Interest expense, net of interest income, was $2.3 million of net interest income in the three months ended September 30, 2024 compared to $2.5 million of net interest expense in the three months ended September 30, 2023, a change of $4.8 million or 193%. This was due primarily to prepayments on the Company’s Term Loans during the three months ended September 30, 2024, which resulted in an additional $9.0 million of the realized deferred gain from August 2023 being released from accumulated other comprehensive income to interest expense, net. In addition to this non-cash interest income, an additional $1.8 million of the deferred gain was amortized as a benefit to interest expense, net in the three months ended September 30, 2024. These interest income amounts were partially offset by interest expense, net of amounts received from interest rate swaps.
Other income (expense), net recognized during the three months ended September 30, 2024 and 2023 were related primarily to foreign currency exchange fluctuations.
For the Nine Months Ended September 30, 2024
Interest expense, net of interest income was $7.7 million in the nine months ended September 30, 2024, compared to $13.4 million in the nine months ended September 30, 2023, a decrease of $5.7 million, or 43%. The decrease in interest expense is primarily attributable to the recognition of $9.0 million of the realized deferred gain from August 2023 being released from accumulated other comprehensive income to interest expense, net due to prepayments on the Company’s Term Loans in August and September 2024. In addition to this non-cash interest income, an additional $4.8 million of the deferred gain was amortized as a credit to interest expense, net in the nine months ended September 30, 2024. These interest income amounts were offset by interest expense, net of amounts received from interest rate swaps.
Other expense, net was $0.1 million in the nine months ended September 30, 2024, compared to other income, net of $0.9 million in the nine months ended September 30, 2023. Other income (expense), net recognized in the nine months ended September 30, 2024 and September 30, 2023 related primarily to foreign currency exchange fluctuations.
Provision for income taxes was $0.5 million in the three months ended September 30, 2024, compared to a benefit from income taxes of $1.5 million in the three months ended September 30, 2023, resulting in an increase in expense from income taxes of $2.0 million. The increase for the three months ended September 30, 2024 related primarily to the foreign income taxes associated with our combined non-U.S. operations.
For the Nine Months Ended September 30, 2024
The provision for income taxes was $1.2 million in the nine months ended September 30, 2024, compared to a benefit from income taxes of $3.1 million in the nine months ended September 30, 2023, an increase in the provision of $4.3 million. This increase was largely comprised of foreign taxes associated with our combined non-U.S. operations, and was partially offset by the non-cash impact of deferred taxes related to the goodwill impairment recorded in the first quarter of 2024.
Liquidity and Capital Resources
We have financed our operations primarily through cash generated from operating activities, the raising of capital including sales of our Common Stock or our convertible preferred stock, and borrowings under our Credit Facility. We believe that current cash and cash equivalents, and cash flows from operating activities will be sufficient to fund our operations for at least the next twelve months.
As of September 30, 2024, we had cash and cash equivalents of $59.7 million and $301.0 million of borrowings outstanding under our Term Loans that mature August 6, 2026. As of December 31, 2023, we had cash and cash equivalents of $236.6 million and $482.1 million of borrowings outstanding under our Term Loans. The $176.8 million decrease in cash and cash equivalents from December 31, 2023 to September 30, 2024 was due primarily to $11.0 million paid to repurchase shares of the Company’s Common Stock, and $181.1 million in debt repayment which includes $177.0 million of prepayments made in the current quarter, offset by $14.9 million in cash flows from operations.
Our cash and cash equivalents held by our foreign subsidiaries was $33.8 million as of September 30, 2024 and $34.8 million as of December 31, 2023. Our intent is to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate them to fund our domestic operations. We do not provide for federal income taxes on the undistributed earnings of our foreign subsidiaries.
As of September 30, 2024 and December 31, 2023, we had a working capital deficit of $1.0 million and a working capital surplus of $169.6 million, respectively.
Credit Facility
As described in “Note 6. Debt—Credit Facility”, the Company has a Credit Facility which includes the fully drawn Term Loans as of September 30, 2024. The Term Loans mature on August 6, 2026. The $60 million revolver under our Credit Facility expired in August 2024 with no amounts outstanding at the time of maturity.
The following table summarizes our cash flows for the periods indicated:
Nine Months Ended September 30,
2024
2023
(dollars in thousands)
Consolidated Statements of Cash Flow data:
Net cash provided by operating activities
$
14,898
$
41,154
Net cash used in investing activities
(562)
(1,034)
Net cash used in financing activities
(192,838)
(48,745)
Effect of exchange rate fluctuations on cash
1,682
(437)
Change in cash and cash equivalents
(176,820)
(9,062)
Cash and cash equivalents, beginning of period
236,559
248,653
Cash and cash equivalents, end of period
$
59,739
$
239,591
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. 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, 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 $14.9 million for the nine months ended September 30, 2024 compared to cash provided by operating activities of $41.2 million for the nine months ended September 30, 2023, a decrease of approximately $26.3 million driven by the $54.6 million decrease in net loss, and offset by the one-time $20.5 million cash gain on the sale of a portion of our interest rate swaps in the nine months ended September 30, 2023. Other changes in cash provided by operating activities were due to a decrease in non-cash interest expense, net related to the $9.0 million deferred gain that was released to interest expense, net, upon the prepayment of $175 million of the Company’s debt in August 2024 as compared to the $2.8 million deferred gain that was released to interest expense, net upon prepayment of $35 million of the Company’s debt in August 2023 as well as changes in working capital for the nine months ended September 30, 2024 which include collections on accounts receivable, increases in prepaid and other current assets, payments of current liabilities and decreases in deferred revenue.
A substantial source of cash is invoicing for subscriptions and support fees in advance, which is recorded as deferred revenue, and is included on our condensed consolidated balance sheets as a liability. Deferred revenue consists of the unearned portion of booked fees for our software subscriptions and support, which is amortized into revenue in accordance with our revenue recognition policy. We assess our liquidity, in part, through an analysis of new subscriptions invoiced, expected cash receipts on new and existing subscriptions, and our ongoing operating expense requirements.
Cash Flows from Investing Activities
Historically, our primary investing activities have consisted of acquisitions of complementary technologies and businesses. As our business grows and evolves, we expect our primary investing activities to continue to expand and refine our product library, customer base, and market access, as well as routine purchases of office equipment.
For the nine months ended September 30, 2024, cash used in investing activities consisted of purchases of property and equipment of $0.6 million compared to $1.0 million of purchases of property and equipment for the nine months ended September 30, 2023. The decrease in purchases of property and equipment was related to a one-time purchase of office software during the nine months ended September 30, 2023.
Cash Flows from Financing Activities
Historically, 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 was $192.8 million for the nine months ended September 30, 2024 compared to $48.7 million for the nine months ended September 30, 2023, an increase of $144.1 million of cash used due to $142.0 million in additional payments on the Company’s Term Loans in the nine months ended September 30, 2024 over payments made in the nine months ended September 30, 2023, and an additional $7.7 million used for Common Stock repurchases in the nine months ended September 30, 2024 over the nine months ended September 30, 2024. These increases in cash used were offset by $5.6 million less cash used in nine months ended
September 30, 2024 for payments for additional consideration to sellers of businesses than in the nine months ended September 30, 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:
•income taxes; and
•goodwill and other intangibles.
We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of November 7, 2024, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
Other Key Accounting Policies
Our unaudited interim financial statements and other financial information for the three and nine months ended September 30, 2024, as presented herein and in “Item 1. Financial Statements” to this Quarterly Report on Form 10-Q, reflect no material changes in our critical accounting policies and estimates as set forth in our Annual Report on Form 10-K for the year ended December 31, 2023 (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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 FDIC insured institutional liquid deposit accounts.
The Company has floating-to-fixed interest rate swap agreements to limit exposure to interest rate risk related to our debt with an annualized fixed rate of 5.4% through the maturity of the Term Loans. The total notional value of the interest rate swap agreements was $256.5 million at September 30, 2024. The Company’s Term Loans have a floating interest rate of 9.1% based on the interest rate as described in “Note 6. Debt. The effective cash interest rate for the nine months ended September 30, 2024 was 6.9%.
As of September 30, 2024, we had an outstanding balance of $301.0 million under our Term Loans that mature August 6, 2026. Based on the Company’s outstanding balance of variable rate debt at September 30, 2024, a hypothetical change of 100 basis points could have resulted in a $1.5 million increase to total interest expense for the nine months ended September 30, 2024.
Foreign Currency Exchange Risk
Our customers are generally invoiced in the currency of the country in which they are located. In addition to the United States dollar, we incur a portion of our operating expenses in foreign currencies, including Australian dollars, Canadian dollars, Indian Rupees, British pounds, Euros, and Israeli New Shekels 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 $4.6 million for the nine months ended September 30, 2024. We have not previously 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).
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, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2024, the end of the period covered by this Quarterly Report on Form 10-Q. As of December 31, 2023, management identified a material weakness in the design and operation of a management review control over prospective financial information used in the Company’s goodwill impairment assessment, and specifically, not sufficiently performing and documenting the reasonableness of significant assumptions used therein. Our remediation efforts with respect to this material weakness are continuing, and we have determined that this material weakness is continuing as of September 30, 2024. As a result, our management, including our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures were not effective as of September 30, 2024 due to the material weakness.
Notwithstanding the identified material weakness, management has concluded that the condensed consolidated financial statements included in this quarterly report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with GAAP.
Remediation Plan
Management, with the oversight of the Audit Committee of the Board of Directors, has evaluated the material weakness described above and designed a remediation plan to enhance our internal control environment. To remediate the material weakness, we plan to enhance the design, including the precision, of management’s review control over prospective financial information used in the Company’s goodwill impairment assessment, and specifically, the evaluation of significant assumptions utilized in the development of that prospective financial information. In addition, we will retain incremental evidence of the execution of such procedures.
Changes in Internal Control over Financial Reporting
Except for the material weakness described above, 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, 2024 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 2023 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. There have been no material changes during 2024 to the risk factors that were included in the Company's Annual Report on Form 10-K, except as shown below.
We have identified a material weakness in our internal control over financial reporting. If we fail to properly remediate this material weakness or if we are otherwise unable to maintain an effective system of internal control over financial reporting, material misstatements in our financial statements could occur and we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in us, our business, results of operations and financial condition, the trading price of our common stock, and our ability to remain listed on Nasdaq.
We identified a material weakness in our internal control over financial reporting related to a management review control over prospective financial information used in the Company’s goodwill impairment assessment, and specifically, not sufficiently performing and documenting the reasonableness of significant assumptions used therein. See Part I, Item 4 “Controls and Procedures” of this quarterly report for additional information about this material weakness and our remediation efforts.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis.
Effective internal controls are necessary to provide reliable financial reporting and prevent fraud. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected and we could become subject to litigation or regulatory investigations. We continue to evaluate and implement steps to remediate the material weakness. These remediation measures may be time consuming and costly and there is no assurance that these initiatives will ultimately have the intended effects. The material weakness in our internal control over financial reporting will not be considered remediated until the management review control operates for a sufficient period of time and management concludes, through testing, that the control operates effectively. If we do not successfully remediate the material weakness, or if other material weaknesses or other deficiencies arise in the future, we may be unable to accurately report our financial results, specifically potential goodwill impairments, which could cause our financial results to be materially misstated. In such case, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports, which could adversely affect investor confidence in us, our business, results of operations and financial condition, the trading price of our common stock, and our ability to remain listed on Nasdaq.
Item 5. Other Information
Rule 10b5-1 Trading Plans
During the three months ended September 30, 2024, none of our officers (as defined in Rule 16a-1(f)) or directors adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K under the Securities Act).
Item 6. Exhibits
See the Exhibit Index immediately following this page, which is incorporated herein by reference.
Inline XBRL (Extensible Business Reporting Language). The following materials from this Quarterly Report on Form 10-Q for the periods ended September 30, 2024, formatted in Inline XBRL: (i) condensed consolidated balance sheets of Upland Software, Inc., (ii) condensed consolidated statements of operations of Upland Software, Inc., (iii) condensed consolidated statements of comprehensive income/(loss) of Upland Software, Inc., (iv) condensed consolidated statement of stockholders’ equity of Upland Software, Inc., (v) condensed consolidated statements of cash flows of Upland Software, Inc. and (vi) notes to unaudited condensed consolidated financial statements of Upland Software, Inc. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
104*
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
