,322 6,663 Total revenue 74,497 80,227 151,553 158,943 Cost of revenue: Subscription and support 22,073 24,125 45,558 46,194 Professional services and other 2,105 2,428 4,156 5,114 Total cost of revenue 24,178 26,553 49,714 51,308 Gross profit 50,319 53,674 101,839 107,635 Operating expenses: Sales and marketing 15,755 15,331 30,044 30,924 Research and development 12,443 11,676 24,973 23,743 General and administrative 15,583 21,828 32,772 41,442 Depreciation and amortization 14,853 10,802 29,947 21,853 Acquisition-related expenses 1,072 4,925 2,166 15,338 Impairment of goodwill — — 128,755 — Total operating expenses 59,706 64,562 248,657 133,300 Loss from operations ( 9,387 ) ( 10,888 ) ( 146,818 ) ( 25,665 ) Other expense: Interest expense, net ( 5,376 ) ( 7,754 ) ( 10,837 ) ( 15,516 ) Other income (expense), net ( 617 ) 1,777 808 1,359 Total other expense ( 5,993 ) ( 5,977 ) ( 10,029 ) ( 14,157 ) Loss before benefit from income taxes ( 15,380 ) ( 16,865 ) ( 156,847 ) ( 39,822 ) Benefit from income taxes 233 472 1,655 598 Net loss $ ( 15,147 ) $ ( 16,393 ) $ ( 155,192 ) $ ( 39,224 ) Preferred stock dividends ( 1,329 ) — ( 2,644 ) — Net loss attributable to common stockholders $ ( 16,476 ) $ ( 16,393 ) $ ( 157,836 ) $ ( 39,224 ) Net loss per common share: Net loss per common share, basic and diluted $ ( 0.51 ) $ ( 0.52 ) $ ( 4.88 ) $ ( 1.25 ) Weighted-average common shares outstanding, basic and diluted 32,473,872 31,380,505 32,367,084 31,272,489 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 Upland Software, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) (in thousands) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net loss $ ( 15,147 ) $ ( 16,393 ) $ ( 155,192 ) $ ( 39,224 ) Other comprehensive income (loss): Foreign currency translation adjustment 840 ( 17,356 ) 855 ( 18,403 ) Unrealized translation gain (loss) on intercompany loans with foreign subsidiaries 2,464 ( 5,503 ) 3,699 ( 6,796 ) Unrealized gain (loss) on interest rate swaps 7,905 8,156 ( 249 ) 34,369 Other comprehensive income (loss): $ 11,209 $ ( 14,703 ) $ 4,305 $ 9,170 Comprehensive loss $ ( 3,938 ) $ ( 31,096 ) $ ( 150,887 ) $ ( 30,054 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Upland Software, Inc. Condensed Consolidated Statements of Equity (unaudited) (in thousands, except share amounts) Three Months Ended June 30, 2023 Preferred Stock Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Shares Amount Balance at March 31, 2023 115,000 $ 113,606 32,441,010 $ 3 $ 611,667 $ 4,206 $ ( 449,043 ) $ 166,833 Dividends accrued - Convertible Preferred Stock — 1,329 — — ( 1,329 ) — — ( 1,329 ) Issuance of stock under Company plans, net of shares withheld for tax — — 213,605 — ( 152 ) — — ( 152 ) Stock-based compensation — — — — 6,370 — — 6,370 Foreign currency translation adjustment — — — — — 840 — 840 Unrealized translation gain (loss) on intercompany loans with foreign subsidiaries — — — — — 2,464 — 2,464 Unrealized gain (loss) on interest rate swaps — — — — — 7,905 — 7,905 Net loss — — — — — — ( 15,147 ) ( 15,147 ) Balance at June 30, 2023 115,000 $ 114,935 32,654,615 $ 3 $ 616,556 $ 15,415 $ ( 464,190 ) $ 167,784 Three Months Ended June 30, 2022 Preferred Stock Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Shares Amount Balance at March 31, 2022 — $ — 31,320,765 $ 3 $ 579,638 $ 12,359 $ ( 263,416 ) $ 328,584 Issuance of stock under Company plans, net of shares withheld for tax — — 311,863 — ( 435 ) — — ( 435 ) Stock-based compensation — — — — 14,877 — — 14,877 Foreign currency translation adjustment — — — — — ( 17,356 ) — ( 17,356 ) Unrealized translation gain (loss) on intercompany loans with foreign subsidiaries — — — — — ( 5,503 ) — ( 5,503 ) Unrealized gain (loss) on interest rate swaps — — — — — 8,156 — 8,156 Net loss — — — — — — ( 16,393 ) ( 16,393 ) Balance at June 30, 2022 — $ — 31,632,628 $ 3 $ 594,080 $ ( 2,344 ) $ ( 279,809 ) $ 311,930 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Six Months Ended June 30, 2023 Preferred Stock Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Shares Amount Balance at December 31, 2022 115,000 112,291 32,221,855 $ 3 $ 606,755 $ 11,110 $ ( 308,998 ) $ 308,870 Dividends accrued - Convertible Preferred Stock — 2,644 — — $ ( 2,644 ) — — ( 2,644 ) Issuance of stock under Company plans, net of shares withheld for tax — — 432,760 — ( 387 ) — — ( 387 ) Stock-based compensation — — — — 12,832 — — 12,832 Foreign currency translation adjustment — — — — — 855 — 855 Unrealized translation gain (loss) on intercompany loans with foreign subsidiaries — — — — — 3,699 — 3,699 Unrealized gain (loss) on interest rate swaps — — — — — ( 249 ) — ( 249 ) Net loss — — — — — — ( 155,192 ) ( 155,192 ) Balance at June 30, 2023 115,000 $ 114,935 32,654,615 $ 3 $ 616,556 $ 15,415 $ ( 464,190 ) $ 167,784 Six Months Ended June 30, 2022 Preferred Stock Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Shares Amount Balance at December 31, 2021 — $ — 31,096,548 $ 3 $ 568,384 $ ( 11,514 ) $ ( 240,585 ) $ 316,288 Issuance of stock under Company plans, net of shares withheld for tax — — 536,080 — ( 800 ) — — ( 800 ) Stock-based compensation — — — — 26,496 — — 26,496 Foreign currency translation adjustment — — — — — ( 18,403 ) — ( 18,403 ) Unrealized translation gain (loss) on intercompany loans with foreign subsidiaries — — — — — ( 6,796 ) — ( 6,796 ) Unrealized gain (loss) on interest rate swaps — — — — — 34,369 — 34,369 Net loss — — — — — — ( 39,224 ) ( 39,224 ) Balance at June 30, 2022 — $ — 31,632,628 $ 3 $ 594,080 $ ( 2,344 ) $ ( 279,809 ) $ 311,930 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Upland Software, Inc. Condensed Consolidated Statements of Cash Flows (unaudited) Six Months Ended June 30, (In thousands) 2023 2022 Operating activities Net loss $ ( 155,192 ) $ ( 39,224 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 36,784 28,193 Change in fair value of liabilities due to sellers of businesses — ( 75 ) Deferred income taxes ( 2,674 ) ( 2,407 ) Amortization of deferred costs 6,667 5,883 Foreign currency re-measurement loss ( 882 ) 3 Non-cash interest and other expense 1,152 1,115 Non-cash stock compensation expense 12,832 26,496 Non-cash loss on impairment of goodwill 128,755 — Non-cash loss on retirement of fixed assets 34 — Changes in operating assets and liabilities, net of purchase business combinations: Accounts receivable 13,212 22,087 Prepaid expenses and other current assets ( 6,524 ) ( 4,597 ) Accounts payable ( 1,217 ) ( 898 ) Accrued expenses and other liabilities ( 4,106 ) ( 5,154 ) Deferred revenue ( 5,994 ) ( 9,162 ) Net cash provided by operating activities 22,847 22,260 Investing activities Purchase of property and equipment ( 504 ) ( 297 ) Purchase business combinations, net of cash acquired — ( 62,356 ) Net cash used in investing activities ( 504 ) ( 62,653 ) Financing activities Payments of debt costs ( 177 ) ( 20 ) Payments on notes payable ( 2,700 ) ( 2,700 ) Taxes paid related to net share settlement of equity awards ( 388 ) ( 982 ) Issuance of common stock, net of issuance costs 1 182 Additional consideration paid to sellers of businesses ( 5,550 ) ( 3,088 ) Net cash used in financing activities ( 8,814 ) ( 6,608 ) Effect of exchange rate fluctuations on cash 374 ( 3,873 ) Change in cash and cash equivalents 13,903 ( 50,874 ) Cash and cash equivalents, beginning of period 248,653 189,158 Cash and cash equivalents, end of period $ 262,556 $ 138,284 Supplemental disclosures of cash flow information: Cash paid for interest, net of interest rate swaps $ 14,426 $ 14,474 Cash paid for taxes $ 4,972 $ 2,416 Non-cash investing and financing activities: Business combination consideration including holdbacks and earnouts $ — $ 7,820 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Upland Software, Inc. Notes to Unaudited Condensed Consolidated Financial Statements (unaudited) 1. Organization and Nature of Operations Upland Software, Inc. (“Upland,” “we,” “us,” “our,” or the “Company”), a Delaware corporation, is a provider of cloud-based software that enables organizations to drive digital transformation in the following business functions: Marketing, Sales, Contact Center, Knowledge Management, Project Management, Information Technology, Business Operations, Human Resources and Legal. To support continued growth, Upland intends to pursue acquisitions within its cloud offerings of complementary technologies and businesses. Upland expects that this will expand its product offerings, customer base and market access, resulting in increased benefits of scale. 2. Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The condensed consolidated financial statements include the accounts of Upland Software, Inc. and its wholly owned subsidiaries (collectively referred to as “Upland”, the “Company”, “we”, “us” or “our”). All intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. In the opinion of management of the Company, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, in all material respects, and include all adjustments of a normal recurring nature necessary for a fair presentation. The results of operations for the six months ended June 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023 or for any other period. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2022 Annual Report on Form 10-K filed with the SEC on February 28, 2023. Use of Estimates The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses. Significant items subject to such estimates include those related to revenue recognition, deferred commissions, allowance for credit losses, stock-based compensation, contingent consideration, acquired intangible assets, impairment of goodwill, intangibles and long-lived assets, the useful lives of intangible assets and property and equipment, the fair value of the Company’s interest rate swaps and income taxes. In accordance with GAAP, management bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Management regularly evaluates its estimates and assumptions using historical experience and other factors; however, actual results could differ from those estimates. Upland is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of August 3, 2023, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions. No material changes have been made to the Company’s significant accounting policies disclosed in Note 2, Basis of Presentation and Summary of Significant Accounting Policies , in our Annual Report. Concentrations of Credit Risk and Significant Customers Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, accounts 7 receivable and the Company’s interest rate swap hedges. The Company’s cash and cash equivalents are placed with high quality financial institutions, which, at times, may exceed federally insured limits. The Company has not experienced any losses in these accounts, and the Company does not believe it is exposed to any significant credit risk related to cash and cash equivalents. The Company provides credit, in the normal course of business, to a number of its customers. To manage accounts receivable credit risk, the Company performs periodic credit evaluations of its customers and maintains current expected credit losses which considers such factors as historical loss information, geographic location of customers, current market conditions, and reasonable and supportable forecasts. No individual customer represented more than 10% of total revenues for the six months ended June 30, 2023, or more than 10% of accounts receivable as of June 30, 2023 or December 31, 2022. Recent Accounting Pronouncements Recently issued accounting pronouncements - Adopted In March 2020, the Financial Standards Accounting Board (“FASB”) issued accounting standards update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Interbank Offer Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We adopted Topic 848 during the first quarter of 2023. On February 21, 2023, the Company entered into an amended and restated credit agreement to, among other things, provide for the replacement of LIBOR with the Secured Overnight Financing Rate (“SOFR”), an index measuring the cost of borrowing cash overnight collateralized by Treasury securities. The Company has elected to apply the debt agreement modification expedients related to changes to the reference rate from LIBOR to SOFR in the Company's Credit Agreement, which it completed during the three months ended March 31, 2023. Application of these expedients allows the Company to account for the modification as not substantial. As a result, the debt agreement modification will be accounted for by prospectively adjusting the Credit Agreement’s effective interest rate, any existing unamortized debt discount will carry forward and continue to be amortized and no remeasurement of the Credit Agreement at the modification date is required. The Company has also elected to apply the hedge accounting expedients and exceptions related to changes to the reference rate from LIBOR to SOFR in the Company's interest rate swaps, which it completed during the three months ended March 31, 2023. Application of these exceptions preserves the cash flow hedge designation of the interest rate swaps and the related accounting and presentation consistent with past presentation. The replacement of LIBOR with SOFR in the credit agreement did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures. See “ Note—7. Debt ” for additional information. In October 2021, the FASB issued ASU 2021-08 , Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which creates an exception to the general recognition and measurement principle for contract assets and contract liabilities from contracts with customers acquired in a business combination. The new guidance requires companies to apply the definition of a performance obligation under accounting standard codification (“ASC”) Topic 606 to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers that are acquired in a business combination. Under prior GAAP, an acquirer in a business combination was generally required to recognize and measure the assets it acquired and the liabilities it assumed at fair value on the acquisition date. The new guidance will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. These amendments were effective for fiscal years beginning after December 15, 2022, with early adoption permitted. We adopted ASU 2021-08 on January 1, 2023 and our adoption did not have a material impact on our condensed consolidated financial statements. In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity . ASU 2020-06 simplified the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This update also amended the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 amended the diluted earnings per share guidance, including the 8 requirement to use the if-converted method for all convertible instruments. The update also required entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The guidance was effective for interim and annual periods beginning after December 15, 2021. The Company adopted this guidance in the first quarter of fiscal 2022. 3. Acquisitions The Company performs quantitative and qualitative analyses to determine the significance of each acquisition to the financial statements the Company. Based on these analyses the below acquisitions were deemed to be insignificant on an individual and cumulative basis. 2023 Acquisitions The Company had no acquisitions during the six months ended June 30, 2023. 2022 Acquisitions The acquisitions completed during the year ended December 31, 2022 were: • 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., a Delaware corporation (“BA Insight”). • Objectif Lune - On January 07, 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”). Consideration The following table summarizes the consideration transferred for the acquisitions described above (in thousands): BA Insight Objectif Lune Cash $ 33,355 $ 29,750 Holdback (1) 645 5,250 Working capital and other adjustments 1,587 644 Total consideration $ 35,587 $ 35,644 (1) Represents the cash holdbacks subject to indemnification claims that are payable 12 months following closing for Objectif Lune, and 15 months following closing for BA Insight. As of June 30, 2023, all of the holdbacks had been paid. Fair Value of Assets Acquired and Liabilities Assumed The Company recorded the purchase of the acquisitions described above using the acquisition method of accounting, and has recognized the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. Management has recorded the purchase price allocations based upon acquired company information that is currently available. Management completed the purchase accounting for BA Insight in December 2022 and Objectif Lune during the first quarter of 2023. 9 The following condensed table presents the finalized acquisition-date fair value of the assets acquired and liabilities assumed for the acquisitions during the year ended December 31, 2022 and through the six months ended June 30, 2023 (in thousands): Final BA Insight Objectif Lune Year Acquired 2022 2022 Cash $ 4 $ 745 Accounts receivable 2,466 5,677 Other current assets 4,080 7,183 Operating lease right-of-use asset 110 1,905 Property and equipment 3 248 Customer relationships 10,500 17,717 Trade name 150 362 Technology 2,000 5,512 Favorable Leases — 291 Goodwill 25,495 23,797 Other assets 25 744 Total assets acquired 44,833 64,181 Accounts payable ( 236 ) ( 2,001 ) Accrued expense and other ( 4,083 ) ( 9,431 ) Deferred tax liabilities — ( 6,353 ) Deferred revenue ( 4,817 ) ( 8,847 ) Operating lease liabilities ( 110 ) ( 1,905 ) Total liabilities assumed ( 9,246 ) ( 28,537 ) Total consideration $ 35,587 $ 35,644 The Company uses third party valuation consultants to determine the fair values of assets acquired and liabilities assumed. Tangible assets are valued at their respective carrying amounts, which approximates their estimated fair value. The valuation of identifiable intangible assets reflects management’s estimates based on, among other factors, the use of established valuation methods. Customer relationships are valued using the multi-period excess earnings method. Developed technology and trade names are valued using the relief-from-royalty method. The following table summarizes the weighted-average useful lives, by major finite-lived intangible asset class, for intangibles acquired during the year ended December 31, 2022 (in years): Useful Life Customer relationships 7.0 Trade name 2.0 Developed technology 6.2 Favorable Leases 6.3 Total weighted-average useful life 6.8 During the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill based on changes to management's estimates and assumptions. The goodwill of $ 49.3 million for the above acquisitions was primarily attributable to the synergies expected to arise after the acquisition and the value of the acquired workforce. Goodwill that was deductible for tax purposes at the time of the acquisitions was $ 4.6 million. 10 Total transaction related expenses incurred with respect to acquisition activity during the six months ended June 30, 2023 and June 30, 2022 were nil and $ 0.4 million, respectively. Transaction related expenses, excluding transformation costs, include expenses such as banker fees, legal and professional fees, insurance costs, and deal bonuses. Transaction costs are included in acquisition-related expenses in our condensed consolidated statement of operations. 4. Fair Value Measurements The Company recognizes financial instruments in accordance with the authoritative guidance on fair value measurements and disclosures for financial assets and liabilities. This guidance defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. The guidance also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include Level 1, defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions. The Company’s financial instruments consist principally of cash and cash equivalents, money market funds, accounts receivable, accounts payable, interest rate swap assets, and debt. The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value, primarily due to short maturities. Assets measured at fair value on a recurring basis are summarized below (in thousands): Fair Value Measurements at June 30, 2023 (unaudited) Level 1 Level 2 Level 3 Total Assets: Money market funds included in cash and cash equivalents $ 229,861 $ — $ — $ 229,861 Interest rate swap assets $ — $ 40,919 $ — $ 40,919 Total $ 229,861 $ 40,919 $ — $ 270,780 Fair Value Measurements at December 31, 2022 Level 1 Level 2 Level 3 Total Assets: Money market funds included in cash and cash equivalents $ 172,849 $ — $ — $ 172,849 Interest rate swap asset $ — $ 41,168 $ — $ 41,168 Total $ 172,849 $ 41,168 $ — $ 214,017 Money market funds are highly-liquid investments and are included in cash and cash equivalents on the consolidated balance sheets. The pricing information on these investment instruments is readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy. The fair value of the Company's interest rate swap assets are measured at the end of each interim reporting period based on the then assessed fair value and adjusted if necessary. As the fair value measure is based on the market approach, they are categorized as Level 2. Debt The Company believes the carrying value of its long-term debt at June 30, 2023 approximates its fair value based on the interest rates currently available to the Company. The estimated fair value of the Company's debt, before debt discount, at June 30, 2023 and December 31, 2022 was $ 519.8 million and $ 522.5 million, respectively. 11 5. Goodwill and Other Intangible Assets Changes in the Company’s goodwill balance for the six months ended June 30, 2023 are summarized in the table below (in thousands): Balance at December 31, 2022 $ 477,043 Adjustment related to prior year business combinations 415 Impairment of goodwill ( 128,755 ) Foreign currency translation adjustment and other 3,868 Balance at June 30, 2023 $ 352,571 As a result of the decline of our stock price impacting our market capitalization during the quarter ended March 31, 2023, we performed a quantitative impairment evaluation as of March 31, 2023, which resulted in a goodwill impairment of $ 128.8 million. This quantitative goodwill impairment analysis applied two methodologies to estimate the Company’s fair value which were: a) a discounted cash flow method and b) a guideline public company method. The two methods generated similar results and indicated that the fair value of the Company was less than its carrying value. The discounted cash flow method required significant judgments, including estimation of future cash flows, which are dependent on internally developed forecasts, estimation of the long-term rate of growth for our business, and determination of our weighted average cost of capital. Under the guideline public company method, we estimated fair value based on a market multiple of revenues and earnings derived for comparable publicly traded companies with similar operating characteristics as the Company. We will continue to evaluate Goodwill for impairment and adjust as indicators arise. Intangible assets, net include the estimated acquisition-date fair values of customer relationships, marketing-related assets, developed technology, and non-compete agreements that the Company recorded as part of its business acquisitions. The following is a summary of the Company’s intangible assets, net (in thousands): Estimated Useful Life (Years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount June 30, 2023: (unaudited) Customer relationships 1 - 10 $ 377,077 $ 193,936 $ 183,141 Trade name 1.5 - 10 9,966 7,360 2,606 Developed technology 4 - 9 93,752 63,766 29,986 Favorable Leases 6.3 279 66 213 Total intangible assets $ 481,074 $ 265,128 $ 215,946 Estimated Useful Life (Years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount December 31, 2022: Customer relationships 1 - 10 $ 372,162 $ 162,995 $ 209,167 Trade name 1.5 - 10 9,837 6,728 3,109 Developed technology 4 - 9 92,585 56,240 36,345 Favorable Leases 6.3 $ 273 $ 43 $ 230 Total intangible assets $ 474,857 $ 226,006 $ 248,851 Management recorded no impairments of intangible assets during the three and six months ended June 30, 2023 and June 30, 2022. The Company periodically reviews the estimated useful lives of its identifiable intangible assets, taking into consideration any events or circumstances that might result in either a diminished fair value or revised useful life. During the three months ended June 30, 2023, the Company adjusted the estimated useful life for certain intangible assets as a result of the continued evaluation of our products. 12 Total amortization expense was $ 18.0 million and $ 13.5 million during the three months ended June 30, 2023 and June 30, 2022, respectively, and $ 36.1 million and $ 27.4 million during the six months ended June 30, 2023 and June 30, 2022, respectively. As of June 30, 2023, the estimated annual amortization expense for the next five years and thereafter is as follows (in thousands): Amortization Expense Year ending December 31: Remainder of 2023 $ 34,105 2024 52,120 2025 37,077 2026 34,852 2027 30,584 2028 and thereafter 27,208 Total $ 215,946 6. Income Taxes The Company’s income tax benefit for the three and six months ended June 30, 2023 and June 30, 2022 reflects its estimate of the effective tax rates expected to be applicable for the full years, adjusted for any discrete events that are recorded in the period in which they occur. The estimates are re-evaluated each quarter based on the estimated tax expense for the full year. The income tax benefit of $ 0.2 million and $ 1.7 million for the three and six months ended June 30, 2023 is primarily related to the deferred tax impact of the goodwill impairment booked during the first quarter of 2023. This tax benefit is offset by the foreign income taxes associated with our combined non-U.S. operations, changes in deferred tax liabilities associated with amortization of United States tax deductible goodwill, and state taxes in certain states in which the Company does not file on a consolidated basis or have net operating loss carryforwards. The income tax benefit of $ 0.5 million and $ 0.6 million for the three and six months ended June 30, 2022 is primarily related to foreign income taxes associated with our combined non-U.S. operations. These tax benefits are offset by changes in deferred tax liabilities associated with amortization of United States tax deductible goodwill and state taxes in certain states in which the Company does not file on a consolidated basis or have net operating loss carryforwards and the impact, recorded as discrete for the three months ended March 31, 2022, of the deferred tax provision attributable to the tax gain associated with the transfer of goodwill between foreign and domestic jurisdictions. The Company historically incurred operating losses in the United States prior to 2021 and, given its cumulative losses and limited history of profits, has recorded a valuation allowance against its United States net deferred tax assets, exclusive of tax deductible goodwill, at June 30, 2023 and December 31, 2022, respectively. The Company has reflected any uncertain tax positions primarily within its long-term taxes payable and a portion within deferred tax assets. The Company and its subsidiaries file tax returns in the U.S. federal jurisdiction, several U.S. state jurisdictions and several foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years ending before December 31, 2019 and is no longer subject to state and local or foreign income tax examinations by tax authorities for years ending before December 31, 2018, other than where cross-border transactions extend the statute of limitations. The Company is not currently under audit in any federal, state or any foreign jurisdictions. U.S. operating losses generated in years prior to 2019 remain open to adjustment until the statute of limitations closes for the tax year in which the net operating losses are utilized. 13 7. Debt Long-term debt consisted of the following at June 30, 2023 and December 31, 2022 (in thousands): June 30, 2023 December 31, 2022 Senior secured loans (includes unamortized discount of $ 6,493 and $ 7,467 based on an imputed interest rate of 5.9 % and 5.8 %, at June 30, 2023 and December 31, 2022, respectively) $ 513,257 $ 514,983 Less current maturities ( 3,094 ) ( 3,136 ) Total long-term debt $ 510,163 $ 511,847 In 2019, the Company entered into a credit agreement (the “Credit Facility”) which provides for (i) a fully-drawn $ 350 million, 7 year, senior secured term loan facility (the “Term Loan”) and (ii) a term loan facility to be established under the Credit Facility in an aggregate principal amount of $ 190.0 million (the “2019 Incremental Term Loan” and together with the Term Loan, the “Term Loans”) and (iii) a $ 60 million, 5 year, revolving credit facility (the “Revolver”) that was fully available as of June 30, 2023. The Term Loans are repayable on a quarterly basis beginning on December 31, 2019 by an amount equal to 0.25 % ( 1.00 % per annum) of the aggregate principal amount of such loan. Any amount remaining unpaid is due and payable in full on August 6, 2026 (the “Term Loan Maturity Date”). Loans under the Revolver are available up to $ 60 million. The Revolver provides a sub-facility whereby the Company may request letters of credit (the “Letters of Credit”) in an aggregate amount not to exceed, at any one time outstanding, $ 10 million for the Company. The aggregate amount of outstanding Letters of Credit are reserved against the credit availability under the Maximum Revolver Amount. The Company incurs a 0.50 % per annum unused line fee on the unborrowed balance of the Revolver which is paid quarterly. Loans under the Revolver may be borrowed, repaid and reborrowed until August 6, 2024 (the “Maturity Date”), at which time all amounts borrowed under the Revolver must be repaid. As of June 30, 2023, the Company had no borrowings outstanding under the Revolver or related sub-facility. On February 21, 2023, the Company entered into that certain Amendment No.1 to the Credit Facility (as herein defined below) (the “Amendment”), which amends the Credit Facility. The Amendment amended the interest rate benchmark from LIBOR to SOFR. Other than the foregoing, the material terms of the Credit Agreement remain unchanged. At the option of the Company, the Term Loans accrue interest at a per annum rate based on (i) the Base Rate plus a margin of 2.75 % or (ii) the rate (not less than 0.00 %) published by CME Group Benchmark Administration Limited (CBA), or as otherwise determined in accordance with the Credit Facility (based on a period equal to 1, 2, 3 or 6 months or, if available and agreed to by all relevant Lenders and the Agent, 12 months or such period of less than 1 month) plus a margin of 3.75 %. The Base Rate for any day is a rate per annum equal to the greatest of (i) the prime rate in effect on such day, (ii) the federal funds effective rate (not less than 0.00 %) in effect on such day plus ½ of 1.00%, and (iii) the Federal Funds Effective Rate for a one month interest period beginning on such day plus 1.00 %. Accrued interest on the loans will be paid quarterly or, with respect to loans that are accruing interest based on the Federal Funds Effective Rate, at the end of the applicable interest rate period. Covenants The Credit Facility contains customary affirmative and negative covenants. The negative covenants limit the ability of the Loan Parties to, among other things (in each case subject to customary exceptions for a credit facility of this size and type): • Incur additional indebtedness or guarantee indebtedness of others; • Create liens on their assets; • Make investments, including certain acquisitions; • Enter into mergers or consolidations; • Dispose of assets; • Pay dividends and make other distributions on the Company’s capital stock, and redeem and repurchase the Company’s capital stock; • Enter into transactions with affiliates; and • Prepay indebtedness or make changes to certain agreements. 14 The Credit Facility has no financial covenants as long as less than 35 % of the Revolver is drawn as of the last day of any fiscal quarter. If 35 % of the Revolver is drawn as of the last day of a given fiscal quarter the Company will be required to maintain a Total Leverage Ratio (the ratio of funded indebtedness as of such date less the amount of unrestricted cash and cash equivalents of the Company and its guarantors in an amount not to exceed $ 50.0 million, to adjusted EBITDA (calculated on a pro forma basis including giving effect to any acquisition)), measured on a quarter-end basis for each four consecutive fiscal quarters then ended, of not greater than 6.00 to 1.00. In addition, the Credit Facility contains customary events of default subject to customary cure periods for certain defaults that include, among others, non-payment defaults, inaccuracy of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness, change in control, bankruptcy and insolvency defaults and material judgment defaults. The occurrence of an event of default could result in the acceleration of Term Loans and Revolver and a right by the agent and lenders to exercise remedies. At the election of the lenders, a default interest rate shall apply on all obligations during an event of default, at a rate per annum equal to 2.00 % above the applicable interest rate. The Term Loan and Revolver are secured by substantially all of the Company's assets. As of June 30, 2023 the Company was in compliance with all covenants under the Credit Facility. Interest rate swaps The Company has 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 convert the entire balance of the Company's $ 540.0 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 debt. The interest rate associated with our undrawn $ 60 million Revolver remains floating. The interest rate swaps have been designated as a cash flow hedge and are valued using a market approach, which is a Level 2 valuation technique. At June 30, 2023, the fair value of the interest rate swap was a $ 40.9 million asset as a result of the change in the yield curve for our interest rate swaps since December 31, 2022. In the next twelve months, the Company estimates that $ 9.9 million will be reclassified from Accumulated other comprehensive income to Interest expense, net on our condensed consolidated statement of operations. Increases or decreases in cash paid for interest as a result of the Company’s interest rate swaps are included cash flows from operations. Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Unrealized gain (loss) recognized in Other comprehensive income on derivative financial instruments $ 7,905 $ 8,156 $ ( 249 ) $ 34,369 Gain (loss) on interest rate swap (included in Interest expense on our consolidated statement of operations) $ 4,471 $ ( 1,159 ) $ 8,303 $ ( 3,131 ) Cash interest costs averaged 5.4 % and 5.4 % for the six months ended June 30, 2023 and 2022, respectively. In addition, as of June 30, 2023 and December 31, 2022 the Company had $ 6.5 million and $ 7.5 million, respectively, of unamortized deferred financing costs associated with the Credit Facility. These financing costs will be amortized to non-cash interest expense over the remaining term of the Credit Facility. 15 8. Net Loss Per Share We compute loss per share of our common stock, par value $ 0.0001 per share (“Common Stock”) and Series A Preferred Stock using the two-class method. The two-class method requires income available to common stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. We consider our Series A Preferred Stock to be a participating security, as its holders are entitled to fully participate in any dividends or other distributions declared or paid on our Common Stock on an as-converted basis. The following table sets forth the computations of loss per share (in thousands, except share and per share amounts): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Numerator: Net Loss $ ( 15,147 ) $ ( 16,393 ) $ ( 155,192 ) $ ( 39,224 ) Preferred stock dividends and accretion ( 1,329 ) — ( 2,644 ) — Net loss attributable to common stockholders $ ( 16,476 ) $ ( 16,393 ) $ ( 157,836 ) $ ( 39,224 ) Denominator: Weighted–average common shares outstanding, basic and diluted 32,473,872 31,380,505 32,367,084 31,272,489 Net loss per common share, basic and diluted $ ( 0.51 ) $ ( 0.52 ) $ ( 4.88 ) $ ( 1.25 ) Due to the net losses for the six months ended June 30, 2023 and June 30, 2022, respectively, basic and diluted loss per share were the same. The Company uses the application of the if-converted method for calculating diluted earnings per share on our Series A Preferred Stock. The Company applies the treasury stock method for calculating diluted earnings per share on our stock options, restricted stock units and performance restricted stock units. The following table sets forth the anti–dilutive common share equivalents as of: June 30, 2023 2022 Stock options 152,683 190,894 Restricted stock units 2,242,054 1,892,460 Performance restricted stock units 193,750 93,750 Series A Preferred Stock on an if-converted basis (1) 6,827,998 — Total anti–dilutive common share equivalents 9,416,485 2,177,104 (1) As of June 30, 2023 , the Series A Preferred Stock plus accumulated dividends totaled $ 119.5 million. The Series A Preferred Stock has a conversion price of $ 17.50 per share, as detailed in “ Note 10. Series A Convertible Preferred Stock ” 9. Commitments and Contingencies Purchase Commitments The Company has purchase commitments related to hosting services, third-party technology used in the Company's solutions and for other services the Company purchases as part of normal operations. In certain cases these arrangements require a minimum annual purchase commitment. 16 Litigation In the normal course of business, the Company may become involved in various lawsuits and legal proceedings. At this time, the Company is not involved in any current or pending legal proceedings, and does not anticipate any legal proceedings, that may have a material adverse effect on the Company's condensed consolidated balances sheets or condensed consolidated statement of operations. In addition, when we acquire companies, we require that the sellers provide industry standard indemnification for breaches of representations and warranties contained in the acquisition agreement and we will withhold payment of a portion of the purchase price for a period of time in order to satisfy any claims that we may make for indemnification. In certain transactions, we agree with the sellers to purchase a representation and warranty insurance policy that will pay such claims for indemnification. From time to time we may have one or more claims for indemnification pending. Similarly, we may have one or more ongoing negotiations related to the amount of an earnout. Gain contingencies related to indemnification claims are not recognized in our condensed consolidated financial statements until realized. 10. Series A Convertible Preferred Stock On July 14, 2022, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Ulysses Aggregator, LP (the “Purchaser”), an affiliate of HGGC, LLC, to issue and sell at closing 115,000 shares of Series A Preferred Stock of the Company, par value $ 0.0001 per share, at a price of $ 1,000 per share (the “Initial Liquidation Preference”) for an aggregate purchase price of $ 115.0 million (the “Investment”). The Company will use the proceeds of the Investment (a) for general corporate purposes and (b) for transaction-related fees and expenses. On August 23, 2022 (the “Closing Date”), the closing of the Investment (the “Closing”) occurred, and the Series A Preferred Stock was issued to the Purchaser. In connection with the issuance of the Series A Preferred Stock, the Company incurred direct and incremental expenses comprised of transaction fees, and financial advisory and legal expenses (the “Series A Preferred Stock Issuance Costs”), which reduced the carrying value of the Series A Preferred Stock. As of June 30, 2023, the Series A Preferred Stock Issuance Costs totaled $ 4.6 million. Cumulative preferred dividends accrue quarterly on the Series A Preferred Stock at a rate of 4.5 % per year within the first seven years after the Closing Date regardless of whether declared or assets are legally available for the payment. Such dividends shall accrue and compound quarterly in arrears from the date of issuance of the shares. The dividend rate will increase to 7.0 % on the seven-year anniversary of the Closing Date. The Series A Preferred Stock had accrued unpaid dividends of $ 4.5 million as of June 30, 2023. Contemporaneous with the Closing Date, the Company and the Purchaser entered into a Registration Rights Agreement (the “Registration Rights Agreement”) and the Company filed a Certificate of Designation (the “Certificate of Designation”) setting out the powers, designations, preferences, and other rights of the Series A Preferred Stock with the Secretary of State of the State of Delaware in connection with the Closing. Pursuant to the Registration Rights Agreement, the Purchaser has certain customary registration rights with respect to any shares of Series A Preferred Stock or the Common Stock of the Company issuable upon conversion of the Series A Preferred Stock, including rights with respect to the filing of a shelf registration statement, underwritten offering rights and piggy back rights. Dividend Provisions The Series A Preferred Stock ranks senior to the Company’s Common Stock with respect to payment of dividends and rights on the distribution of assets on any liquidation, dissolution or winding up of the affairs of the Company. The Series A Preferred Stock has an Initial Liquidation Preference of $ 1,000 per share, representing an aggregate Liquidation Preference (as defined below) of $ 1,000 upon issuance. Holders of the Series A Preferred Stock are entitled to the dividend at the rate of 4.5 % per annum, within the first seven years after the Closing Date regardless of whether declared or assets are legally available for the payment. Such dividends shall accrue and compound quarterly in arrears from the date of issuance of the shares. The dividend rate will increase to 7.0 % on the seven-year anniversary of the Closing Date. The dividend can be paid, in the Company’s sole discretion, in cash or dividend in kind by adding to the Liquidation Preference of each share of Series A Preferred Stock outstanding. On June 7, 2023, the stockholders of the Company authorized, for purposes of complying with Nasdaq Listing Rules 5635(b) and (d), the issuance of shares of Common Stock underlying shares of Series A Preferred Stock in an amount equal to or in excess of 20% of the Common Stock outstanding immediately prior to the issuance of such Series A Preferred Stock (including upon the operation of anti-dilution provisions contained in the Certificate of Designation designating the terms of such Series A Preferred Stock). The Series A Preferred Stock is also entitled to fully participate in any dividends paid to the holders of common stock in cash, in stock or otherwise, on an as-converted basis. 17 Liquidation Rights In the event of any Liquidation, holders of the Series A Preferred Stock are entitled to receive an amount per share equal to the greater of (1) the Initial Liquidation Preference per share plus any accrued or declared but unpaid dividends on such shares (the “Liquidation Preference”) or (2) the amount payable if the Series A Preferred Stock were converted into Common Stock. The Series A Preferred Stock will have distribution and liquidation rights senior to all other equity interests of the Company. As of June 30, 2023, the Liquidation Preference of the Series A Preferred Stock was $ 119.5 million. Optional Redemption On or after the 7th anniversary of the original issue date of the Series A Preferred Stock, the Company has the right to redeem any outstanding shares of the Series A Preferred Stock for a cash purchase price equal to 105 % of the Liquidation Preference plus accrued and unpaid dividends as of the date of redemption. Deemed Liquidation Event Redemption Upon a fundamental change, holders of the Series A Preferred Stock have the right to require the Company to repurchase any or all of its Series A Preferred Stock for cash equal to the greater of (1) 105 % of the Liquidation Preference plus the present value of the dividend payments the holders would have been entitled to through the fifth anniversary of the issue date and (2) the amount that such Preferred Stock would have been entitled to receive as if converted into common shares immediately prior to the fundamental change. A fundamental change (“Deemed Liquidation Event”) is defined as either the direct or indirect sale, lease, transfer, conveyance or other disposition of all or substantially all the properties or assets of the Company and its subsidiaries to any third party or the consummation of any transaction, the result of which is that any third party or group of third parties become the beneficial owner of more than 50 % of the voting power of the Company. Voting Rights The Series A Preferred Stock will vote together with the Common Shares on all matters and not as a separate class (except as specifically provided in the Certificate of Designation or as otherwise required by law) on an as-if-converted basis. The holders of the Series A Preferred Stock will have the right to elect one member of the Board of Directors of the Company (the “Board of Directors”) for so long as holders of the Series A Preferred Stock own in the aggregate at least 5 % of the shares of Common Stock on a fully diluted basis. In addition, the holders of the Series A Preferred Stock will have the right to elect one non-voting observer to the Board of Directors for so long as they hold at least 10 % of the shares of Convertible Preferred Stock outstanding as of the date of the issue date. Conversion Feature The Series A Preferred Stock may be converted, at any time in whole or in part at the option of the holder into a number of shares of Common Stock equal to the quotient obtained by dividing the sum of the Liquidation Preference plus all accrued and unpaid dividends by the conversion price of $ 17.50 (the “Conversion Price”). The Conversion Price is subject to adjustment in the following events: • Stock splits and combinations • Tender offers or exchange offers • Distribution of rights, options, or warrants at a price per share that is less than the average of the last reported sale prices per share of Common Stock for the ten consecutive trading days • Spin-offs and other distributed property • Issuance of equity-linked securities at a price per share less than the conversion price Anti-Dilution Provisions The Series A Preferred Stock has customary anti-dilution provisions for stock splits, stock dividends, mergers, sales of significant assets, and reorganization events and recapitalization transactions or similar events, and weighted average anti- 18 dilution protection, subject to customary exceptions for issuances pursuant to current or future equity-based incentive plans or arrangements (including upon the exercise of employee stock options). 11. Stockholders' Equity Registration Statements 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—10. Series A Convertible Preferred Stock ” for further details. Increase in Authorized Shares of Common Stock At the Company’s annual meeting on June 7, 2023, the stockholders of the Company adopted a Certificate of Amendment (the “Certificate of Amendment”) to the Amended and Restated Certificate of Incorporation of the Company (the “Certificate of Incorporation”). Among other things, the Certificate of Amendment amended the Certificate of Incorporation to increase the number of authorized shares of the Company’s Common Stock, from 50,000,000 to 75,000,000 . Tax Benefit Preservation Plan and Preferred Stock Purchase Rights On May 2, 2023, our Board of Directors authorized and declared a dividend of one preferred stock purchase right (a “Right”) for each outstanding share of Common Stock of the Company as of May 12, 2023 (the “Record Date”). 32,441,010 Rights were issued to the holders of record of shares of Common Stock. The description and terms of the Rights are set forth in a Tax Benefit Preservation Plan, dated as of May 2, 2023, as the same may be amended from time to time (the “Plan”), between the Company and Broadridge Corporate Issuer Solutions, LLC, as Rights Agent. By adopting the Plan, the Board of Directors is seeking to protect the Company’s ability to use its net operating loss carryforwards (“NOLs”) and other tax attributes to offset potential future income tax liabilities. The Company’s ability to use such NOLs and other tax attributes would be substantially limited if the Company experiences an “ownership change,” as defined in Section 382 of the Internal Revenue Code (the “Code”). Generally, an “ownership change” occurs if the percentage of the Company’s stock owned by one or more “five percent stockholders” increases by more than fifty percentage points over the lowest percentage of stock owned by such stockholders at any time during the prior three-year period or, if sooner, since the last “ownership change” experienced by the Company. The Plan is intended to make it more difficult for the Company to undergo an ownership change by deterring any person from acquiring 4.9 % or more of the outstanding shares of stock without the approval of the Board of Directors. The Board of Directors believes it is in the best interest of the Company and its stockholders to reduce the likelihood of an ownership change, which could harm the Company’s future operating results by effectively increasing the Company future tax liabilities. The Rights trade with, and are inseparable from, the Common Stock, and the record holders of shares of Common Stock are the record holders of the Rights. The Rights are evidenced only by certificates (or, in the case of uncertificated shares, by notations in the book-entry account system) that represent shares of Common Stock. Rights will also be issued in respect of any shares of Common Stock that shall become outstanding after the Record Date (including upon conversion of any shares of Series A Preferred Stock of the Company) and, subject to certain exceptions specified in the Plan, prior to the earlier of the Distribution Date (as defined below) and the Expiration Date (as defined below). The Rights are not exercisable until the Distribution Date. After the Distribution Date, each Right will be exercisable to purchase from the Company one one-thousandth of a share of Series B Junior Participating Preferred Stock, par value $ 0.0001 per share, of the Company (the “Series B Preferred”), at a purchase price of $18.00 per one one-thousandth of a share of Series B Preferred (the “Purchase Price”), subject to adjustment as provided in the Plan. The “Distribution Date” is the earlier of (i) the close of business on the tenth day after the public announcement that a person or group has become an Acquiring Person (as defined below) or that discloses information which reveals the existence of an Acquiring Person or such earlier date as a majority of the Board shall become aware of the existence of an Acquiring Person (the date described in this clause (i), the “Stock Acquisition Date”) and (ii) the close of business on the tenth business day (or such later date as the Board of Directors shall determine prior to such time as any person or group becomes an Acquiring 19 Person) after the date that a tender or exchange offer by any person is commenced, the consummation of which would result in such person becoming an Acquiring Person. A person or group becomes an “Acquiring Person” upon acquiring beneficial ownership of 4.9 % or more of the outstanding shares of Common Stock, except in certain situations specified in the Plan. The Rights will expire on the earliest of (a) the close of business on May 1, 2024, (b) the time at which the Rights are redeemed or exchanged pursuant to the Plan, or (c) the time at which the Board of Directors determines that the Tax Benefits are utilized in all material respects or that an ownership change under Section 382 of the Code would not adversely impact in any material respect the time period in which the Company could use the Tax Benefits, or materially impair the amount of the Tax Benefits that could be used by the Company in any particular time period, for applicable tax purposes (such earliest date, the “Expiration Date”). Until a Right is exercised or exchanged, the holder thereof, as such, will have no rights as a stockholder of the Company by virtue of holding such Right, including, without limitation, the right to vote and to receive dividends. The Board of Directors may adjust the Purchase Price, the number of shares of Series B Preferred issuable and the number of outstanding Rights to prevent dilution that may occur from a stock dividend, a stock split, a reclassification of the Series B Preferred or Common Stock or certain other specified transactions. No adjustments to the Purchase Price of less than 1 % are required to be made. In connection with the adoption of the Plan, the Board of Directors approved a Certificate of Designations of the Series B Junior Participating Preferred Stock (the “Certificate of Designations”). The Certificate of Designations was filed with the Secretary of State of the State of Delaware on May 2, 2023. Each one one-thousandth of a share of Series B Preferred, if issued: • Will not be redeemable. • Will entitle holders to quarterly dividend payments of $ 0.001 per one one-thousandth of a share of Series B Preferred, or an amount equal to the dividend paid on one share of Common Stock, whichever is greater. • Will entitle holders upon liquidation either to receive $ 0.001 per one one-thousandth of a share of Series B Preferred, or an amount equal to the payment made on one share of Common Stock, whichever is greater. • Will have the same voting power as one share of Common Stock. • If shares of Common Stock are exchanged as a result of a merger, consolidation, or a similar transaction, will entitle holders to a per share payment equal to the payment made on one share of Common Stock. Accumulated Other Comprehensive Income Comprehensive income consists of two elements, net loss and other comprehensive income (loss). Other comprehensive income (loss) items are recorded in the stockholders’ equity section of our condensed consolidated balance sheets and are excluded from net loss. Our other comprehensive income consists primarily of foreign currency translation adjustments for subsidiaries with functional currencies other than the U.S. dollar, unrealized translation gains on intercompany loans with foreign subsidiaries, and unrealized gains on interest rate swaps. The following table shows the components of accumulated other comprehensive income (loss), net of income taxes, (“AOCI”) in the stockholders’ equity section of our condensed consolidated balance sheets at the dates indicated (in thousands): June 30, 2023 December 31, 2022 Foreign currency translation adjustment $ ( 21,777 ) $ ( 22,632 ) Unrealized translation loss on intercompany loans with foreign subsidiaries ( 3,727 ) ( 7,426 ) Unrealized gain on interest rate swaps 40,919 41,168 Total accumulated other comprehensive income $ 15,415 $ 11,110 The unrealized translation gains (losses) on intercompany loans with foreign subsidiaries as of June 30, 2023 is net of income tax expense of $ 1.4 million. The tax provision to unrealized translation gains (losses) on intercompany loans for the three and six months ended June 30, 2023 was $ 0.5 million and $ 1.0 million, respectively. The tax benefit related to unrealized translation gains on intercompany loans for the three and six months ended June 30, 2022 was $ 1.0 million and $ 1.5 million, respectively. The income tax expense/benefit allocated to each component of other comprehensive income for all other 20 periods and components is not material. The Company reclassifies taxes from AOCI to earnings as the items to which the tax effects relate are similarly reclassified. The functional currency of our foreign subsidiaries are the local currencies. Results of operations for foreign subsidiaries are translated into United States dollars (“USD”) using the average exchange rates on a monthly basis during the year. The assets and liabilities of those subsidiaries are translated into USD using the exchange rates in effect at the balance sheet date. The related translation adjustments are recorded in a separate component of stockholders' equity in AOCI. The Company has intercompany loans that were used to fund the acquisitions of foreign subsidiaries. Due to the long-term nature of the loans, the unrealized translation gains (losses) resulting from re-measurement are recognized as a component of AOCI. Stock-Based Compensation The Company recognizes stock-based compensation expense from all awards in the following expense categories included in our condensed consolidated statements of income were as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Cost of revenue $ 301 $ 575 $ 604 $ 977 Research and development 648 658 1,303 1,406 Sales and marketing 558 1,498 1,134 2,972 General and administrative (1) 4,863 12,146 9,791 21,141 Total $ 6,370 $ 14,877 $ 12,832 $ 26,496 (1) Includes accelerated stock-based compensation expense of $ 4.4 million for the three months and six months ended June 30, 2022, respectively, in accordance with ASC 718, Compensation—Stock Compensation . 2014 Equity Incentive Plan Beginning in 2019, the Company began granting restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”) under its 2014 Equity Incentive Plan (the “2014 EIP”), in lieu of restricted stock awards, primarily for stock plan administrative purposes. Restricted Stock Units (“RSU”) and Performance-Based Restricted Stock Units (“PSU”) In 2023 and 2022, fifty percent of the awards granted to our Chief Executive Officer were PSUs. The 2023 and 2022 PSU agreements provide that the quantity of units subject to vesting may range from 0 % to 200 % and 0 % to 300 %, respectively, of the units granted per the table below based on the Company's absolute total shareholder return (“TSR”) at the end of the performance periods of thirty-four months and eighteen months , respectively. The following table summarizes PSU and RSU activity during the six months ended June 30, 2023: Number of Units Weighted-Average Grant Date Fair Value Unvested restricted units outstanding as of December 31, 2022 1,603,023 $ 21.33 Granted 1,431,277 8.78 Vested ( 525,066 ) 21.14 Forfeited ( 73,430 ) 19.18 Unvested restricted units outstanding as of June 30, 2023 2,435,804 $ 14.07 The PSU and RSU activity table above includes PSU units granted that are based on a 100 % target payout. Compensation expense is recognized over the required service period of the grant. The fair value of the RSUs is determined based on the grant date fair value of the award. The fair value of the PSUs is determined using the Monte Carlo simulation model and is not subject to fluctuation due to achievement of the underlying market-based target. 21 Significant assumptions used in the Monte Carlo simulation model for the PSUs granted during the six months ended June 30, 2023 and year ended December 31, 2022 are as follows: June 30, 2023 December 31, 2022 Expected volatility 55.5 % 49.5 % Risk-free interest rate 4.4 % 0.7 % Remaining performance period (in years) 2.86 1.46 Dividend yield — — Stock Option Activity Stock option activity during the six months ended June 30, 2023 was as follows: Number of Options Outstanding Weighted– Average Exercise Price Outstanding at December 31, 2022 154,321 $ 11.19 Options exercised ( 819 ) 1.77 Options forfeited — — Options expired ( 819 ) 6.23 Outstanding at June 30, 2023 152,683 $ 11.27 12. Revenue Recognition Revenue Recognition Policy Revenue is recognized when control of the promised goods or services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services over the term of the agreement, generally when made available to the customers. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of sales credits and allowances. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. Revenue is recognized based on the following five step model in accordance with ASC 606, Revenue from Contracts with Customers : • Identification of the contract with a customer • Identification of the performance obligations in the contract • Determination of the transaction price • Allocation of the transaction price to the performance obligations in the contract • Recognition of revenue when, or as, the Company satisfies a performance obligation Performance obligations under our contracts consist of subscription and support, perpetual licenses, and professional services revenues within a single operating segment. Subscription and Support Revenue The Company's software solutions are available for use as hosted application arrangements under subscription fee agreements without licensing perpetual rights to the software. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company's solution is made available to the customer. As our customers have access to use our solutions over the term of the contract agreement we believe this method of revenue recognition provides a faithful depiction of the transfer of services provided. Our subscription contracts are generally 1 to 3 years in length. Amounts that have been invoiced are recorded in accounts receivable and deferred revenue or subscription and support revenue, 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 22 at the end of each month and are invoiced concurrently. Subscription and support revenue includes revenue related to the Company’s digital engagement application which provides short code connectivity for its two-way short message service (“SMS”) programs and campaigns. As discussed further in the “Principal vs. Agent Considerations” section below, the Company recognizes revenue related to these messaging-related subscription contracts on a gross basis. Perpetual License Revenue The Company also records revenue from the sales of proprietary software products under perpetual licenses. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. The majority of the Company’s products do not require significant customization. Professional Services Revenue Professional services provided with subscription and support licenses and perpetual licenses consist of implementation fees, data extraction, configuration, and training. The Company’s implementation and configuration services do not involve significant customization of the software and are not considered essential to the functionality. Revenue from professional services are recognized over time as such services are performed. Revenue for fixed price services are generally recognized over time applying input methods to estimate progress to completion. Revenue 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. Determining whether products and services are considered distinct performance obligations that should be evaluated separately versus together may require significant judgment. The Company has contracts with customers that often include multiple performance obligations, usually including professional services sold with either individual or multiple subscriptions or perpetual licenses. For these contracts, the Company records individual performance obligations separately if they are distinct by allocating the contract's total transaction price to each performance obligation in an amount based on the relative standalone selling price (“SSP”), of each distinct good or service in the contract. Judgment is required to determine the SSP for each distinct performance obligation. A residual approach is only applied in limited circumstances when a particular performance obligation has highly variable and uncertain SSP and is bundled with other performance obligations that have observable SSP. A contract's transaction price is allocated to each distinct performance obligation and is recognized as revenue when, or as, the performance obligation is satisfied. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, historical standalone sales, customer demographics, geographic locations, and the number and types of users within our contracts. Principal vs. Agent Considerations The Company evaluates whether it is the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis) for vendor reseller agreements and messaging-related subscription agreements. Where the Company is the principal, it first obtains control of the inputs to the specific good or service and directs their use to create the combined output. The Company's control is evidenced by its involvement in the integration of the good or service on its platform before it is transferred to its customers, and is further supported by the Company being primarily responsible to its customers and having a level of discretion in establishing pricing. While none of the factors individually are considered presumptive or determinative, in reaching conclusions on gross versus net revenue recognition, the Company places the most weight on the analysis of whether or not it is the primary obligor in the arrangement. Generally, the Company reports 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. As the Company is primarily obligated in its messaging-related subscription contracts, has latitude in establishing prices associated with its messaging program management services, is responsible for fulfillment of the transaction, and has credit risk, revenue is recorded on a gross basis with related telecom messaging costs incurred from third parties recorded as cost of revenue. Revenue provided from agreements in which the Company is an agent are immaterial. 23 Contract Balances The timing of revenue recognition, billings and cash collections can result in billed accounts receivable, unbilled receivables, and deferred revenue. Billings scheduled to occur after the performance obligation has been satisfied and revenue recognition has occurred result in unbilled receivables, which are expected to be billed during the succeeding twelve-month period and are recorded in Unbilled receivables in our condensed consolidated balance sheets. A contract liability results when we receive prepayments or deposits from customers in advance for implementation, maintenance and other services, as well as subscription fees. Customer prepayments are generally applied against invoices issued to customers when services are performed and billed. We recognize contract liabilities as revenue upon satisfaction of the underlying performance obligations. Contract liabilities that are expected to be recognized as revenue during the succeeding twelve-month period are recorded in Deferred revenue and the remaining portion is recorded in Deferred revenue noncurrent on the accompanying condensed consolidated balance sheets at the end of each reporting period. Deferred revenue primarily consists 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 revenue as revenue 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. Unbilled Receivables Unbilled receivables represent amounts for which the Company has recognized revenue, pursuant to its revenue recognition policy, for software licenses already delivered and professional services already performed, but invoiced in arrears and for which the Company believes it has an unconditional right to payment. As of June 30, 2023 and December 31, 2022, unbilled receivables were $ 3.6 million and $ 5.3 million, respectively. Deferred Commissions Sales commissions earned by our sales force, and related payroll taxes, are considered incremental and recoverable costs of obtaining a contract with a customer. Deferred commissions and other costs for new customer contracts are capitalized upon contract signing and amortized on a systematic basis that is consistent with the transfer of goods and services over the expected life of the customer relationships, which has been determined to be approximately 6 years. The expected life of our customer relationships is based on historical data and management estimates, including estimated renewal terms and the useful life of the associated underlying technology. 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 average contractual renewal term of 18 months. We utilize the 'portfolio approach' practical expedient permitted under ASC 606-10-10-4, which allows entities to apply the guidance to a portfolio of contracts with similar characteristics as the effects on the financial statements of this approach would not differ materially from applying the guidance to individual contracts. The portion of capitalized costs expected to be amortized during the succeeding twelve-month period is recorded in current assets as deferred commissions, current, and the remainder is recorded in long-term assets as deferred commissions, net of current portion. Amortization expense is included in sales and marketing expenses in the accompanying condensed consolidated statements of operations. Deferred commissions are reviewed for impairment whenever events or circumstances indicate their carrying value may not be recoverable consistent with the Company's long-lived assets policy. No indicators of impairment were identified during the six months ended June 30, 2023. 24 The following table presents the activity impacting deferred commissions for the six months ended June 30, 2023 (in thousands: Deferred Commissions Balance at December 31, 2022 $ 24,755 Capitalized deferred commissions 6,159 Amortization of deferred commissions ( 6,606 ) Balance at June 30, 2023 $ 24,308 Amortization of deferred commissions in excess of commissions capitalized for the three and six months ended June 30, 2023 was $ 0.1 million and $ 0.4 million, respectively. Deferred Revenue Deferred revenue represents either customer advance payments or billings for which the aforementioned revenue recognition criteria have not yet been met. Deferred revenue is mainly unearned revenue related to subscription services and support services. During the six months ended June 30, 2023, we recognized $ 82.3 million and $ 2.8 million of subscription services and professional services revenue, respectively, that was included in the deferred revenue balances at the beginning of the period. Remaining Performance Obligations As of June 30, 2023, approximately $ 266.1 million of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 69 % of these remaining performance obligations over the next 12 months, with the balance recognized thereafter. Disaggregated Revenue The Company disaggregates revenue from contracts with customers by geography and revenue generating activity, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. 25 Revenue by geography is based on the ship-to address of the customer, which is intended to approximate where the customers' users are located. The ship-to country is generally the same as the billing country. The Company has operations primarily in the United States, United Kingdom and Canada. Information about these operations is presented below (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Revenues: Subscription and support: United States $ 50,162 $ 52,996 $ 102,403 $ 104,340 United Kingdom 9,160 10,120 18,835 21,709 Canada 3,441 5,427 6,932 8,895 Other International 7,731 6,474 15,238 13,700 Total subscription and support revenue 70,494 75,017 143,408 148,644 Perpetual license: United States 721 734 1,377 1,471 United Kingdom 69 162 292 291 Canada 14 101 56 177 Other International 448 861 1,098 1,697 Total perpetual license revenue 1,252 1,858 2,823 3,636 Professional services: United States 1,557 1,752 3,155 3,447 United Kingdom 452 670 710 1,459 Canada 230 255 459 459 Other International 512 675 998 1,298 Total professional service revenue 2,751 3,352 5,322 6,663 Total revenue $ 74,497 $ 80,227 $ 151,553 $ 158,943 13. Related Party Transactions The Company does not have any material related party transactions to report for the three and six months ended June 30, 2023 . 26 Table of Contents