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, 2022, filed on February 28, 2023. 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”). 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 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 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; • the risk that we did not consider another contingency included in this list; • our expectations as to the payment of dividends; • our Share Repurchase Plan (as defined in Note 11. 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 29 Table of Contents • other risk factors included under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 28, 2023, 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, 2022, filed with the SEC on February 28, 2023. 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 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. Our revenue has grown from $149.9 million in the year ended December 31, 2018 to $317.3 million in the year ended December 31, 2022, representing a compound annual growth rate of 21%. During the 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. 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. Acquisitions 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. 30 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 September 30, 2023, 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 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. 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. 31 Table of Contents 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, 2023 2022 (dollars in thousands) Reconciliation of total revenue to core organic revenue: Total revenue $ 74,121 $ 79,549 Less: Perpetual license revenue 1,494 1,684 Professional services revenue 2,665 2,770 Subscription and support revenue from Sunset Assets 8,269 11,775 Overage Charges 1,258 1,711 Core organic revenue $ 60,435 $ 61,609 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 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. 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 (dollars in thousands) Reconciliation of net loss to Adjusted EBITDA: Net loss $ (8,670) $ (6,513) $ (163,862) $ (45,737) Add: Depreciation and amortization expense 17,692 13,140 54,475 41,333 Interest expense, net 2,525 7,354 13,362 22,870 Other expense (income), net (103) (339) (911) (1,698) Benefit from income taxes (1,471) (1,056) (3,126) (1,654) Stock-based compensation expense 5,360 7,527 18,192 34,023 Acquisition-related expense 443 3,586 2,609 18,924 Non-recurring litigation costs 277 15 427 15 Purchase accounting deferred revenue discount 106 1,174 465 4,766 Impairment of goodwill — — 128,755 — Adjusted EBITDA $ 16,159 $ 24,888 $ 50,386 $ 72,842 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 32 Table of Contents 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: • 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; • Adjusted EBITDA may not reflect changes in, or cash requirements for, our working capital needs or contractual commitments; • Adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation; • Adjusted EBITDA does not reflect interest or tax payments that could reduce cash available for use; and • Other companies, including companies in our industry, might calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as comparative measures. Because of these limitations, you should consider Adjusted EBITDA together with other financial performance measures, including various cash flow metrics, net loss and our other GAAP results. 33 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 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 (dollars in thousands, except share and per share data) Revenue: Subscription and support $ 69,962 94 % $ 75,095 94 % $ 213,370 95 % $ 223,739 94 % Perpetual license 1,494 2 % 1,684 2 % 4,317 2 % 5,320 2 % Total product revenue 71,456 96 % 76,779 96 % 217,687 97 % 229,059 96 % Professional services 2,665 4 % 2,770 4 % 7,987 3 % 9,433 4 % Total revenue 74,121 100 % 79,549 100 % 225,674 100 % 238,492 100 % Cost of revenue: Subscription and support (1)(3) 20,853 28 % 23,553 30 % 66,411 29 % 69,747 29 % Professional services and other (1) 2,085 3 % 2,173 2 % 6,241 3 % 7,287 3 % Total cost of revenue 22,938 31 % 25,726 32 % 72,652 32 % 77,034 32 % Gross profit 51,183 69 % 53,823 68 % 153,022 68 % 161,458 68 % Operating expenses: Sales and marketing (1) 16,860 23 % 14,361 18 % 46,904 21 % 45,285 19 % Research and development (1) 12,740 17 % 11,645 15 % 37,713 17 % 35,388 15 % General and administrative (1)(2) 14,597 20 % 14,668 18 % 47,369 21 % 56,110 24 % Depreciation and amortization 14,262 19 % 10,117 13 % 44,209 20 % 31,970 13 % Acquisition-related expenses 443 — % 3,586 4 % 2,609 — % 18,924 8 % Impairment of goodwill — — % — — % 128,755 57 % — — % Total operating expenses 58,902 79 % 54,377 68 % 307,559 136 % 187,677 79 % Loss from operations (7,719) (10) % (554) — % (154,537) (68) % (26,219) (11) % Other Expense: Interest expense, net (2,525) (3) % (7,354) (9) % (13,362) (6) % (22,870) (10) % Other income (expense), net 103 — % 339 — % 911 — % 1,698 1 % Total other expense (2,422) (3) % (7,015) (9) % (12,451) (6) % (21,172) (9) % Loss before provision for income taxes (10,141) (13) % (7,569) (9) % (166,988) (74) % (47,391) (20) % Benefit from income taxes 1,471 1 % 1,056 1 % 3,126 1 % 1,654 1 % Net loss (8,670) (12) % (6,513) (8) % (163,862) (73) % (45,737) (19) % Preferred stock dividends and accretion (1,344) (2) % (546) (1) % (3,988) (2) % (546) — % Net loss attributable to common shareholders $ (10,014) (14) % $ (7,059) (9) % $ (167,850) (74) % $ (46,283) (19) % Net loss per common share: Net loss per common share, basic and diluted $ (0.31) $ (0.22) $ (5.17) $ (1.47) Weighted-average common shares outstanding, basic and diluted 32,579,544 31,655,206 32,438,682 31,401,463 (1) Includes stock-based compensation detailed under Share-based Compensation in “ Item 1. Financial Statements—Note 11. 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. 34 Table of Contents Comparison of the Three and Nine Months Ended September 30, 2023 and 2022 Revenue Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 % Change 2023 2022 % Change (dollars in thousands) Revenue: Subscription and support $ 69,962 $ 75,095 (7) % $ 213,370 $ 223,739 (5) % Perpetual license 1,494 1,684 (11) % 4,317 5,320 (19) % Total product revenue 71,456 76,779 (7) % 217,687 229,059 (5) % Professional services 2,665 2,770 (4) % 7,987 9,433 (15) % Total revenue $ 74,121 $ 79,549 (7) % $ 225,674 $ 238,492 (5) % Percentage of revenue: Subscription and support 94% 94% 95% 94% Perpetual license 2% 2% 2% 2% Total product revenue 96% 96% 97% 96% Professional services 4% 4% 3% 4% Total revenue 100% 100% 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. 35 Table of Contents Cost of Revenue Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 % Change 2023 2022 % Change (dollars in thousands) Cost of revenue: Subscription and support (1) $ 20,853 $ 23,553 (11) % $ 66,411 $ 69,747 (5) % Professional services and other 2,085 2,173 (4) % 6,241 7,287 (14) % Total cost of revenue 22,938 25,726 (11) % 72,652 77,034 (6) % Gross profit $ 51,183 $ 53,823 $ 153,022 $ 161,458 Percentage of total revenue: Subscription and support (1) 28% 30% 29% 29% Professional services and other 3% 2% 3% 3% Total cost of revenue 31% 32% 32% 32% Gross profit 69% 68% 68% 68% (1) Includes depreciation, amortization and stock compensation expense as follows: Depreciation $ 1 $ 2 $ 5 $ 7 Amortization $ 3,429 $ 3,021 $ 10,261 $ 9,356 Stock Compensation $ 246 $ 510 $ 850 $ 1,487 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%. 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. 36 Table of Contents Operating Expenses Sales and Marketing Expense Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 % Change 2023 2022 % Change (dollars in thousands) Sales and marketing (1) $ 16,860 $ 14,361 17 % $ 46,904 $ 45,285 4 % Percentage of total revenue 23% 18% 21% 19% (1) Includes stock compensation expense as follows: Stock Compensation $ 429 $ 612 $ 1,563 $ 3,584 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. Research and Development Expense Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 % Change 2023 2022 % Change (dollars in thousands) Research and development (1) $ 12,740 $ 11,645 9 % $ 37,713 $ 35,388 7 % Percentage of total revenue 17% 15% 17% 15% (1) Includes stock compensation expense as follows: Stock Compensation $ 608 $ 701 $ 1,911 $ 2,107 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. 37 Table of Contents General and Administrative Expense Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 % Change 2023 2022 % Change (dollars in thousands) General and administrative (1) $ 14,597 $ 14,668 — % $ 47,369 $ 56,110 (16) % Percentage of total revenue 20% 18% 21% 24% (1) Includes stock compensation expense as follows: Stock compensation $ 4,077 $ 5,704 $ 13,868 $ 26,845 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. Depreciation and Amortization Expense Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 % Change 2023 2022 % Change (dollars in thousands) Depreciation and amortization: Depreciation $ 451 $ 363 24 % $ 1,088 $ 1,191 (9) % Amortization 13,811 9,754 42 % 43,121 30,779 40 % Total depreciation and amortization $ 14,262 $ 10,117 41 % $ 44,209 $ 31,970 38 % Percentage of total revenue: Depreciation —% 1% 1% —% Amortization 19% 12% 19% 13% Total depreciation and amortization 19% 13% 20% 13% 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. 38 Table of Contents Acquisition-related Expenses Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 % Change 2023 2022 % Change (dollars in thousands) Acquisition-related expenses $ 443 $ 3,586 (88) % $ 2,609 $ 18,924 (86) % Percentage of total revenue —% 4% —% 8% 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. Impairment of goodwill Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 % Change 2023 2022 % 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. 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. Goodwill and Other Intangible Assets ” in the notes to our condensed consolidated financial statements for more information regarding our first quarter 2023 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. 39 Table of Contents Other Income (Expense) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 % Change 2023 2022 % Change (dollars in thousands) Other expense: Interest expense, net $ (2,525) $ (7,354) (66) % $ (13,362) $ (22,870) (42) % Other income (expense), net 103 339 (70) % 911 1,698 (46) % Total other expense $ (2,422) $ (7,015) (65) % $ (12,451) $ (21,172) (41) % Percentage of total revenue: Interest expense, net (3)% (9)% (6)% (10)% Other income (expense), net —% —% —% 1% Total other expense (3)% (9)% (6)% (9)% 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. 40 Table of Contents Benefit from Income Taxes Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 % Change 2023 2022 % Change (dollars in thousands) Benefit from income taxes $ 1,471 $ 1,056 39 % $ 3,126 $ 1,654 89 % Percentage of total revenue 1% 1% 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. operations. This tax benefit is offset by 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. 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. 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 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 December 31, 2022, we had cash and cash equivalents of $248.7 million, $60.0 million of available borrowings under our Revolver, and $522.5 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. 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 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. 41 Table of Contents Credit Facility As described in “ Note 7. 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. The following table summarizes our cash flows for the periods indicated: Nine Months Ended September 30, 2023 2022 (dollars in thousands) Consolidated Statements of Cash Flow data: Net cash provided by operating activities $ 41,154 $ 24,138 Net cash used in investing activities (1,034) (63,074) Net cash provided by (used in) financing activities (48,745) 97,127 Effect of exchange rate fluctuations on cash (437) (5,629) Change in cash and cash equivalents (9,062) 52,562 Cash and cash equivalents, beginning of period 248,653 189,158 Cash and cash equivalents, end of period $ 239,591 $ 241,720 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 $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. 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 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. 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. 42 Table of Contents 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. 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: • revenue recognition and deferred revenue; • income taxes; • deferred sales commissions and sales commission expense; • business combinations; • goodwill and other intangibles; and • 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. 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 and nine months ended September 30, 2023, 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, 2022 filed with the SEC on February 28, 2023 (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. 43 Table of Contents