Upland Software Inc.
03/12/2025 | Press release | Distributed by Public on 03/12/2025 14:04
Annual Report for Fiscal Year Ending December 31, 2024 (Form 10-K)
Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in "Item 1A. Risk Factors."
This section and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. 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. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled "Item 1A. Risk Factors" above, which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. For a comparison of the years ended December 31, 2023 and 2022 refer to "Item 7. Management's Discussion and Analysis" in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 22, 2024. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended December 31 and the associated quarters of those fiscal years. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Overview
We enable global businesses to work smarter with over 20 proven cloud software products that increase revenue, reduce costs, and deliver immediate value. Our AI-powered solutions cover knowledge management, content lifecycle and workflow automation, and digital marketing. We service over 10,000 customers ranging from large global corporations and various government agencies as well as small and medium-sized businesses. Our customers operate in a wide variety of industries, including financial services, consulting services, technology, manufacturing, media, telecommunications, government, insurance, non-profit, healthcare, life sciences, legal, retail and hospitality.
Through a series of acquisitions and integrations, we have established a library of diverse software applications under the Upland brand that address specific digital transformation needs. Our revenue has grown from $149.9 million in the year ended December 31, 2018 to $274.8 million in the year ended December 31, 2024, representing a compound annual growth rate of 11%. During the years ended December 31, 2024, 2023 and 2022, non-US revenue as a percent of total revenue was 29%, 30%, and 30%, respectively.
Our operating results in a given period can fluctuate based on the mix of subscription and support, perpetual license and professional services revenue. For the years ended December 31, 2024, 2023 and 2022, our subscription and support revenue represented 95%, 95% and 94% of our total revenue, respectively. Historically, we have sold certain of our applications under perpetual licenses, which also are paid in advance. For the years ended December 31, 2024, 2023 and 2022, our perpetual license revenue accounted for 2%, 2% and 2% of our total revenue, respectively. The support agreements related to our perpetual licenses are one-year in duration and entitle the customer to support and unspecified upgrades. The revenue related to such support agreements is included as part of our subscription and support revenue. Professional services revenue consists of fees related to implementation, data extraction, integration and configuration and training on our applications. For the years ended December 31, 2024, 2023 and 2022, our professional services revenue accounted for 3%, 3%, and 4% of our total revenue, respectively.
To support continued growth, we may pursue acquisitions of complementary technologies and businesses. This may expand our product library, customer base and market access, resulting in increased benefits of scale.
Sunset Assets
In connection with periodic reviews of our business in 2022 and 2023, we decided to discontinue the availability of certain non-strategic product offerings and a limited number of non-strategic customer contracts (collectively referred to as "Sunset
Assets"). As a result of the discontinuation of these Sunset Assets, the Company has established end of life targets and reduced certain expenditures related to the sales and marketing of the Sunset Assets.
It is possible that during future periodic reviews of our business we may determine to add additional non-strategic product offerings or non-strategic customer contracts to Sunset Assets or remove certain product offerings or customer contracts from the classification of Sunset Assets. In either case, we will adjust the revenues attributable to Sunset Assets for the then current period and properly reflect the year over year change for such addition or removal.
Components of Operating Results
Revenue
Subscription and support revenue. We derive our subscription revenue from fees paid to us by our customers for use of our cloud-based applications. We recognize the revenue associated with subscription agreements ratably over the term of the agreement as the customer receives and consumes the benefits of the cloud services through the contract period. Our subscription agreements typically have terms of one to three years.
Our support revenue consists of maintenance fees associated with our perpetual licenses and hosting fees paid to us by our customers. Typically, when purchasing a perpetual license, a customer also purchases maintenance for which we charge a fee, priced as a percentage of the perpetual license fee. Maintenance agreements include the right to support and unspecified upgrades. We recognize the revenue associated with maintenance ratably over the term of the contract. In limited instances, at the customer's option, we may host the software purchased by a customer under a perpetual license on systems at our third-party data centers.
Perpetual license revenue. Perpetual license revenue reflects the revenue recognized from sales of perpetual licenses to new customers and additional perpetual licenses to existing customers. We generally recognize the license fee portion of the arrangement up-front at a point in time when the software is made available to the customer.
Professional services revenue. Professional services revenue consists of fees related to implementation, data extraction, integration and configuration and training on our applications. We generally recognize the revenue associated with these professional services over time as services are performed. Revenues for fixed price services are generally recognized over time applying input methods to estimate progress to completion. Revenues for consumption-based services are generally recognized as the services are performed.
Cost of Revenue
Cost of product revenue. Cost of product revenue consists primarily of hosting costs, personnel-related costs of our customer success and cloud operations teams, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, and allocated overhead, as well as software license fees, internet connectivity, depreciation expenses, amortization of acquired intangible assets, specifically developed technology, as a result of business combination purchase accounting adjustments and pass-through costs directly related to delivering our applications. We expect that cost of revenues may increase in the future depending on the growth rate of our new customers and billings and our need to support the implementation, hosting and support of those new customers. We intend to continue to invest additional resources in expanding the delivery capability of our applications. As we add hosting infrastructure capacity and support personnel in advance of anticipated growth, our cost of product revenue will increase, and if such anticipated revenue growth does not occur, our product gross profit will be adversely affected both in terms of absolute dollars and as a percentage of total revenues in any particular quarterly or annual period. Our cost of product revenue is generally expensed as the costs are incurred. Developed technology is valued using a cost-to-recreate approach and is generally amortized over a four- to nine-year period.
Cost of professional services revenue. Cost of professional services revenue consists primarily of personnel-related costs, including salaries, benefits, bonuses, payroll taxes, stock-based compensation and allocated overhead, as well as the costs of contracted third-party vendors and reimbursable expenses. As most of our personnel are employed on a full-time basis, our cost of professional services revenue is largely fixed in the short-term, while our professional services revenue may fluctuate, leading to fluctuations in professional services gross profit. We expect that cost of professional services as a percentage of total revenues could fluctuate from period to period depending on the growth of our professional services business, the timing of sales of applications, and any associated costs relating to the delivery of services. Our cost of professional services revenue is generally expensed as costs are incurred.
Operating Expenses
Our operating expenses are classified into six categories: sales and marketing, research and development, general and administrative, depreciation and amortization, acquisition-related expenses and impairment of goodwill. For each category, other than depreciation and amortization and impairment of goodwill, the largest expense component is primarily personnel-related costs, which includes salaries, employee benefit costs, bonuses, commissions, stock-based compensation, and payroll taxes. Operating expenses also include allocated overhead costs for facilities, which are allocated to each department based on relative department headcount. Operating expenses are generally recognized as incurred.
Sales and marketing. Sales and marketing expenses primarily consist of personnel-related costs for our sales and marketing staff, including salaries, benefits, deferred commission amortization, bonuses, payroll taxes, stock-based compensation and allocated overhead, as well as costs of promotional events, corporate communications, online marketing, product marketing and other brand-building activities. Sales commissions earned by our sales force, and related payroll taxes, are considered incremental and recoverable costs of obtaining a contract with a customer. Deferred commissions and other costs for a particular customer agreement for initial contracts are amortized over the expected life of the customer relationships while deferred commissions related to contract renewals are amortized over average renewal term. Sales commissions, and related payroll taxes, are earned when the initial customer contract is signed and upon any renewal as our obligation to pay a sales commission arises at these times. Sales and marketing expenses may fluctuate as a percentage of total revenues for a variety of reasons including the timing of such expenses, in any particular quarter or annual period.
Research and development. Research and development expenses primarily consist of personnel-related costs of our research and development staff, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, allocated overhead and costs of certain third-party contractors. Research and development costs related to the development of our software applications are generally recognized as incurred. We have devoted our product development efforts primarily to enhancing the functionality, and expanding the capabilities, of our applications. Investment tax credits are included as a reduction of research and development costs. Investment tax credits are recorded in the year in which the research and development costs of the capital expenditures are incurred, provided that we are reasonably certain that the credits will be received. The investment tax credit must be examined and approved by the tax authorities, and it is possible that the amounts granted will differ from the amounts recorded.
General and administrative. General and administrative expenses primarily consist of personnel-related costs for our executive, administrative, accounting and finance, information technology, legal, accounting and human resource staff, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, allocated overhead, professional fees and other corporate expenses. We have recently incurred, and expect to continue to incur, additional expenses as we grow our operations, including potentially higher legal, corporate insurance, accounting and auditing expenses and the additional costs of enhancing and maintaining our internal control environment. General and administrative expenses may fluctuate as a percentage of revenue, and overtime we expect that general and administrative expenses will decrease as a percent of revenue due to operational efficiencies.
Depreciation and amortization. Depreciation and amortization expenses primarily consist of depreciation and amortization of acquired intangible assets, specifically customer relationships and trade names, as a result of business combination purchase accounting adjustments. The valuation of identifiable intangible assets reflects management's estimates based on, among other factors, use of established valuation methods. Customer relationships are valued using an income approach, which estimates fair value based on the earnings and cash flow capacity of the subject asset and are amortized over a seven to ten-year period. The value of the trade name intangibles are determined using a relief from royalty method, which estimates fair value based on the value the owner of the asset receives from not having to pay a royalty to use the asset and are amortized over mostly a three-year period.
Acquisition-related expenses. Acquisition-related expenses are typically incurred for up to four quarters after each acquisition, with the majority of these costs being incurred within six to nine months, to transform the acquired business into the Company's UplandOne platform. These expenses can vary based on the size, timing and location of each acquisition. These acquisition-related expenses include transaction related expenses such as banker fees, legal and professional fees, insurance costs and deal bonuses. These acquisition-related expenses also include transformational expenses such as severance, compensation for transitional personnel, office lease terminations and vendor cancellations. Generally these acquisition-related expenses should no longer be material if the Company has done no acquisitions after one year.
Impairment of goodwill. 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. See "Note 5. Goodwill and Other Intangible Assets" in the notes to our consolidated financial statements for more information regarding our first quarter 2024, our first quarter 2023 and our fourth quarter 2022 goodwill impairment charges. We will continue to evaluate goodwill impairment in future periods.
Total Other Expense
Total other expense consists primarily of amortization of debt issuance costs over the term of the related term loan, revaluation of foreign subsidiaries, interest expense on outstanding debt, partially offset by interest income on our interest-bearing cash balances held in money market accounts. We participate in interest rate swap agreements for the purpose of reducing variability in interest rate payments on the Company's outstanding term loans. These interest rate swaps fix a portion of the Company's interest rate (including the hedge premium) at 5.4% for the term of the Credit Facility (as hereinafter defined in "Liquidity and Capital Resources-Credit Facility"). In addition, gains/losses on divested assets that meet the definition of a business under ASC 805-10, Business Combination-Overall, are included in Total other expense.
Income Taxes
Because we have not generated domestic net income in any period to date, we have recorded a full valuation allowance against our domestic net deferred tax assets, exclusive of tax deductible goodwill. We have historically not recorded any material provision for federal or state income taxes, other than deferred taxes related to tax deductible goodwill and current taxes in certain separate company filing states and states in which loss carryforwards do not fully offset taxable income. The balance of the tax benefit for the years ended December 31, 2024, 2023 and 2022, outside of tax deductible goodwill and current taxes in separate filing states, is related to foreign income taxes, primarily operations of our subsidiaries in Canada and Ireland, and to the release of valuation allowances associated with acquisitions of domestic entities with a benefit generated in the UK and Australia fully offset by valuation allowances. Realization of any of our domestic deferred tax assets depends upon future earnings, the timing and amount of which are uncertain. Based on analysis of acquired net operating losses, utilization of our net operating losses will be subject to annual limitations due to the ownership change rules under the Internal Revenue Code of 1986, as amended, or the Code, and similar state provisions. In the event we have subsequent changes in ownership, the availability of net operating losses and research and development credit carryovers could be further limited.
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).
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||||||||||||||||||||
| Amount | Percent of Revenue | Amount | Percent of Revenue | Amount | Percent of Revenue | ||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||
| Subscription and support | $ | 260,685 | 95% | $ | 281,554 | 95% | $ | 297,887 | 94% | ||||||||||||||||||||||||||
| Perpetual license | 5,837 | 2% | 6,077 | 2% | 6,948 | 2% | |||||||||||||||||||||||||||||
| Total product revenue | 266,522 | 97% | 287,631 | 97% | 304,835 | 96% | |||||||||||||||||||||||||||||
| Professional services | 8,272 | 3% | 10,221 | 3% | 12,468 | 4% | |||||||||||||||||||||||||||||
| Total revenue | 274,794 | 100% | 297,852 | 100% | 317,303 | 100% | |||||||||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||||||||||||||
| Subscription and support (1)(2) | 76,037 | 28% | 88,894 | 30% | 93,948 | 30% | |||||||||||||||||||||||||||||
| Professional services and other | 5,055 | 2% | 7,467 | 2% | 9,793 | 3% | |||||||||||||||||||||||||||||
| Total cost of revenue | 81,092 | 30% | 96,361 | 32% | 103,741 | 33% | |||||||||||||||||||||||||||||
| Gross profit | 193,702 | 70% | 201,491 | 68% | 213,562 | 67% | |||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||
| Sales and marketing (1) | 66,301 | 24% | 64,342 | 22% | 59,416 | 19% | |||||||||||||||||||||||||||||
| Research and development (1) | 47,365 | 17% | 49,375 | 17% | 46,187 | 15% | |||||||||||||||||||||||||||||
| General and administrative (1) | 49,463 | 18% | 61,264 | 21% | 70,462 | 22% | |||||||||||||||||||||||||||||
| Depreciation and amortization | 45,622 | 17% | 58,614 | 20% | 43,669 | 14% | |||||||||||||||||||||||||||||
| Acquisition-related expenses | 19 | -% | 3,060 | -% | 21,556 | 6% | |||||||||||||||||||||||||||||
| Impairment of goodwill | 87,227 | 32% | 128,755 | 43% | 12,500 | 4% | |||||||||||||||||||||||||||||
| Total operating expenses | 295,997 | 108% | 365,410 | 123% | 253,790 | 80% | |||||||||||||||||||||||||||||
| Loss from operations | (102,295) | (38)% | (163,919) | (55)% | (40,228) | (13)% | |||||||||||||||||||||||||||||
| Other expense: | |||||||||||||||||||||||||||||||||||
| Interest expense, net | (8,939) | (3)% | (18,684) | (6)% | (29,145) | (9)% | |||||||||||||||||||||||||||||
| Other income (expense), net | 1,142 | -% | 236 | -% | (781) | -% | |||||||||||||||||||||||||||||
| Total other expense | (7,797) | (3)% | (18,448) | (6)% | (29,926) | (9)% | |||||||||||||||||||||||||||||
| Loss before benefit from (provision for) income taxes | (110,092) | (41)% | (182,367) | (61)% | (70,154) | (22)% | |||||||||||||||||||||||||||||
| Benefit from (provision for) income taxes | (2,640) | -% | 2,493 | 1% | 1,741 | -% | |||||||||||||||||||||||||||||
| Net loss | (112,732) | (41)% | (179,874) | (60)% | (68,413) | (22)% | |||||||||||||||||||||||||||||
| Preferred stock dividends and accretion | (5,592) | (2)% | (5,347) | (2)% | (1,846) | (1)% | |||||||||||||||||||||||||||||
| Net loss attributable to common stockholders (3) | $ | (118,324) | (43)% | $ | (185,221) | (62)% | $ | (70,259) | (22)% | ||||||||||||||||||||||||||
| Net loss per common share: | |||||||||||||||||||||||||||||||||||
| Loss from continuing operations per common share, basic and diluted (3) | $ | (4.26) | $ | (5.77) | $ | (2.23) | |||||||||||||||||||||||||||||
| Weighted-average common shares outstanding, basic and diluted (3) | 27,789,248 | 32,074,906 | 31,528,881 | ||||||||||||||||||||||||||||||||
| (1) Includes stock-based compensation. See table below for stock-based compensation by operating expense line item. | |||||||||||||||||
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Stock-based compensation: | |||||||||||||||||
| Cost of revenue | $ | 765 | $ | 952 | $ | 1,984 | |||||||||||
| Research and development | 2,095 | 2,463 | 2,733 | ||||||||||||||
| Sales and marketing | 1,512 | 2,059 | 4,239 | ||||||||||||||
| General and administrative | 10,898 | 17,400 | 32,646 | ||||||||||||||
| Total | $ | 15,270 | $ | 22,874 | $ | 41,602 | |||||||||||
(2) Includes depreciation and amortization of $9.4 million, $13.4 million and $12.5 million in the years ended December 31, 2024, 2023 and 2022, respectively.
(3) See "Note 8 Net Loss Per Share" in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion and a reconciliation of historical net loss attributable to common stockholders and weighted average shares outstanding for historical basic and diluted net loss per share calculations.
Comparison of Years Ended December 31, 2024 and December 31, 2023
Revenue
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||||||||||||||||||||
| Amount | Percent of Revenue | Amount | Percent of Revenue | Amount | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||
| Subscription and support | $ | 260,685 | 95% | $ | 281,554 | 95% | $ | (20,869) | (7)% | ||||||||||||||||||||||||||
| Perpetual license | 5,837 | 2% | 6,077 | 2% | (240) | (4)% | |||||||||||||||||||||||||||||
| Total product revenue | 266,522 | 97% | 287,631 | 97% | (21,109) | (7)% | |||||||||||||||||||||||||||||
| Professional services | 8,272 | 3% | 10,221 | 3% | (1,949) | (19)% | |||||||||||||||||||||||||||||
| Total revenue | $ | 274,794 | 100% | $ | 297,852 | 100% | $ | (23,058) | (8)% | ||||||||||||||||||||||||||
Subscription and support revenue was $260.7 million in the year ended December 31, 2024, compared to $281.6 million in the year ended December 31, 2023, a decrease of $20.9 million, or 7%. $17.1 million of the decrease relates to declining revenue from Sunset Assets as a result of reduced sales and marketing focus on those assets. Subscription and support revenues related to overage charges decreased by $1.4 million as a result of variable demand fluctuations in the year ended December 31, 2024. Additional decreases in Subscription and support revenue of $2.4 million are due to decreases in customer renewals across product lines and industries.
Perpetual license revenue was $5.8 million in the year ended December 31, 2024, compared to $6.1 million in the year ended December 31, 2023, a decrease of $0.3 million, or 4%. The decrease is attributable to decreases in customer purchases of on-premise software.
Professional services revenue was $8.3 million in the year ended December 31, 2024, compared to $10.2 million in the year ended December 31, 2023, a decrease of $1.9 million, or 19%. Professional services revenue related to our Sunset Assets decreased by $0.5 million. The remaining decrease in professional services revenue is attributable to fewer implementation projects in the year ended December 31, 2024.
Cost of Revenue and Gross Profit Margin
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||||||||||||||||||||
| Amount | Percent of Revenue | Amount | Percent of Revenue | Amount | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||||||||||||||
| Subscription and support (1) | $ | 76,037 | 28% | $ | 88,894 | 30% | $ | (12,857) | (14)% | ||||||||||||||||||||||||||
| Professional services | 5,055 | 2% | 7,467 | 2% | (2,412) | (32)% | |||||||||||||||||||||||||||||
| Total cost of revenue | 81,092 | 30% | 96,361 | 32% | (15,269) | (16)% | |||||||||||||||||||||||||||||
| Gross profit | $ | 193,702 | 70% | $ | 201,491 | 68% | $ | (7,789) | (4)% | ||||||||||||||||||||||||||
| (1) Includes depreciation and amortization expense as follows: | |||||||||||||||||||||||||||||||||||
| Depreciation | $ | - | -% | $ | 5 | -% | $ | (5) | (100)% | ||||||||||||||||||||||||||
| Amortization | $ | 9,364 | 3% | $ | 13,366 | 4% | $ | (4,002) | (30)% | ||||||||||||||||||||||||||
Cost of subscription and support revenue was $76.0 million in the year ended December 31, 2024, compared to $88.9 million in the year ended December 31, 2023, a decrease of $12.9 million, or 14%. This decrease was the result of a decrease in non-cash amortization of intangible assets of $4.0 million associated with our Sunset Assets, a decrease of $4.9 million in hosting and infrastructure costs, a decrease of $2.9 million in personnel-related costs and a decrease of $1.4 million in variable telecom carrier costs and other expenses. These decreases were offset by an increase in professional fees of $0.4 million.
Cost of professional services revenue was $5.1 million in the year ended December 31, 2024, compared to $7.5 million in the year ended December 31, 2023, a decrease of $2.4 million, or 32%. The decrease in cost of professional services revenue is related to a decrease in personnel-related costs resulting from decreased professional services delivered.
Operating Expenses
Sales and Marketing Expense
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||||||||||||||||||||
| Amount | Percent of Revenue | Amount | Percent of Revenue | Amount | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 66,301 | 24% | $ | 64,342 | 22% | $ | 1,959 | 3% | ||||||||||||||||||||||||||
Sales and marketing expense was $66.3 million in the year ended December 31, 2024, compared to $64.3 million in the year ended December 31, 2023, an increase of $2.0 million, or 3%. Sales and marketing expense increased $4.3 million as a direct result of our intentional investment in our go to market strategy, including increased marketing spend and personnel-related costs to strengthen our marketing and demand generation. This increase is partially offset by a decrease of $2.5 million in sales and marketing expense related to our Sunset Assets.
Research and Development Expense
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | ||||||||||||||||||||||||||||||||||||
| Amount | Percent of Revenue | Amount | Percent of Revenue | Amount | % Change | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 47,365 | 17% | $ | 49,375 | 17% | $ | (2,010) | (4)% | |||||||||||||||||||||||||||||
Research and development expense was $47.4 million in 2024, compared to $49.4 million in 2023, a decrease of $2.0 million, or 4%. Research and development expense decreased primarily due to a decrease of $2.0 million of research and development costs related to our Sunset Assets offset by a slight increase in personnel-related costs related to product development.
General and Administrative Expense
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||||||||||||||||||||
| Amount | Percent of Revenue | Amount | Percent of Revenue | Amount | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| General and administrative | $ | 49,463 | 18% | $ | 61,264 | 21% | $ | (11,801) | (19)% | ||||||||||||||||||||||||||
General and administrative expense was $49.5 million in 2024, compared to $61.3 million in 2023, a decrease of $11.8 million, or 19%. This decrease was driven primarily by lower non-cash stock compensation expense of $6.5 million due to lower grant date fair values, lower personnel-related costs of $2.9 million in response to intentional cost cutting measures, lower professional fees of $2.1 million primarily due to lower tax fees and legal fees related to non-recurring litigation and decreases in insurance and other costs of $0.2 million.
Depreciation and Amortization Expense
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||||||||||||||||||||
| Amount | Percent of Revenue | Amount | Percent of Revenue | Amount | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Depreciation and amortization: | |||||||||||||||||||||||||||||||||||
| Depreciation | $ | 1,222 | 1% | $ | 1,414 | 1% | $ | (192) | (14)% | ||||||||||||||||||||||||||
| Amortization | 44,400 | 16% | 57,200 | 19% | (12,800) | (22)% | |||||||||||||||||||||||||||||
| Total depreciation and amortization | $ | 45,622 | 17% | $ | 58,614 | 20% | $ | (12,992) | (22)% | ||||||||||||||||||||||||||
Depreciation and amortization expense was $45.6 million in 2024, compared to $58.6 million in 2023, a decrease of $13.0 million, or 22%. The decrease in amortization expense relates to the 2023 reduction in the useful life expected for the acquired intangible assets such as customer relationships and tradenames for our Sunset Assets. The decrease in depreciation is due to assets becoming fully depreciated during 2024.
Acquisition-related Expense
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||||||||||||||||||||
| Amount | Percent of Revenue | Amount | Percent of Revenue | Amount | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Acquisition-related expense | $ | 19 | -% | $ | 3,060 | -% | $ | (3,041) | (99)% | ||||||||||||||||||||||||||
Acquisition-related expense was $0.0 million in 2024, compared to $3.1 million for 2023, a decrease of $3.1 million, or 99%. The decrease in expense was a result of no acquisitions in 2024. Expense in 2023 primarily related to final settlements of the 2022 acquisitions.
Impairment of goodwill
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||||||||||||||||||||
| Amount | Percent of Revenue | Amount | Percent of Revenue | Amount | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Impairment of goodwill | $ | 87,227 | 32% | $ | 128,755 | 43% | $ | (41,528) | (32)% | ||||||||||||||||||||||||||
Goodwill impairment is recognized on a non-recurring basis when the carrying value (or GAAP basis book value) of our Company (which is our only reporting unit) exceeds the estimated fair value of our Company as determined by reference to a number of factors and assumptions, including the trends in the stock price of our Common Stock. We assess goodwill for impairment annually on October 1st, or more frequently when an event occurs which could cause the carrying value of our Company to exceed the estimated fair value of our Company. As a result of declines in our stock price during the three months ended March 31, 2024 and the three months ended March 31, 2023, we performed goodwill impairment evaluations in each quarter which resulted in impairments of goodwill was $87.2 million and $128.8 million, respectively.
Other Expense, net
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||||||||||||||||||||
| Amount | Percent of Revenue | Amount | Percent of Revenue | Amount | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Other Expense: | |||||||||||||||||||||||||||||||||||
| Interest expense, net | $ | (8,939) | (3)% | $ | (18,684) | (6)% | $ | 9,745 | (52)% | ||||||||||||||||||||||||||
| Other expense, net | 1,142 | -% | 236 | -% | 906 | 384% | |||||||||||||||||||||||||||||
| Total other expense | $ | (7,797) | (3)% | $ | (18,448) | (6)% | $ | 10,651 | (58)% | ||||||||||||||||||||||||||
Interest expense, net was $8.9 million in 2024, compared to $18.7 million for 2023, a decrease of $9.8 million, or 52%. The decrease results from the recognition of $10.6 million more in benefit from the recognition of amounts reclassified from accumulated other comprehensive income benefit related to our interest rate swaps, the decrease in cash interest expense of $3.1 million net of the cash flows from the interest rate swaps due to lower interest rates as well as a decrease in outstanding borrowings on our Credit Facility and the decrease of $0.2 million of other interest charges. These decreases in interest expense, net were offset by the recognition of the decline in fair value of the de-designated interest rates swaps after August 2024 of $1.6 million and the decrease in interest income on our deposits of $2.5 million due to lower interest rates and lower invested cash balance.
Other income, net was $1.1 million in 2024, compared to other income of $0.2 million in 2023, a change $0.9 million. The difference in other expense is primarily due to an increase in foreign currency exchange gains compared to 2023.
Benefit from Income Taxes
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||||||||||||||||||||
| Amount | Percent of Revenue | Amount | Percent of Revenue | Amount | % Change | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Benefit from (provision for) income taxes | $ | (2,640) | -% | $ | 2,493 | 1% | $ | (5,133) | (206)% | ||||||||||||||||||||||||||
| Effective income tax rate | 2.4 | % | (1.4) | % | |||||||||||||||||||||||||||||||
Provision for income taxes was $2.6 million in 2024, compared to a benefit for income taxes of $2.5 million in 2023, an increase in the provision for income taxes of $5.1 million, or 206%. This increased expense was primarily related to the increased expense in Canada and reduced benefit in the UK for 2024. The 2024 increased expense was also impacted by a material goodwill impairment in 2024, changes in deferred tax liabilities associated with amortization of U.S. tax deductible goodwill and U.S. state taxes in certain states in which the Company does not file on a consolidated basis or have net operating loss carryforwards. The increase in tax expense was partially offset by reduced tax expense related to other international operations.
Comparison of Years Ended December 31, 2023 and December 31, 2022
For a comparison of the years ended December 31, 2023 and 2022 refer to "Item 7. Management's Discussion and Analysis" in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 22, 2024.
Key Metrics and Non-GAAP Financial Measures
In addition to the GAAP financial measures described in "Results of Operations" above, 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 (in thousands, except percentages):
| As of December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Other Financial Data (unaudited): | |||||||||||||||||
| Annualized recurring revenue value at year-end | $ | 225,620 | $ | 242,136 | $ | 266,278 | |||||||||||
| Annual net dollar retention rate | 96% | 95% | 95% | ||||||||||||||
| Adjusted EBITDA | $ | 55,638 | $ | 64,438 | $ | 97,105 | |||||||||||
Key Metrics
Annualized recurring revenue value at year-end
We define annualized recurring revenue ("ARR") as the value as of December 31 that equals the monthly value of our recurring revenue under support and subscription contracts excluding month-to-month contracts measured as of December 31 multiplied by 12. This measure excludes the revenue value of uncontracted overage fees, on-demand or monthly usage service fees. As a metric, ARR mitigates fluctuations in revenue recognition due to certain factors, including contract term and the sales mix of recurring revenue contracts and perpetual licenses. ARR does not have any standardized meaning and may not be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenues and deferred revenues and is not intended to be combined with or to replace either of those elements of our financial statements. ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our clients. Refer to "Note 3 Acquisitions" and "Note 5 Goodwill and Other Intangible Assets" in the notes to the consolidated financial statements for further discussion.
Our ARR was $225.6 million, $242.1 million and $266.3 million as of December 31, 2024, 2023 and 2022, respectively.
Annual net dollar retention rate
We measure our ability to grow and retain ARR from existing clients using a metric we refer to as our annual net dollar retention rate. We define annual net dollar retention rate as of December 31 as the aggregate ARR as of December 31 from those customers that were also customers as of December 31 of the prior fiscal year, divided by the aggregate ARR value from all customers as of December 31 of the prior fiscal year. This measure excludes the revenue value of uncontracted overage fees, on-demand service fees and our Sunset Assets.
Our annual net dollar retention rate was 96%, 95% and 95% as of December 31, 2024, 2023 and 2022, respectively.
Non-GAAP Financial Measures
Adjusted EBITDA
We monitor Adjusted EBITDA to help us evaluate the effectiveness and efficiency of our operations. We define Adjusted EBITDA as net income (loss), calculated in accordance with GAAP, adjusted for depreciation and amortization expense, net interest expense, loss on debt extinguishment, net other expense, benefit from income taxes, stock-based compensation expense, acquisition-related expense, purchase accounting deferred revenue discount and impairment of goodwill.
Adjusted EBITDA is a non-GAAP financial measure that our management believes 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 our 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; and
•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:
•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.
•Impairment of goodwill and depreciation and amortization are non-cash charges, and the assets being depreciated or amortized, which contribute to the generation of revenue, will often have to be replaced in the future and Adjusted EBITDA does not reflect cash requirements for such replacements; however, much of the depreciation and amortization relates to amortization of acquired intangible assets as well as the goodwill as a result of business combination purchase accounting adjustments, which will not need to be replaced in the future;
•Adjusted EBITDA may not reflect changes in, or cash requirements for, our working capital needs or contractual commitments;
•Adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation;
•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.
The following table presents a reconciliation of Net loss from continuing operations to Adjusted EBITDA for each of the periods indicated (in thousands).
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Net loss | $ | (112,732) | $ | (179,874) | $ | (68,413) | |||||||||||
| Depreciation and amortization expense | 54,986 | 71,985 | 56,146 | ||||||||||||||
| Interest expense, net | 8,939 | 18,684 | 29,145 | ||||||||||||||
| Other expense, net | (1,142) | (236) | 781 | ||||||||||||||
| Benefit from (provision for) income taxes | 2,640 | (2,493) | (1,741) | ||||||||||||||
| Stock-based compensation expense | 15,270 | 22,874 | 41,602 | ||||||||||||||
| Acquisition-related expense | 19 | 3,060 | 21,556 | ||||||||||||||
| Non-recurring litigation costs | 187 | 1,126 | 33 | ||||||||||||||
| Purchase accounting deferred revenue discount | 244 | 557 | 5,496 | ||||||||||||||
| Impairment of goodwill | 87,227 | 128,755 | 12,500 | ||||||||||||||
| Adjusted EBITDA | $ | 55,638 | $ | 64,438 | $ | 97,105 | |||||||||||
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, 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 December 31, 2024, our Core Organic Growth Rate was 0.0%.
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
Overage Charges are subscription and support revenues earned in addition to contractual minimum customer commitments as a result of the usage volume of services including text and e-mail messaging and third-party pass-through costs that exceed the levels stipulated in contracts with the Company.
The following table represents a reconciliation of total revenue, the most comparable GAAP measure, to core organic revenue for each of the periods indicated.
| Three Months Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (dollars in thousands) | |||||||||||
| Reconciliation of total revenue to core organic revenue: | |||||||||||
| Total revenue | $ | 68,027 | $ | 72,178 | |||||||
| Less: | |||||||||||
| Perpetual license revenue | 1,531 | 1,760 | |||||||||
| Professional services revenue | 2,164 | 2,234 | |||||||||
| Subscription and support revenue from Sunset Assets | 7,084 | 10,405 | |||||||||
| Overage Charges | 908 | 1,413 | |||||||||
| Core organic revenue | $ | 56,340 | $ | 56,366 | |||||||
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 and our convertible preferred stock, and borrowings under our Credit Facility (as hereinafter defined). 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.
The following table summarizes our liquidity for the periods indicated:
| Year Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (dollars in thousands) | |||||||||||
| Cash, cash equivalents and restricted cash | $ | 57,052 | $ | 236,559 | |||||||
|
Available borrowings from our Revolving Credit Facility (1)
|
- | 60,000 | |||||||||
| Total Liquidity | $ | 57,052 | $ | 296,559 | |||||||
(1) Loans under the Revolver could be borrowed, repaid and reborrowed until it matured on August 6, 2024.
The $179.5 million decrease in cash and cash equivalents from December 31, 2023 to December 31, 2024 was due primarily to the $183.0 million additional principal pay down of amounts outstanding under our Term Loans during 2024 compared to $35 million additional principal payments in 2023. In addition, cash flow from operations was $25.7 million less than in prior year due primarily to the one time cash inflow of $20.5 million from the sale of a portion of our interest rate swaps and other net cash inflows from operations.
Our cash and cash equivalents held by our foreign subsidiaries was $32.4 million as of December 31, 2024. If these funds held by our foreign subsidiaries are needed for our domestic operations, we may be required to accrue and pay U.S. taxes to repatriate these funds to the U.S. However, 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 December 31, 2024 and 2023, we had a working capital deficit of $2.0 million and a working capital surplus of $169.6 million, respectively.
Credit Facility
Our Credit Facility, as defined and described in "Note 7. Debt", is comprised of fully drawn Term Loans as of December 31, 2024. The Term Loans are repayable on a quarterly basis with any amount remaining unpaid due and payable in full on August 6, 2026. Our $60.0 million revolving credit facility matured on August 6, 2024 with no amounts drawn.
The following table summarizes our cash flows for the periods indicated:
| Year Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (dollars in thousands) | |||||||||||
| Consolidated Statements of Cash Flow Data: | |||||||||||
| Net cash provided by operating activities | $ | 24,239 | $ | 49,943 | |||||||
| Net cash used in investing activities | (882) | (1,220) | |||||||||
| Net cash used in financing activities | (202,307) | (61,384) | |||||||||
| Effect of exchange rate fluctuations on cash, cash equivalents and restricted cash | (557) | 567 | |||||||||
| Change in cash, cash equivalents and restricted cash | (179,507) | (12,094) | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period | 236,559 | 248,653 | |||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 57,052 | $ | 236,559 | |||||||
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, 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 and renewals on those bookings, 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 $24.2 million for 2024 compared to $49.9 million for 2023, a decrease of $25.7 million. This decrease in operating cash flow is generally attributable to a one-time $20.5 million cash gain on the sale of a portion of our interest rate swaps in August 2023. The working capital sources of cash outweighed the working capital uses of cash but 2024 non-cash adjustments to net loss were less than 2023 due to decreases in goodwill impairment, depreciation and amortization, stock-based compensation and non-cash interest.
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 consolidated balance sheet as a liability. Deferred revenue consists of the unearned portion of booked fees for our software subscriptions and support and for professional services, 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.
Cash used in investing activities consisted of purchases of property and equipment of $0.9 million in 2024 compared to purchases of property and equipment of $1.2 million in 2023, a decrease of $0.3 million as a result of fewer purchases of office equipment in 2024.
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 of our debt obligations, and share based tax payment activity.
Cash used in financing activities increased $140.9 million in 2024 compared to 2023. The additional uses of cash in financing activities relates primarily to additional prepayments of $183.0 million of the outstanding Term Loans in 2024 compared to prepayments of $35.0 million in 2023. This is offset by cash used for Common Stock repurchases of $11.0 million in 2024 compared to $14.1 million in 2023.
Contractual Payment Obligations
The following table summarizes our future contractual obligations as of December 31, 2024 (in thousands):
| Next 12 Months | Beyond 12 Months | Total | ||||||||||||||||||
|
Debt Obligations(1)
|
$ | 5,400 | $ | 288,250 | $ | 293,650 | ||||||||||||||
|
Interest on Debt Obligations (2)
|
24,902 | 14,650 | 39,552 | |||||||||||||||||
|
Operating Lease Obligations (3)
|
1,130 | 746 | 1,876 | |||||||||||||||||
|
Purchase Commitments (4)
|
16,469 | 3,651 | 20,120 | |||||||||||||||||
| Total | $ | 47,901 | $ | 307,297 | $ | 355,198 | ||||||||||||||
(1)Consists of contractual principal payments on our Credit Facility. See "Liquidity and Capital Resources" above for further discussion regarding our Credit Facility.
(2)Future interest on debt obligations is calculated using the interest rate effective as of December 31, 2024. We have entered into floating-to-fixed interest rate swap agreements to limit exposure to interest rate risk related to a portion of our debt. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk-Interest Rate Risk" for further discussion.
(3)We lease office space under operating leases that expire between 2024 and 2033. Operating lease obligations above do not include the impact of future rental income related to agreements we have entered into to sublet excess office space as a result of our transformation activities.
(4)We define a purchase commitment as an agreement that is enforceable and legally binding and that specifies all significant terms, including: fixed or minimum services to be used; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included. In addition, purchase orders are not included as they represent authorizations to purchase rather than binding agreements.
The Company has purchase commitments related to hosting services, third-party technology used in the Company's solutions and for other services the Company purchases as part of normal operations. In certain cases these arrangements require a minimum annual purchase commitment.
Critical Accounting Policies and the Use of Estimates
We prepare our consolidated financial statements in accordance with GAAP. The preparation of 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.
While our significant accounting policies are more fully described in "Note 2. Basis of Presentation and Summary of Significant Accounting Policies" in the notes to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, 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.
Income Taxes
We are subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in evaluating and estimating our provision for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. The Tax Act has provisions that require additional guidance on specific interpretations of the tax law changes. Our provision for income taxes could be adversely affected by our earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where
we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and geographies and changes to our existing businesses, acquisitions and investments, changes in our deferred tax assets and liabilities including changes in our assessment of valuation allowances, changes in the relevant tax laws or interpretations of these tax laws, and developments in current and future tax examinations.
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities will be recognized in the period that includes the enactment date. We make significant estimates in determining the value of our deferred tax assets. These estimates include, but are not limited to, the expected reversal periods of deferred tax assets and liabilities, the availability of net operating losses and other carryovers and consideration of the future ability to generate taxable income. These estimates are inherently uncertain and unpredictable, and if different estimates were used, it would impact the value of our deferred tax assets and the income tax benefit recognized in fiscal 2024 and in future periods when the deferred taxes are realized.
A valuation allowance is established against our deferred tax assets to reduce their carrying value to an amount that is more likely than not to be realized. As of December 31, 2024 we recorded a valuation allowance of $50.4 million against our deferred tax assets. If, in the future, we evaluate that our deferred tax assets are not more likely than not to be realized, an increase in the related valuation allowance could result in a material income tax expense in the period such determination is made.
The Company has adopted an indefinite reinvestment position whereby foreign earnings for foreign subsidiaries are expected to be reinvested and future earnings are not expected to be repatriated. As a result of this policy, no deferred tax liability has been accrued in anticipation of future dividends from foreign subsidiaries.
The Company accounts for the uncertainty of income taxes based on a "more likely than not" threshold for the recognition and derecognition of tax positions. The Company's policy is to account for interest and penalties as a component of income tax expense.
Goodwill Impairment
We assess goodwill for impairment annually on October 1st, or more frequently when an event occurs which could cause the carrying value (or GAAP basis book value) of our Company to exceed the estimated fair value of our Company.
As we operate as one reporting unit, the goodwill impairment evaluation is performed at the consolidated entity level by comparing the estimated fair value of the Company to its carrying value. We first assess qualitative factors to determine whether it is more likely than not that the fair value of our single reporting unit is less than its carrying value. qualitative factors considered include: industry and market considerations; macroeconomic conditions; and other relevant events and factors. Based on the qualitative assessment, if it is determined that it is more likely than not that the Company's fair value is less than its carrying value, then we perform a quantitative analysis using a fair-value-based approach to determine if the fair value of our reporting unit is less than its carrying value. Performing a quantitative goodwill impairment test includes the determination of the fair value of a reporting unit and involves significant estimates and assumptions. These estimates and assumptions include, among others, revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, and future economic and market conditions. See "Note 5. Goodwill and Other Intangible Assets" for more information regarding our 2024, 2023, and 2022 goodwill impairments.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, refer to "Note 2. Basis of Presentation and Summary of Significant Accounting Policies" in the notes to the consolidated financial statements included in "Part II-Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.