Upland Software, Inc.: Form 10-Q for the period ended Sep 30, 2023

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
• 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.

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.

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

(dollars in thousands)

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.

(dollars in thousands)

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:

• 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.

Results of Operations

Consolidated Statements of Operations Data

The following tables set forth our results of operations for the specified periods, as well as our results of operations for the specified periods as a percentage of revenue. The period-to-period comparisons of results of operations are not necessarily indicative of results for future periods.

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

34

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

Revenue

(dollars in thousands)

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.

Cost of Revenue

(dollars in thousands)

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.

Operating Expenses

Sales and Marketing Expense

(dollars in thousands)

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

(dollars in thousands)

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.

General and Administrative Expense

(dollars in thousands)

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

(dollars in thousands)

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.

Acquisition-related Expenses

(dollars in thousands)

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

(dollars in thousands)

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.

Other Income (Expense)

(dollars in thousands)

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.

Benefit from Income Taxes

(dollars in thousands)

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.

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:

(dollars in thousands)

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.

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.

We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange and inflation risks, as well as risks relating to changes in the general economic conditions in the countries where we conduct business. Any impact on our statement of operations is mitigated by having an offsetting liability in deferred revenue to partially or completely offset against the outstanding receivable if an account should become uncollectible. Our cash balances are kept in customary operating accounts, a portion of which are insured by the Federal Deposit Insurance Corporation, and uninsured money market accounts. The majority of our cash balances in money market accounts are with the lender under our Credit Facility. To date, we have not used derivative instruments to mitigate the impact of our market risk exposures. We also have not used, nor do we intend to use, derivatives for trading or speculative purposes.

Interest Rate Risk

Our exposure to market risk for changes in interest rates primarily relates to our cash equivalents and variable rate indebtedness. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This objective is accomplished currently by making diversified investments, consisting only of money market mutual funds and certificates of deposit.

In conjunction with our Term Loans under the Credit Facility, we had entered into interest rate swaps with a total notional amount of $540 million for the full seven-year term, effectively fixing the interest rate of our Term Loans at 5.4% prior to August 2023. On August 24, 2023, the Company sold a portion of their interest rate swaps with a total notional amount of $259.9 million and received $20.5 million of net cash proceeds. After giving effect to such sale, $260 million of the Term Loans has an effective annualized fixed interest rate of 5.4%, and the remaining principal outstanding at September 30, 2023 has a floating interest rate of 9.2% based on the interest rate as described in “Note 7. Debt.

The interest rate associated with our $60 million, 5 year, revolving credit facility remains floating.

As of September 30, 2023, we had an outstanding balance of $483.4 under our Credit Facility. Based on the Company’s outstanding balance of variable rate debt at September 30, 2023, a hypothetical change of 100 basis points could have resulted in a $0.4 million increase to total interest expense for the nine months ended September 30, 2023.

Foreign Currency Exchange Risk

Our customers are generally invoiced in the currency of the country in which they are located. In addition, we incur a portion of our operating expenses in foreign currencies, including Australian dollars, Canadian dollars, British pounds, and Euros, and in the future as we expand into other foreign countries, we expect to incur operating expenses in other foreign currencies. As a result, we are exposed to foreign exchange rate fluctuations as the financial results of our international operations and our revenue and operating results could be adversely affected. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business could have resulted in a change in revenue of $5.7 million for the nine months ended September 30, 2023. To date, we have not engaged in any currency hedging strategies. If we decide to hedge our foreign currency exchange rate exposure, we may not be able to hedge effectively due to lack of experience, unreasonable costs, or illiquid markets. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in foreign currency exchange rates.

The non-financial assets and liabilities of our foreign subsidiaries are translated into United States dollars using the exchange rates in effect at the balance sheet date. The related translation adjustments are recorded in a separate component of stockholders' equity in accumulated other comprehensive income (loss). In addition, we have intercompany loans that are used to fund the acquisition of foreign subsidiaries. Due to the long-term nature of these loans, the foreign currency gains (losses) resulting from remeasurement are recognized as a component of accumulated other comprehensive income (loss).

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of such date. Our management has concluded that the condensed consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with GAAP.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting (as defined in Rules 13a- 15(f) and 15d- 15(f) of the Exchange Act) during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, the risk.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2022 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. Except as set forth below, there have been no material changes during 2023 to the risk factors that were included in the Company's Annual Report on Form 10-K filed with the SEC on February 28, 2023.

Our Board has adopted a Tax Benefit Preservation Plan, which may not protect the future availability of the Company’s tax assets in all circumstances and which could delay or discourage takeover attempts that some shareholders may consider favorable.

As of March 31, 2023, we had approximately $147 million of NOLs as well as other tax attributes that could be available in certain circumstances to reduce future U.S. corporate income tax liabilities. Pursuant to Section 382 (“Section 382”) of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), and the Treasury Regulations issued thereunder, a corporation that undergoes an “ownership change” is subject to limitations on its use of its existing NOL and interest expense carryforwards and certain other tax attributes (collectively, “Tax Assets”), which can be utilized in certain circumstances to offset future U.S. tax liabilities. Generally, an “ownership change” occurs if the percentage of the Company’s stock owned by one or more “five percent stockholders” increases by more than fifty percentage points over the lowest percentage of stock owned by such stockholders at any time during the prior three-year period or, if sooner, since the last “ownership change” experienced by the Company. In the event of such an “ownership change,” Section 382 imposes an annual limitation on the amount of post-change taxable income a corporation may offset with pre-change Tax Assets. Similar rules apply in various U.S. state and local jurisdictions. However, with respect to the substantial majority of our Tax Assets, while we have in recent years experienced significant changes in the ownership of our stock, we do not believe we have undergone an “ownership change” that would limit our ability to use these Tax Assets. However, there can be no assurance that the Internal Revenue Service will not challenge this position.

On May 2, 2023, our Board of Directors authorized and declared a dividend of one preferred stock purchase right for each outstanding share of Common Stock. See “Note 11. Stockholders' Equity" for additional information on the terms and operation of the Plan. By adopting the Plan, the Board of Directors is seeking to protect the Company’s ability to use its NOLs and other tax attributes to offset potential future income tax liabilities. The Company’s ability to use such NOLs and other tax attributes would be substantially limited if the Company experiences an “ownership change,” as defined in Section 382. The Plan is intended to make it more difficult for the Company to undergo an ownership change by deterring any person from acquiring 4.9% or more of the outstanding shares of stock without the approval of the Board of Directors. However, there can be no assurance that the Plan will prevent an “ownership change” from occurring for purposes of Section 382, and events outside of our control and which may not be subject to the Plan, such as sales of our stock by certain existing shareholders, may result in such an “ownership change” in the future. While we currently have a full valuation allowance against our NOLs and other historic Tax Assets for financial accounting purposes, if we have undergone or in the future undergo an ownership change that applies to our Tax Assets, our ability to use these Tax Assets could be substantially limited after the ownership change, and this limit could have a substantial adverse effect on our cash flows and financial position.

While the Plan is not principally intended to prevent a takeover, it may have an anti-takeover effect because an “acquiring person” thereunder may be diluted upon the occurrence of a triggering event. Accordingly, the Plan may complicate or discourage a merger, tender offer, accumulations of substantial blocks of our stock, or assumption of control by a substantial holder of our securities. The Plan should not interfere with any merger or other business combination approved by the Board of Directors. Because the Board of Directors may consent to certain transactions, the Plan gives our Board of Directors significant discretion to act in the best interests of shareholders.