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Item 2. Management’s Discussion and Analysis

2024-05-02 compared with 2023-11-02 · 105 added, 159 removed, 280 unchanged (49% of the section changed)

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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission ( “ SEC ” ), including our Annual Report on Form 10-K for the year ended December 31, 2023, filed on February 22, 2024.

In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Forward-looking statements generally relate to future events or our future financial or operating performance.

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

• our expectations with regard to revenue from perpetual licenses and professional services;

• our expectations with regard to revenue from perpetual licenses, usage fees, and professional services;

• our ability to adapt to macroeconomic factors impacting the global economy, including foreign currency exchange risk, inflation and supply chain constraints;

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• our ability to comply with privacy laws and regulations;

• our ability to incorporate and deliver artificial intelligence (“AI”) functionality into our products and services;

• our ability to deliver high-quality customer service;

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• the operation, reliability and security of our third-party data centers;

• the risk that we did not consider another contingency included in this list;

• our expectations as to the payment of dividends;

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Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

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, retail, technology, manufacturing, legal, education, consumer goods, media, telecommunications, government, non-profit, food and beverage, healthcare and life sciences.

Through a series of acquisitions and integrations, we have established a library of diverse, cloud-based software applications that address specific digital transformation needs.

We enable global businesses to work smarter with over 25 cloud software products that help increase revenue, reduce costs, and deliver business value.

Our solutions cover digital marketing, knowledge management, contact center service, sales productivity, and content lifecycle automation.

We service over 10,000 customers ranging from large global corporations and various government agencies as well as small and medium-sized businesses.

Our customers operate in a wide variety of industries, including financial services, consulting services, technology, manufacturing, media, telecommunications, government, insurance, non-profit, healthcare, life sciences, retail and hospitality.

Through a series of acquisitions and integrations, we have established a library of diverse software applications under the Upland brand that address specific digital transformation needs.

Our revenue has grown from $149.9 million in the year ended December 31, 2018 to $297.9 million in the year ended December 31, 2023, representing a compound annual growth rate of 15%.

During the nine months ended September 30, 2023 and 2022, foreign revenue as a percent of total revenue was 30%.

See “ Note 12.

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

During the three months ended March 31, 2024 and 2023, foreign revenue as a percent of total revenue was 30% and 29%, respectively.

To support continued growth, we intend to pursue acquisitions of complementary technologies and businesses.

This will expand our product library, customer base, and market access resulting in increased benefits of scale.

Consistent with our growth strategy, we have made 31 acquisitions from February 2012 through September 30, 2023.

2022 Acquisitions

During the nine months ended September 30, 2022, we completed the two acquisitions summarized below.

• 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.

As a result of the February 22, 2022 purchase date, the impact of this acquisition is fully reflected in our results of operations for the nine months ended September 30, 2023 but is not fully reflected in our results of operations for the nine months ended September 30, 2022.

• 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.

The purchase was recorded using a convenience date of January 1, 2022, therefore the impact of this acquisition is fully reflected in our results of operations for the nine months ended September 30, 2023 and the nine months ended September 30, 2022.

Consistent with our growth strategy, we have made 31 acquisitions from February 2012 through March 31, 2024.

Key Metrics and Non-GAAP Financial Measures

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Core Organic Growth Rate does not represent actual organic revenue generated by our business as it stood at the beginning of the respective period.

For the three-month period ended September 30, 2023, our Core Organic Growth Rate was negative 1.9%.

For the three-month period ended March 31, 2024, our Core Organic Growth Rate was negative 1.9%.

Core Organic Growth Rates are not necessarily indicative of either future results of operations or actual results that might have been achieved had certain Sunset Asset classifications not been made or had certain acquisitions or dispositions been consummated on the first day of the prior year period presented.

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Related Defined Terms

In connection with periodic reviews of our business, we have decided to sunset certain non-strategic product offerings and customer contracts (collectively referred to as “Sunset Assets”).

During the three months ended December 31, 2022, as part of the first phase of a major strategic review of our business, we decided to classify as Sunset Assets certain non-strategic product offerings representing an estimated $27.9 million of 2023 annual total revenue.

Subsequently, during the second quarter of 2023, in connection with the completion of that review of our business, we determined that certain product offerings that had been placed in Sunset Assets did have use cases that would be strategic and, as a result, we removed them from our Sunset Assets.

At the same time we identified other product offerings to include in Sunset Assets.

The net effect of these actions resulted in the estimated addition of approximately $5.0 million in 2023 annual total revenues to our Sunset Assets.

It is possible that during future periodic reviews of our business we may determine to add additional non-strategic product offerings or customer contracts to Sunset Assets or remove certain product offerings or customer contracts from the classification of Sunset Assets.

In either case, we will adjust the revenues attributable to Sunset Assets for the then current period and properly reflect the year over year change for such addition or removal.

In connection with periodic reviews of our business, we have decided to discontinue the availability of certain non-strategic product offerings and a limited number of non-strategic customer contracts (collectively referred to as “Sunset Assets”).

It is possible that during future periodic reviews of our business we may determine to add additional non-strategic product offerings or non-strategic customer contracts to Sunset Assets or remove certain product offerings or customer contracts from the classification of Sunset Assets.

In either case, we will adjust the revenues attributable to Sunset Assets and properly reflect the year over year change for such addition or removal.

Overage Charges are subscription and support revenues earned in addition to contractual minimum customer commitments as a result of the usage volume of services including text and e-mail messaging and third-party pass-through costs that exceed the levels stipulated in contracts with the Company.

The following table represents a reconciliation of total revenue, the most comparable GAAP measure, to core organic revenue for each of the periods indicated.

Three Months Ended September 30,

Three Months March 31,

(dollars in thousands)

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Adjusted EBITDA is a non-GAAP financial measure.

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

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.

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

Three Months Ended Nine Months Ended

September 30, September 30,

2023 2022 2023 2022

Three Months Ended

(dollars in thousands)

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

• Our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, in the preparation of our annual operating budget, as a measure of our operating performance, to assess the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance because

Adjusted EBITDA eliminates the impact of items that we do not consider indicative of our core operating performance;

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

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The use of Adjusted EBITDA as an analytical tool has limitations such as:

• Depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect cash requirements for such replacements;

however, much of the depreciation and amortization currently reflected relates to amortization of acquired intangible assets as a result of business combination purchase accounting adjustments, which will not need to be replaced in the future;

• 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;

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The period-to-period comparisons of results of operations are not necessarily indicative of results for future periods.

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Amount Percent of Revenue Amount Percent of Revenue Amount Percent of Revenue Amount Percent of Revenue

Three Months Ended March 31,

Amount Percent of Revenue Amount Percent of Revenue

(dollars in thousands, except share and per share data)

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Stockholders' Equity” .

(2) Includes general and administrative stock-based compensation of $4.1 million and $5.7 million for the three months September 30, 2023 and September 30, 2022, respectively, and $13.9 million and $26.8 million for the nine months ended September 30, 2023 and September 30, 2022, respectively.

General and administrative expense excluding stock-based compensation as a percentage of total revenues was 14% and 11% for the three months ended September 30, 2023 and September 30, 2022, respectively, and 15% and 12% for the nine months ended September 30, 2023 and September 30, 2022, respectively.

(3) Includes depreciation and amortization of $3.4 million and $3.0 million for the three months ended September 30, 2023 and September 30, 2022, respectively, and $10.3 million and $9.4 million for the nine months ended September 30, 2023 and September 30, 2022, respectively.

Comparison of the Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 % Change 2023 2022 % Change

(2) Includes general and administrative stock-based compensation of $2.3 million and $4.9 million for the three months March 31, 2024 and March 31, 2023, respectively.

General and administrative expense excluding stock-based compensation as a percentage of total revenues was 15% and 16% for the three months ended March 31, 2024 and March 31, 2023, respectively..

(3) Includes depreciation and amortization of $2.4 million and $3.4 million for the three months ended March 31, 2024 and March 31, 2023, respectively.

Comparison of the Three Months Ended March 31, 2024 and 2023

Three Months Ended March 31,

2024 2023 % Change

(dollars in thousands)

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Total revenue 100% 100%

For the Three Months Ended September 30, 2023

Total revenue was $74.1 million in the three months ended September 30, 2023, compared to $79.5 million in the three months ended September 30, 2022, a decrease of $5.4 million, or 7%.

This decrease is attributable to a $3.6 million decrease in revenue from Sunset Assets as a result of decreased sales focus on these products, a $2.8 million decrease in other recurring revenue products and variable Overage Charges, a $0.1 million decline in perpetual license revenue, a $0.2 million decline in professional services revenue offset by a $0.5 million positive effect from foreign currency fluctuations and an increase of $0.8 million in revenue from acquisitions not fully reflected in the comparable prior period.

For the Nine Months Ended September 30, 2023

Total revenue was $225.7 million in the nine months ended September 30, 2023, compared to $238.5 million in the nine months ended September 30, 2022, a decrease of $12.8 million, or 5%.

This decrease is attributable to a $9.3 million decrease in revenue from Sunset Assets as a result of decreased sales focus on these products, a $6.4 million decrease in other recurring revenue products and variable Overage Charges, a $1.0 million decline in perpetual license revenue, a $1.5 million decline in professional services revenue and a $1.0 million negative effect from foreign currency fluctuations.

This was offset by an increase of $6.4 million in revenue from acquisitions not fully reflected in the comparable prior period.

For the Three Months Ended March 31, 2024

Total revenue was $70.7 million in the three months ended March 31, 2024, compared to $77.1 million in the three months ended March 31, 2023, a decrease of $6.4 million, or 8%.

This decrease is primarily due to the expected decline in revenue from Sunset Assets of $4.4 million.

The remaining decrease results from a decline in overage charges of $0.5 million as a result of customers not exceeding contractual minimums to the extent they did in the prior year period, professional services revenue decline of $0.4 million due to fewer implementation projects, and a decline of $1.1 million due to lower subscription and support revenue from a subset of our products which we are addressing with our growth investments.

Cost of Revenue

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 % Change 2023 2022 % Change

Three Months Ended March 31,

2024 2023 % Change

(dollars in thousands)

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Subscription and support (1)

28% 30% 29% 29%

Professional services and other 2% 3%

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Stock Compensation $ 186 $ 302

For the Three Months Ended September 30, 2023

Cost of subscription and support revenue was $20.9 million in the three months ended September 30, 2023, compared to $23.6 million in the three months ended September 30, 2022, a decrease of $2.7 million, or 11%.

The decrease in cost of subscription and support revenue is primarily related to a $1.3 million decrease in our variable telecom carrier costs, combined with a decrease of $0.7 million in personnel related expenses and a decrease of $0.3 million in non-cash stock compensation offset by an increase of $0.4 million in amortization expense.

Cost of professional services and other revenue was $2.1 million in the three months ended September 30, 2023, compared to $2.2 million in the three months ended September 30, 2022, a decrease of $0.1 million, or 4%.

For the Three Months Ended March 31, 2024

Cost of subscription and support revenue was $19.8 million in the three months ended March 31, 2024, compared to $23.5 million in the three months ended March 31, 2023, a decrease of $3.7 million, or 16%.

The decrease in cost of subscription and support revenue is primarily related to a decrease of $1.2 million in personnel-related costs, a decrease of $1.0 million in infrastructure costs, a $0.4 million decreases in variable telecom carrier costs, and a $1.0 million decrease in amortization of intangible assets related to our Sunset Assets.

Cost of professional services and other revenue was $1.2 million in the three months ended March 31, 2024, compared to $2.1 million in the three months ended March 31, 2023, a decrease of $0.9 million, or 41%.

The decrease in cost of professional services was related to a decrease in personnel-related expenses.

For the Nine Months Ended September 30, 2023

Cost of subscription and support revenue was $66.4 million in the nine months ended September 30, 2023, compared to $69.7 million in the nine months ended September 30, 2022, a decrease of $3.3 million, or 5%.

Cost of subscription and support revenue decreased by $3.3 million primarily due to a $3.9 million decrease in our variable telecom carrier costs, a decrease of $0.5 million in personnel related expenses and a decrease of $0.6 million in non-cash stock compensation offset with increases of $0.3 million in hosting expenses and $1.2 million in amortization expense.

Cost of professional services revenue was $6.2 million in the nine months ended September 30, 2023, compared to $7.3 million in the nine months ended September 30, 2022, a decrease of $1.1 million, or 14%, which reflects a decrease in personnel related expenses.

Operating Expenses

Sales and Marketing Expense

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 % Change 2023 2022 % Change

Three Months Ended March 31,

2024 2023 % Change

(dollars in thousands)

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Stock Compensation $ 397 $ 576

For the Three Months Ended September 30, 2023

Sales and marketing expense was $16.9 million in the three months ended September 30, 2023, compared to $14.4 million in the three months ended September 30, 2022, an increase of $2.5 million, or 17%.

The increase in sales and marketing expense is primarily attributable to increase in personnel related expenses and marketing expenses associated with the announced investment in our go to market strategy partially offset by a decrease in non-cash stock compensation expense of $0.2 million.

For the Nine Months Ended September 30, 2023

Sales and marketing expense was $46.9 million in the nine months ended September 30, 2023, compared to $45.3 million in the nine months ended September 30, 2022, an increase of $1.6 million, or 4% attributable to a decrease of $1.5 million in sales and marketing costs for our Sunset Assets, a decrease of $2.0 million in non-cash stock based compensation, offset by an increase in personnel related expenses and marketing expenses associated with the announced investment in our go to market strategy.

For the Three Months Ended March 31, 2024

Sales and marketing expense was $17.0 million in the three months ended March 31, 2024, compared to $14.3 million in the three months ended March 31, 2023, an increase of $2.7 million, or 19%.

The increase in sales and marketing expense is attributable to a $1.8 million increase in personnel-related expenses and a $0.8 million increase in marketing expenses associated with the announced investments in our growth plan.

Research and Development Expense

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 % Change 2023 2022 % Change

Three Months Ended March 31,

2024 2023 % Change

(dollars in thousands)

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Stock Compensation $ 606 $ 655

For the Three Months Ended September 30, 2023

Research and development expense was $12.7 million in the three months ended September 30, 2023, compared to $11.6 million in the three months ended September 30, 2022, an increase of $1.1 million, or 9%.

Research and development expense increased $1.7 million driven by personnel related expenses associated with the continued growth in our India operations offset by a decrease of $0.6 million in expenses for our Sunset Assets.

For the Nine Months Ended September 30, 2023

Research and development expense was $37.7 million in the nine months ended September 30, 2023, compared to $35.4 million in the nine months ended September 30, 2022, an increase of $2.3 million, or 7%.

The increase was driven by $4.2 million increased personnel related expenses associated with the continued growth in our India operations offset by a decrease of $1.9 million in expenses related to our Sunset Assets.

For the Three Months Ended March 31, 2024

Research and development expense was $12.5 million in the three months ended March 31, 2024, compared to $12.5 million in the three months ended March 31, 2023.

While research and development expense has remained relatively flat in total, we have shifted the mix of our spending by moving personnel-related expenses from higher cost centers in the United States and abroad to our lower cost center in our India Center of Excellence thereby increasing development productivity for the same cost.

General and Administrative Expense

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 % Change 2023 2022 % Change

Three Months Ended March 31,

2024 2023 % Change

(dollars in thousands)

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Stock compensation $ 2,333 $ 4,929

For the Three Months Ended September 30, 2023

General and administrative expense was $14.6 million in the three months ended September 30, 2023, compared to $14.7 million in the three months ended September 30, 2022, a decrease of $0.1 million, or nil%.

Non-cash stock compensation expense decreased $1.6 million due to additional expense recognized in the three months ended September 30, 2022 related to stock award modifications that did not reoccur.

This was partially offset by a $1.5 million increase in personnel related expenses and outside professional expenses.

For the Nine Months Ended September 30, 2023

General and administrative expense was $47.4 million in the nine months ended September 30, 2023, compared to $56.1 million in the nine months ended September 30, 2022, a decrease of $8.7 million, or 16%.

Non-cash stock compensation expense decreased $13.0 million due to additional expense recognized in the nine months ended September 30, 2022 related to stock award modifications that did not reoccur.

General administrative expense increased $4.3 million primarily due to personnel related expenses and outside professional expenses.

For the Three Months Ended March 31, 2024

General and administrative expense was $13.2 million in the three months ended March 31, 2024, compared to $17.2 million in the three months ended March 31, 2023, a decrease of $4.0 million, or 23%.

This decrease is primarily due to reductions in personnel-related costs including a decrease of $2.6 million in non-cash stock compensation expense.

Depreciation and Amortization Expense

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 % Change 2023 2022 % Change

Three Months Ended March 31,

2024 2023 % Change

(dollars in thousands)

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Total depreciation and amortization 16% 20%

For the Three Months Ended September 30, 2023

Depreciation and amortization expense was $14.3 million in the three months ended September 30, 2023, compared to $10.1 million in the three months ended September 30, 2022, an increase of $4.2 million, or 41%.

This increase was primarily due to the adjustment of the estimated useful lives of certain intangible assets.

For the Nine Months Ended September 30, 2023

Depreciation and amortization expense was $44.2 million in the nine months ended September 30, 2023, compared to $32.0 million in the nine months ended September 30, 2022, an increase of $12.2 million, or 38%.

This increase was primarily due to the adjustment of the estimated useful lives of certain intangible assets.

For the Three Months Ended March 31, 2024

Depreciation and amortization expense was $11.4 million in the three months ended March 31, 2024, compared to $15.1 million in the three months ended March 31, 2023, a decrease of $3.7 million, or 25%.

This decrease primarily resulted from certain intangible assets related to Sunset Assets becoming fully amortized.

Acquisition-related Expenses

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 % Change 2023 2022 % Change

Three Months Ended March 31,

2024 2023 % Change

(dollars in thousands)

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Percentage of total revenue —% 1%

Acquisition-related expenses are typically one-time expenses incurred through four full quarters after each acquisition, with the majority of these costs being incurred within 6 to 9 months, to transform the acquired business into the Company's unified operating platform.

These expenses can vary based on the size, timing and location of each acquisition.

Acquisition-related expenses include transaction related expenses such as banker fees, legal and professional fees, insurance costs, and deal bonuses.

Acquisition-related expenses also include transformational expenses such as severance, compensation for transitional personnel, office lease terminations, vendor cancellations, and adjustments to the fair value of earnouts due to sellers.

For the Three Months Ended September 30, 2023

Acquisition-related expense was $0.4 million in the three months ended September 30, 2023, compared to $3.6 million in the three months ended September 30, 2022, a decrease of $3.2 million, or 88%.

We have had no new acquisitions since our two acquisitions during the three months ended March 31, 2022.

The transformational expenses in both the current and year ago periods were primarily related to temporary transitional personnel related expenses incurred as we consolidate and integrate these acquisitions.Transformation expenses in the three months ended September 30, 2022 include expenses related to acquisitions closed in the three months ended March 31, 2022 as well the residual expenses related to the three acquisitions closed in 2021.

For the Nine Months Ended September 30, 2023

Acquisition related expense was $2.6 million the nine months ended September 30, 2023, compared to $18.9 million in the nine months ended September 30, 2022 a decrease of $16.3 million, or 86%.

The transformational expenses in both the current and year ago periods were primarily related to temporary transitional personnel and related costs along with accelerated rent related expenses incurred in conjunction with the closures of offices of our acquired companies as we consolidate and integrate these acquisitions.

These accelerated rent related expenses were nil and $0.9 million during the nine months ended September 30, 2023 and September 30, 2022, respectively.

For the Three Months Ended March 31, 2024

Acquisition-related expense was nil in the three months ended March 31, 2024, compared to $1.1 million in the three months ended March 31, 2023, a decrease of $1.1 million, or 100%.

We have had no new acquisitions since our two acquisitions during 2022.

Acquisition-related expenses in the three months ended March 31, 2023 include expenses related to acquisitions closed in 2022.

Impairment of goodwill

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 % Change 2023 2022 % Change

Three Months Ended March 31,

2024 2023 % Change

(dollars in thousands)

Impairment of goodwill $ — $ — NA $ 128,755 $ — 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.

Impairment of goodwill $ 87,227 $ 128,755 (32) %

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 three months ended March 31, 2023, we performed a goodwill impairment evaluation, which resulted in a goodwill impairment of $128.8 million for the three months ended March 31, 2023.

See “ Note 5.

As a result of declines in our stock price during the three months ended March 31, 2024 and the three months ended March 31, 2023, we performed a goodwill impairment evaluations in each quarter, which resulted in a goodwill impairments of $87.2 million and $128.8 million for the three months ended March 31, 2024 and 2023, respectively.

Goodwill and Other Intangible Assets in the notes to our condensed consolidated financial statements for more information regarding our first quarter 2024 goodwill impairment.

We will continue to evaluate goodwill for impairment in 2023 and future impairments of goodwill could occur if our stock price continues to decline.

We will continue to evaluate goodwill for impairment in 2024 and future impairments of goodwill could occur if our stock price declines.

Other Income (Expense)

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 % Change 2023 2022 % Change

Three Months Ended March 31,

2024 2023 % Change

(dollars in thousands)

7 unchanged sentences

Total other expense (7)% (5)%

For the Three Months Ended September 30, 2023

Interest expense, net of interest income was $2.5 million in the three months ended September 30, 2023 compared to $7.4 million in the three months ended September 30, 2022, a decrease of $4.9 million or 66%, due primarily to the $1.1 million amortization of the deferred gain on the liquidation of a portion of our interest rate swaps as well as a $2.8 million benefit related to the deferred gain recognized immediately into earnings upon the $35 million prepayment on our Term Loans combined with higher interest income on our interest-bearing cash accounts..

Other income, net was $0.1 million in the three months ended September 30, 2023, compared to other income, net of $0.3 million in the three months ended September 30, 2022.

Other income (expense), net recognized during the three months ended September 30, 2023 was related primarily to foreign currency exchange fluctuations.

For the Nine Months Ended September 30, 2023

Interest expense, net of interest income was $13.4 million in the nine months ended September 30, 2023, compared to $22.9 million in the nine months ended September 30, 2022, a decrease of $9.5 million, or 42%.

The decrease is primarily attributable to the $1.1 million amortization of the deferred gain on the liquidation of a portion of our interest rate swaps as well as a $2.8 million benefit related to the deferred gain recognized immediately into earnings upon the $35 million prepayment on our Term Loans combined with higher interest income on our interest-bearing cash accounts.

Other income, net was $0.9 million in the nine months ended September 30, 2023, compared to other income, net of $1.7 million in the nine months ended September 30, 2022.

Other income (expense), net recognized in the nine months ended September 30, 2023 and September 30, 2022 related primarily to foreign currency exchange fluctuations.

For the Three Months Ended March 31, 2024

Interest expense, net of interest income was $5.0 million in the three months ended March 31, 2024 compared to $5.5 million in the three months ended March 31, 2023, a decrease of $0.5 million or 9%, due to a decrease in interest expense as a result of paying down $35 million of debt principal in August 2023 along with regularly scheduled principal payments lowering outstanding borrowings on our Credit Facility.

Additionally, interest income earned on our cash balances has increased as interest rates have increased quarter over quarter.

Other expense, net was $0.1 million in the three months ended March 31, 2024, compared to other income, net of $1.4 million in the three months ended March 31, 2023.

Other income (expense), net recognized during the three months ended March 31, 2024 and 2023 were related primarily to foreign currency exchange fluctuations.

Benefit from Income Taxes

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 % Change 2023 2022 % Change

Three Months Ended March 31,

2024 2023 % Change

(dollars in thousands)

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Percentage of total revenue 1% 1%

For the Three Months Ended September 30, 2023

Benefit from income taxes was $1.5 million in the three months ended September 30, 2023, compared to a benefit for income taxes of $1.1 million in the three months ended September 30, 2022, resulting in an increase in benefit from income taxes of $0.4 million.

The benefit from income taxes for the three months ended September 30, 2023 related primarily to the reduction of uncertain tax positions due to expiration of related statutes of limitation and foreign income taxes associated with our combined non-U.S.

This tax benefit is offset by changes in deferred tax liabilities associated with amortization of United States tax deductible goodwill and U.S.

For the Three Months Ended March 31, 2024

Benefit from income taxes was $0.5 million in the three months ended March 31, 2024, compared to a benefit for income taxes of $1.4 million in the three months ended March 31, 2023, resulting in a decrease in benefit from income taxes of $0.9 million.

The benefit from income taxes for the three months ended March 31, 2024 related primarily to the deferred tax impact of the $87.2 million goodwill impairment booked during the first quarter of 2024.

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 U.S.

state taxes in certain states in which the Company does not file on a consolidated basis or have net operating loss carryforwards.

For the Nine Months Ended September 30, 2023

The benefit from income taxes was $3.1 million in the nine months ended September 30, 2023, compared to a benefit from income taxes of $1.7 million in the nine months ended September 30, 2022, an increase of $1.4 million.

This increase was due primarily to the deferred tax impact of the goodwill impairment booked during the first quarter of 2023, the reduction of uncertain tax positions due to expiration of related statutes of limitation, and foreign income taxes associated with our combined non U.S.

These tax benefits are offset by changes in deferred tax liabilities associated with amortization of United States tax deductible goodwill and state taxes in certain states in which the Company does not file on a consolidated basis or have net operating loss carryforwards.

The benefit from income taxes for the three months ended March 31, 2023 related primarily related to the deferred tax impact of the $128.8 million 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 U.S.

state taxes in certain states in which the Company does not file on a consolidated basis or have net operating loss carryforwards.

Liquidity and Capital Resources

To date, we have financed our operations primarily through cash generated from operating activities, the raising of capital including sales of our Common Stock or our convertible preferred stock, and borrowings under our credit facility.

We have financed our operations primarily through cash generated from operating activities, the raising of capital including sales of our Common Stock or our convertible preferred stock, and borrowings under our credit facility.

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 may utilize the sources of capital available to us under our Revolver to support our continued growth via acquisitions.

As of September 30, 2023, we had cash and cash equivalents of $239.6 million, $60.0 million of available borrowings under our Revolver, as discussed below, and $483.4 million of borrowings outstanding under our Term Loans.

As of March 31, 2024, we had cash and cash equivalents of $231.6 million, $60.0 million of available borrowings under our Revolver, as discussed below, and $480.7 million of borrowings outstanding under our Term Loans.

As of December 31, 2023, we had cash and cash equivalents of $236.6 million, $60.0 million of available borrowings under our Revolver, and $482.1 million of borrowings outstanding under our Term Loans.

The $9.1 million decrease in cash and cash equivalents from December 31, 2022 to September 30, 2023 was due primarily to the $35 million pay down on our outstanding borrowings and the $3.2 million paid to repurchase shares of the Company’s Common Stock, offset by the cash gain of $20.5 million from the sale of a portion of our interest rate swaps and other cash flows from operations.

Our cash and cash equivalents held by our foreign subsidiaries was $22.5 million as of September 30, 2023 and $34.8 million as of December 31, 2022.

The $4.9 million decrease in cash and cash equivalents from December 31, 2023 to March 31, 2024 was due primarily to $7.9 million paid to repurchase shares of the Company’s Common Stock, and $1.4 million in debt repayment, offset by $5.1 million in cash flows from operations.

Our cash and cash equivalents held by our foreign subsidiaries was $33.8 million as of March 31, 2024 and $34.8 million as of December 31, 2023.

Our intent is to permanently reinvest these funds outside the U.S.

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We do not provide for federal income taxes on the undistributed earnings of our foreign subsidiaries.

As of September 30, 2023 and December 31, 2022, we had working capital surpluses of $178.1 million and $170.1 million, respectively.

Series A Preferred Stock Proceeds

In August of 2022, we issued Series A Preferred Stock as discussed in “ Note 10.

Series A Convertible Preferred Stock ” which provided us an additional $110.4 million in liquidity, net of issuance costs of $4.6 million, that we intend to use for general corporate purposes including acquisitions.

As of March 31, 2024 and December 31, 2023, we had working capital surpluses of $165.8 million and $169.6 million, respectively.

Credit Facility

As described in “ Note 6.

Debt—Credit Facility ”, the Company has a Credit Facility which includes the fully drawn Term Loans as of September 30, 2023, and a $60 million Revolver which was fully available as of September 30, 2023.

Debt—Credit Facility ”, the Company has a Credit Facility which includes the fully drawn Term Loans as of March 31, 2024, and a $60 million undrawn Revolver.

The Term Loans mature on August 6, 2026, after the scheduled quarterly principal amortization.

The undrawn Revolver matures on August 6, 2024, and currently, the Company has no intent or need to draw on this Revolver before its maturity.

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

Nine Months Ended September 30,

Three Months Ended March 31,

(dollars in thousands)

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Net cash used in investing activities (183) (215)

Net cash provided by (used in) financing activities (48,745) 97,127

Net cash used in financing activities (9,599) (6,781)

Effect of exchange rate fluctuations on cash (284) 238

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

Cash provided by operating activities was $41.2 million for the nine months ended September 30, 2023 compared to cash provided by operating activities of $24.1 million for the nine months ended September 30, 2022, an increase of $17.0 million.

Working capital sources of cash for the nine months ended September 30, 2023 included a one-time $20.5 million cash gain on the sale of a portion of our interest rate swaps offset by working capital uses of cash for the nine months ended September 30, 2023.

Cash provided by operating activities was $5.1 million for the three months ended March 31, 2024 compared to cash provided by operating activities of $15.8 million for the three months ended March 31, 2023, a decrease of $10.7 million.

Changes in working capital for the three months ended March 31, 2024 included collections on accounts receivable, increases in prepaid and other current assets, payments of current liabilities and decreases in deferred revenue.

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

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Cash Flows from Investing Activities

Our primary investing activities have consisted of acquisitions of complementary technologies and businesses.

Historically, our primary investing activities have consisted of acquisitions of complementary technologies and businesses.

As our business grows, we expect our primary investing activities to continue to expand our product library, customer base, and market access.

For the nine months ended September 30, 2023, cash used in investing activities consisted of purchases of property and equipment of $1.0 million.

Cash used in investing activities decreased $62.0 million for the nine months ended September 30, 2023 compared to the same period in 2022 primarily as a result of no acquisitions closed during the current period compared to the two acquisitions in the comparable prior year period.

For the three months ended March 31, 2024, cash used in investing activities consisted of purchases of property and equipment of $0.2 million.

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 and servicing of our debt obligations, share repurchases and share based employee payroll tax payment activity.

Cash used in financing activities changed by $145.9 million for the nine months ended September 30, 2023 compared to the same period in 2022 due to the use of $35 million used to pay down our Credit Facility in 2023, $3.2 million used for Common Stock repurchases and a $2.6 million decrease in consideration paid to sellers (i.e.

acquisition holdbacks) combined with the $110.5 million received from the issuance of preferred stock in 2022 which was not recurring in 2023.

Cash used in financing activities changed by $2.8 million for the three months ended March 31, 2024 compared to the same period in 2023 due to $7.9 million used for Common Stock repurchases in 2024 offset by additional consideration paid to sellers of businesses of $5.1 million for the three months ended March 31, 2023.

Critical Accounting Policies and the Use of Estimates

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

• revenue recognition and deferred revenue;

• income taxes;

• deferred sales commissions and sales commission expense;

• business combinations;

• goodwill and other intangibles.

• stock-based compensation.

We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of November 2, 2023, the date of issuance of this Quarterly Report on Form 10-Q.

We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of May 2, 2024, 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.

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Other Key Accounting Policies

Our unaudited interim financial statements and other financial information for the three and nine months ended September 30, 2023, as presented herein and in “ Item 1.

Our unaudited interim financial statements and other financial information for the three months ended March 31, 2024, as presented herein and in “ Item 1.

Financial Statements ” to this Quarterly Report on Form 10-Q, reflect no material changes in our critical accounting policies and estimates as set forth in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 22, 2024 (the “Annual Report”).

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis