Upland Software, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission ( “ SEC ” ), including our Annual Report on Form 10-K for the year ended December 31, 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 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. Forward-looking statements may be identified by the use of forward-looking words such as “anticipate,” “believe,” “may,” “will,” “continue,” “seek,” “estimate,” “intend,” “hope,” “predict,” “could,” “should,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions, although not all forward-looking statements contain these words. These forward-looking statements include, but are not limited to, statements concerning the following: • our financial performance and our ability to achieve or sustain profitability or predict future results; • our plans regarding future acquisitions and our ability to consummate and integrate acquisitions; • our ability to expand our go to market operations, including our marketing and sales organization, and successfully increase sales of our products; • our ability to obtain financing in the future on acceptable terms or at all; • our expectations with respect to revenue, cost of revenue and operating expenses in future periods; • our 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; • our ability to attract and retain customers; • our ability to successfully enter new markets and manage our international expansion; • our ability to comply with privacy laws and regulations; • our ability to incorporate and deliver artificial intelligence (“AI”) functionality into our products and services; • our ability to deliver high-quality customer service; • our plans regarding, and our ability to effectively manage, our growth; • maintaining our senior management team and key personnel; • the performance of our resellers; • our ability to adapt to changing market conditions and competition; • our ability to adapt to technological change and continue to innovate; • global economic and financial market conditions and uncertainties; • the growth of demand for cloud-based, digital transformation applications; • our ability to integrate our applications with other software applications; • maintaining and expanding our relationships with third parties; • costs associated with defending intellectual property infringement and other claims; • our ability to maintain, protect and enhance our brand and intellectual property; • our expectations with regard to trends, such as seasonality, which affect our business; • impairments to goodwill and other intangible assets; • our beliefs regarding how our applications benefit customers and what our competitive strengths are; • the operation, reliability and security of our third-party data centers; • our expectations as to the payment of dividends; 22 Table of Contents • our Share Repurchase Plan (as defined in Note 10. Stockholders' Equity ), including expectations regarding the timing and manner of repurchases made under the Share Repurchase Plan; • our current level of indebtedness, including our exposure to variable interest rate risk; • potential elimination or limitation of tax incentives or tax losses and/or reduction of U.S. federal net operating loss carryforwards (“NOLs”); and • other risk factors included under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 22, 2024, as updated by this Quarterly Report on Form 10-Q and periodically updated as necessary in our future quarterly reports on Form 10-Q and other filings that we make with the SEC. You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors, including those described in the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 22, 2024. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. Overview 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 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 March 31, 2024. 23 Table of Contents Key Metrics and Non-GAAP Financial Measures In addition to the GAAP financial measures described below in “Results of Operations,” we regularly review the following key metrics and non-GAAP financial measures to evaluate and identify trends in our business, measure our performance, prepare financial projections and make strategic decisions. Core Organic Growth Rate Beginning with the three months ended June 30, 2023, we began disclosing our Core Organic Growth Rate, a non-GAAP financial measure. We use Core Organic Growth Rate as a key performance measure to assess our consolidated operating performance over time and for planning and forecasting purposes. Core Organic Growth Rate is the percentage change between two reported periods in subscription and support revenue, excluding subscription and support revenue from Sunset Assets and Overage Charges, each as defined below. We calculate our year-over-year Core Organic Growth Rate as though all acquisitions or dispositions closed as of the end of the latest period were closed as of the first day of the prior year period presented. 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 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. We believe that this metric is useful to management and investors in analyzing our financial and operational performance period-over-period along with evaluating the growth of our business normalized for the impact of acquisitions and dispositions, as well as adjusting for the exclusion of non-core Sunset Assets and non-committed Overage Charges. For example, by including pre-acquisition revenue, Core Organic Growth Rate allows us to measure the underlying revenue growth of our business as of the end of the period presented, which we believe provides insight into our current performance. Related Defined Terms 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 March 31, 2024 2023 (dollars in thousands) Reconciliation of total revenue to core organic revenue: Total revenue $ 70,736 $ 77,056 Less: Perpetual license revenue 1,470 1,571 Professional services revenue 2,188 2,571 Subscription and support revenue from Sunset Assets 9,232 13,533 Overage Charges 1,425 1,878 Core organic revenue $ 56,421 $ 57,503 24 Table of Contents Adjusted EBITDA We monitor our Adjusted EBITDA to help us evaluate the effectiveness and efficiency of our operations. Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss), calculated in accordance with GAAP, 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 March 31, 2024 2023 (dollars in thousands) Reconciliation of Net Loss to Adjusted EBITDA: Net loss $ (96,130) $ (140,045) Add: Depreciation and amortization expense 13,802 18,500 Interest expense, net 4,958 5,461 Other expense (income), net 78 (1,425) Benefit from income taxes (547) (1,422) Stock-based compensation expense 3,522 6,462 Acquisition-related expense — 1,086 Non-recurring litigation costs 118 — Purchase accounting deferred revenue discount 75 228 Impairment of goodwill 87,227 128,755 Adjusted EBITDA $ 13,103 $ 17,600 We believe that Adjusted EBITDA provides useful information to management, investors and others in understanding and evaluating our operating results for the following reasons: • Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired; • Our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, in the preparation of our annual operating budget, as a measure of our operating performance, to assess the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance because Adjusted EBITDA eliminates the impact of items that we do not consider indicative of our core operating performance; • Adjusted EBITDA provides more consistency and comparability with our past financial performance, facilitates period-to-period comparisons of our operations and also facilitates comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results. Adjusted EBITDA should not be considered as an alternative to net loss or any other measure of financial performance calculated and presented in accordance with GAAP. The use of Adjusted EBITDA as an analytical tool has limitations such as: • Impairment of goodwill and depreciation and amortization are non-cash charges, and the assets being depreciated or amortized, which contribute to the generation of revenue, will often have to be replaced in the future and Adjusted EBITDA does not reflect cash requirements for such replacements; however, much of the depreciation and amortization relates to amortization of acquired intangible assets as well as the goodwill as a result of business combination purchase accounting adjustments, which will not need to be replaced in the future; • Adjusted EBITDA may not reflect changes in, or cash requirements for, our working capital needs or contractual commitments; • Adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation; 25 Table of Contents • Adjusted EBITDA does not reflect interest or tax payments that could reduce cash available for use; and • Other companies, including companies in our industry, might calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as comparative measures. Because of these limitations, you should consider Adjusted EBITDA together with other financial performance measures, including various cash flow metrics, net loss and our other GAAP results. 26 Table of Contents Results of Operations Consolidated Statements of Operations Data The following tables set forth our results of operations for the specified periods, as well as our results of operations for the specified periods as a percentage of revenue. The period-to-period comparisons of results of operations are not necessarily indicative of results for future periods. Three Months Ended March 31, 2024 2023 Amount Percent of Revenue Amount Percent of Revenue (dollars in thousands, except share and per share data) Revenue: Subscription and support $ 67,078 95 % $ 72,914 95 % Perpetual license 1,470 2 % 1,571 2 % Total product revenue 68,548 97 % 74,485 97 % Professional services 2,188 3 % 2,571 3 % Total revenue 70,736 100 % 77,056 100 % Cost of revenue: Subscription and support (1)(3) 19,829 28 % 23,485 30 % Professional services and other (1) 1,220 2 % 2,051 3 % Total cost of revenue 21,049 30 % 25,536 33 % Gross profit 49,687 70 % 51,520 67 % Operating expenses: Sales and marketing (1) 17,018 24 % 14,289 19 % Research and development (1) 12,455 18 % 12,530 16 % General and administrative (1)(2) 13,232 19 % 17,189 22 % Depreciation and amortization 11,396 16 % 15,094 20 % Acquisition-related expenses — — % 1,094 1 % Impairment of goodwill 87,227 123 % 128,755 167 % Total operating expenses 141,328 200 % 188,951 245 % Loss from operations (91,641) (130) % (137,431) (178) % Other Expense: Interest expense, net (4,958) (7) % (5,461) (7) % Other income (expense), net (78) — % 1,425 2 % Total other expense (5,036) (7) % (4,036) (5) % Loss before provision for income taxes (96,677) (137) % (141,467) (183) % Benefit from income taxes 547 1 % 1,422 1 % Net loss (96,130) (136) % (140,045) (182) % Preferred stock dividends and accretion (1,375) (2) % (1,315) (2) % Net loss attributable to common shareholders $ (97,505) (138) % $ (141,360) (184) % Net loss per common share: Net loss per common share, basic and diluted $ (3.37) $ (4.38) Weighted-average common shares outstanding, basic and diluted 28,917,897 32,259,110 (1) Includes stock-based compensation detailed under Share-based Compensation in “ Item 1. Financial Statements—Note 10. Stockholders' Equity” . (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 27 Table of Contents Revenue Three Months Ended March 31, 2024 2023 % Change (dollars in thousands) Revenue: Subscription and support $ 67,078 $ 72,914 (8) % Perpetual license 1,470 1,571 (6) % Total product revenue 68,548 74,485 (8) % Professional services 2,188 2,571 (15) % Total revenue $ 70,736 $ 77,056 (8) % Percentage of revenue: Subscription and support 95% 95% Perpetual license 2% 2% Total product revenue 97% 97% Professional services 3% 3% Total revenue 100% 100% 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 March 31, 2024 2023 % Change (dollars in thousands) Cost of revenue: Subscription and support (1) $ 19,829 $ 23,485 (16) % Professional services and other 1,220 2,051 (41) % Total cost of revenue 21,049 25,536 (18) % Gross profit $ 49,687 $ 51,520 Percentage of total revenue: Subscription and support (1) 28% 30% Professional services and other 2% 3% Total cost of revenue 30% 33% Gross profit 70% 67% (1) Includes depreciation, amortization and stock compensation expense as follows: Depreciation $ — $ 2 Amortization $ 2,406 $ 3,404 Stock Compensation $ 186 $ 302 28 Table of Contents 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. Operating Expenses Sales and Marketing Expense Three Months Ended March 31, 2024 2023 % Change (dollars in thousands) Sales and marketing (1) $ 17,018 $ 14,289 19 % Percentage of total revenue 24% 19% (1) Includes stock compensation expense as follows: Stock Compensation $ 397 $ 576 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 March 31, 2024 2023 % Change (dollars in thousands) Research and development (1) $ 12,455 $ 12,530 (1) % Percentage of total revenue 18% 16% (1) Includes stock compensation expense as follows: Stock Compensation $ 606 $ 655 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. 29 Table of Contents General and Administrative Expense Three Months Ended March 31, 2024 2023 % Change (dollars in thousands) General and administrative (1) $ 13,232 $ 17,189 (23) % Percentage of total revenue 19% 22% (1) Includes stock compensation expense as follows: Stock compensation $ 2,333 $ 4,929 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 March 31, 2024 2023 % Change (dollars in thousands) Depreciation and amortization: Depreciation $ 292 $ 328 (11) % Amortization 11,104 14,766 (25) % Total depreciation and amortization $ 11,396 $ 15,094 (24) % Percentage of total revenue: Depreciation —% 1% Amortization 16% 19% Total depreciation and amortization 16% 20% 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 March 31, 2024 2023 % Change (dollars in thousands) Acquisition-related expenses $ — $ 1,094 (100) % Percentage of total revenue —% 1% 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. 30 Table of Contents Impairment of goodwill Three Months Ended March 31, 2024 2023 % Change (dollars in thousands) Impairment of goodwill $ 87,227 $ 128,755 (32) % 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 trends in the stock price of our Common Stock. 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 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. See Note 4. 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 2024 and future impairments of goodwill could occur if our stock price declines. Other Income (Expense) Three Months Ended March 31, 2024 2023 % Change (dollars in thousands) Other expense: Interest expense, net $ (4,958) $ (5,461) (9) % Other income (expense), net (78) 1,425 (105) % Total other expense $ (5,036) $ (4,036) 25 % Percentage of total revenue: Interest expense, net (7)% (7)% Other income (expense), net —% 2% Total other expense (7)% (5)% 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. 31 Table of Contents Benefit from Income Taxes Three Months Ended March 31, 2024 2023 % Change (dollars in thousands) Benefit from income taxes $ 547 $ 1,422 (62) % Percentage of total revenue 1% 1% 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. 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 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 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 $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. and our current plans do not demonstrate a need to repatriate them to fund our domestic operations. We do not provide for federal income taxes on the undistributed earnings of our foreign subsidiaries. As of 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 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. 32 Table of Contents The following table summarizes our cash flows for the periods indicated: Three Months Ended March 31, 2024 2023 (dollars in thousands) Consolidated Statements of Cash Flow data: Net cash provided by operating activities $ 5,121 $ 15,825 Net cash used in investing activities (183) (215) Net cash used in financing activities (9,599) (6,781) Effect of exchange rate fluctuations on cash (284) 238 Change in cash and cash equivalents (4,945) 9,067 Cash and cash equivalents, beginning of period 236,559 248,653 Cash and cash equivalents, end of period $ 231,614 $ 257,720 Cash Flows from Operating Activities Cash provided by operating activities is significantly influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business. Included in net cash provided by operations are one-time acquisition related expenses incurred after each acquisition to transact and transform the acquired business into the Company's unified operating platform. Additionally, operating cash flows include the impact of earn-outs payments in excess of original purchase accounting estimates. Our working capital consists primarily of cash, receivables from customers, prepaid assets, unbilled professional services, deferred commissions, accounts payable, accrued compensation and other accrued expenses, acquisition related earnout and holdback liabilities, lease liabilities, and deferred revenues. The volume of professional services rendered, the volume and timing of customer bookings and contract renewals, and the related timing of collections 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 $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. Deferred revenue consists of the unearned portion of booked fees for our software subscriptions and support, which is amortized into revenue in accordance with our revenue recognition policy. We assess our liquidity, in part, through an analysis of new subscriptions invoiced, expected cash receipts on new and existing subscriptions, and our ongoing operating expense requirements. Cash Flows from Investing Activities 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 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 $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. 33 Table of Contents Critical Accounting Policies and the Use of Estimates We prepare our condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of our condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. The following critical accounting policies reflect significant judgments and estimates used in the preparation of our condensed consolidated financial statements: • income taxes; and • goodwill and other intangibles. 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. Actual results could differ materially from these estimates under different assumptions or conditions. Other Key Accounting Policies Our unaudited interim financial statements and other financial information for the three 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”). Please refer to our Annual Report for a detailed description of our critical accounting policies that involve significant management judgment. We evaluate our estimates, judgments and assumptions on an ongoing basis, and while we believe that our estimates, judgments and assumptions are reasonable, they are based upon information available at the time. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions. Recent Accounting Pronouncements For information with respect to recent accounting pronouncements and the impact of these pronouncements on our condensed consolidated financial statements, refer to “Note 2. Basis of Presentation and Summary of Significant Accounting Policies—Recent Accounting Pronouncements” to our condensed consolidated financial statements. 34 Table of Contents