EngageSmart, Inc. - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________ to _________________

Commission File Number: 001-40835

EngageSmart, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware	83-2785225
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
30 Braintree Hill Office Park, Suite 101 Braintree, Massachusetts	02184
(Address of principal executive offices)	(Zip Code)

(781) 848-3733

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common stock, $0.001 par value per share

ESMT

The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒

As of October 31, 2022, the registrant had 165,481,995 shares of common stock, $0.001 par value per share, outstanding.

Table of Contents


		Page

PART I.	FINANCIAL INFORMATION	1

Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	2
	Condensed Consolidated Statements of Members’ Equity	3
	Condensed Consolidated Statements of Stockholders' Equity	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33

PART II.	OTHER INFORMATION	35

Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37
Signatures		38

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “forecasts,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to statements regarding our future results of operations and financial position, industry and business trends, equity compensation, business strategy, plans, market growth and our objectives for future operations.

The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to: risks related to our ability to sustain our rapid growth; our ability to manage our infrastructure to support future growth; risks related to the effectiveness of our risk management efforts to prevent fraudulent activities; risks related to our ability to attract new customers or convert trial customers into paying customers; risks related to our ability to introduce new features or services successfully and to make enhancements to our solutions; risks related to our customers renewing their contracts for our solutions with us and expanding their use of our solutions; risks related to any decline in our customer renewals or failure to convince our customers to broaden their use of solutions and related services; risks related to the net losses we have incurred on an annual basis, and anticipated increases in our operating expenses; our ability to adapt and respond effectively to rapidly changing technology, evolving industry standards and regulations, and changing business needs, requirements, or preferences; risks related to real or perceived errors, failures, or bugs in our solutions; our ability to face intense competition and to maintain or expand market share within our industry; our ability to establish, grow and maintain strategic partnerships; as well as the other important factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 Form 10-K”), filed on March 3, 2022 with the Securities and Exchange Commission (the “SEC”). The forward-looking statements in this Quarterly Report on Form 10-Q are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read this Quarterly Report on Form 10-Q and the documents that we reference and have filed as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

EngageSmart, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)


	September 30, 2022			December 31, 2021
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	293,456		$	254,294
Accounts receivable, net of allowance for credit losses of $255 and $203 as of September 30, 2022 and December 31, 2021, respectively		12,372			10,266
Unbilled receivables		5,722			3,441
Prepaid expenses and other current assets		11,190			7,617
Total current assets		322,740			275,618
Operating lease right-of-use assets		28,024			—
Property and equipment, net		13,426			10,968
Goodwill		425,677			425,677
Acquired intangible assets, net		76,219			87,920
Other assets		5,018			3,811
Total assets	$	871,104		$	803,994
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	759		$	2,090
Accrued expenses and other current liabilities		33,621			25,229
Contingent consideration liability		—			2,800
Deferred revenue		7,819			6,792
Operating lease liabilities		4,557			—
Total current liabilities		46,756			36,911
Long-term operating lease liabilities		28,450			—
Deferred income taxes		1,324			4,224
Deferred revenue, net of current portion		285			232
Other long-term liabilities		188			5,528
Total liabilities		77,003			46,895
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock, par value $0.001 per share, 10,000,000 shares authorized and no shares issued and outstanding as of September 30, 2022 and December 31, 2021		—			—
Common stock, par value $0.001 per share, 650,000,000 shares authorized and 165,268,125 and 161,860,980 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively		165			162
Additional paid-in capital		808,334			787,043
Accumulated stockholders' deficit		(14,398	)		(30,106	)
Total stockholders’ equity		794,101			757,099
Total liabilities and stockholders’ equity	$	871,104		$	803,994

The accompanying notes are an integral part of these condensed consolidated financial statements.

EngageSmart, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Revenue	$	78,796		$	55,493		$	220,020		$	154,664
Cost of revenue		18,845			14,237			52,687			39,735
Gross profit		59,951			41,256			167,333			114,929
Operating expenses:
General and administrative		13,986			15,287			42,270			31,990
Selling and marketing		25,906			19,096			72,262			51,224
Research and development		12,978			9,132			34,011			23,947
Contingent consideration expense		—			1,157			—			1,370
Restructuring charges		—			(330	)		—			(241	)
Amortization of intangible assets		2,363			2,362			7,087			7,086
Total operating expenses		55,233			46,704			155,630			115,376
Income (loss) from operations		4,718			(5,448	)		11,703			(447	)
Other income (expense), net:
Interest expense, including related party interest (Note 15)		(121	)		(3,487	)		(361	)		(8,087	)
Other income (expense), net		1,116			(28	)		1,466			(107	)
Total other income (expense), net		995			(3,515	)		1,105			(8,194	)
Income (loss) before income taxes		5,713			(8,963	)		12,808			(8,641	)
Benefit from income taxes		(1,057	)		(671	)		(2,900	)		(623	)
Net income (loss) and comprehensive income (loss)	$	6,770		$	(8,292	)	$	15,708		$	(8,018	)
Net income (loss) per share:
Basic	$	0.04		$	(0.06	)	$	0.10		$	(0.05	)
Diluted	$	0.04		$	(0.06	)	$	0.09		$	(0.05	)
Weighted-average number of common shares outstanding:
Basic		164,427,770			149,031,242			163,195,976			148,200,589
Diluted		169,222,794			149,031,242			169,064,015			148,200,589

The accompanying notes are an integral part of these condensed consolidated financial statements.

EngageSmart, Inc.

Condensed Consolidated Statements of Members’ Equity

(in thousands, except share amounts)

(Unaudited)


	Class A-1						Class A-2						Class A-3													Accumulated			Total
	Common Shares						Common Shares						Common Shares						Common Stock				Additional			Stockholders'/			Stockholders'/
	Shares			Amount			Shares			Amount			Shares			Amount			Shares		Amount		Paid-in Capital			Members' Deficit			Members' Deficit
Balances as of December 31, 2020		97,209,436		$	293,286			45,262,340		$	136,559			5,010,888		$	19,956			—	$	—	$	—		$	(21,141	)	$	428,660
Exercise of equity-based options		—			—			—			—			306,762			552			—		—		—			—			552
Equity-based compensation expense		—			—			—			—			—			222			—		—		—			—			222
Net income		—			—			—			—			—			—			—		—		—			485			485
Balances as of March 31, 2021		97,209,436		$	293,286			45,262,340		$	136,559			5,317,650		$	20,730			—	$	—	$	—		$	(20,656	)	$	429,919
Exercise of equity-based options		—			—			—			—			167,104			296			—		—		—			—			296
Equity-based compensation expense		—			—			—			—			—			338			—		—		—			—			338
Net loss		—			—			—			—			—			—			—		—		—			(211	)		(211	)
Balances as of June 30, 2021		97,209,436		$	293,286			45,262,340		$	136,559			5,484,754		$	21,364			—	$	—	$	—		$	(20,867	)	$	430,342
Exercise of equity-based options		—			—			—			—			99,860			215			—		—		—			—			215
Repurchase and retirement of common shares		—			—			—			—			(74,529	)		(51	)		—		—		—			—			(51	)
Conversion of Class A-1, A-2 and A-3 common shares into common stock in connection with initial public offering (Note 10)		(97,209,436	)		(293,286	)		(45,262,340	)		(136,559	)		(5,510,085	)		(21,528	)		147,981,861		148		451,225			—			—
Issuance of common stock upon initial public offering, net of underwriting discounts and commissions		—			—			—			—			—			—			13,620,054		14		331,975			—			331,989
Costs incurred in connection with initial public offering		—			—			—			—			—			—			—		—		(5,662	)		—			(5,662	)
Stock-based compensation expense		—			—			—			—			—			—			—		—		6,603			—			6,603
Net loss		—			—			—			—			—			—			—		—		—			(8,292	)		(8,292	)
Balances as of September 30, 2021		—		$	—			—		$	—			—		$	—			161,601,915	$	162	$	784,141		$	(29,159	)	$	755,144

The accompanying notes are an integral part of these condensed consolidated financial statements.

EngageSmart, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(in thousands, except share amounts)

(Unaudited)


						Additional			Accumulated			Total
	Common Stock					Paid-in			Stockholders'			Stockholders'
	Shares			Amount		Capital			Deficit			Equity
Balances as of December 31, 2021		161,860,980		$	162	$	787,043		$	(30,106	)	$	757,099
Issuance of common stock upon exercise of stock options		561,581			—		1,897			—			1,897
Vesting of restricted stock units		17,302			—		—			—			—
Shares withheld for employee taxes		(5,471	)		—		(132	)		—			(132	)
Stock-based compensation expense		—			—		2,987			—			2,987
Net income		—			—		—			2,059			2,059
Balances as of March 31, 2022		162,434,392		$	162	$	791,795		$	(28,047	)	$	763,910
Issuance of common stock upon exercise of stock options		1,162,554			2		3,689			—			3,691
Issuance of common stock in connection with employee stock purchase plan		25,930			—		463			—			463
Vesting of restricted stock units		18,018			—		—			—			—
Shares withheld for employee taxes		(6,076	)		—		(134	)		—			(134	)
Stock-based compensation expense		—			—		3,327			—			3,327
Net income		—			—		—			6,879			6,879
Balances as of June 30, 2022		163,634,818		$	164	$	799,140		$	(21,168	)	$	778,136
Issuance of common stock upon exercise of stock options		1,605,814			1		5,598			—			5,599
Vesting of restricted stock units		38,777			—		—			—			—
Shares withheld for employee taxes		(11,284	)		—		(202	)		—			(202	)
Stock-based compensation expense		—			—		3,798			—			3,798
Net income		—			—		—			6,770			6,770
Balances as of September 30, 2022		165,268,125		$	165	$	808,334		$	(14,398	)	$	794,101

The accompanying notes are an integral part of these condensed consolidated financial statements.

EngageSmart, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2022			2021
Cash flows from operating activities:
Net income (loss)	$	15,708		$	(8,018	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense		13,989			13,620
Stock/equity-based compensation expense		10,112			7,163
Contingent consideration expense		—			1,370
Non-cash operating lease expense		3,385			—
Deferred income taxes		(2,900	)		(623	)
Loss on disposal of property and equipment		22			43
Non-cash interest expense, including loss on extinguishment of debt		175			4,066
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		(3,573	)		(3,194	)
Accounts receivable, net		(2,106	)		(2,195	)
Unbilled receivables		(2,281	)		(931	)
Other assets		(1,382	)		(484	)
Accounts payable		(1,253	)		3,622
Accrued expenses and other current liabilities		7,227			5,475
Deferred revenue		1,080			1,142
Operating lease liabilities		(4,115	)		—
Other long-term liabilities		26			(702	)
Net cash provided by operating activities		34,114			20,354
Cash flows from investing activities:
Purchases of property and equipment, including costs capitalized for development of internal-use software		(4,759	)		(3,190	)
Net cash used in investing activities		(4,759	)		(3,190	)
Cash flows from financing activities:
Proceeds from issuance of common stock upon initial public offering, net of underwriting discounts and commissions		—			331,989
Proceeds from issuance of common stock to General Atlantic (IC), L.P. in connection with the Corporate Conversion (Note 10)		—			43,236
Payment to settle fractional shares related to Class A-2 shareholders in connection with the Corporate Conversion (Note 10)		—			(43,236	)
Repayment of long-term debt		—			(114,174	)
Payment of debt issuance costs		(23	)		(747	)
Payment of debt extinguishment costs		—			(90	)
Payments of related party notes		—			(5,900	)
Payments of contingent consideration		(1,066	)		(1,868	)
Proceeds from exercise of stock/equity-based options		11,187			1,063
Repurchase and retirement of common shares		—			(51	)
Payments of taxes related to net share settlement of equity awards		(468	)		—
Proceeds from issuance of common stock under employee stock purchase plan		463			—
Payment of initial public offering costs		(286	)		(2,912	)
Net cash provided by financing activities		9,807			207,310
Net increase in cash, cash equivalents and restricted cash		39,162			224,474
Cash, cash equivalents and restricted cash at beginning of period		254,594			29,650
Cash, cash equivalents and restricted cash at end of period	$	293,756		$	254,124
Reconciliation of cash, cash equivalents, and restricted cash:
Cash and cash equivalents	$	293,456		$	253,824
Restricted cash within other assets		300			300
Total cash, cash equivalents, and restricted cash	$	293,756		$	254,124

The accompanying notes are an integral part of these condensed consolidated financial statements.

EngageSmart, Inc.

Condensed Consolidated Statements of Cash Flows (Continued)

(in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2022		2021
Supplemental cash flow information:
Cash paid for interest	$	181	$	5,310
Cash paid for taxes	$	4,330	$	35
Supplemental disclosure of non-cash investing and financing activities:
Additions to property and equipment included in accounts payable and accrued expenses	$	189	$	187
Deferred initial public offering costs included in accrued expenses	$	—	$	2,750
Debt issuance costs included in accrued expenses	$	—	$	450

The accompanying notes are an integral part of these condensed consolidated financial statements.

EngageSmart, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Business and Basis of Presentation

EngageSmart, Inc. and its subsidiaries (together referred to herein as the “Company” or “EngageSmart”) is a leading provider of vertically tailored customer engagement software and integrated payments solutions. EngageSmart offers single instance, multi-tenant, true Software-as-a-Service (“SaaS”) vertical solutions, including SimplePractice, InvoiceCloud, HealthPay24 and DonorDrive, that are designed to simplify the Company's customers' engagement with its clients by driving digital adoption and self-service. The Company serves customers across several core verticals: Health & Wellness, Government, Utilities, Financial Services, Healthcare and Giving. EngageSmart's solutions are purpose-built for each of the Company's verticals and they simplify and automate mission-critical workflows such as scheduling, client onboarding, client communication, paperless billing, and electronic payment processing. EngageSmart is headquartered in Braintree, Massachusetts with additional locations throughout the United States.

Initial Public Offering

On September 27, 2021, the Company completed its initial public offering ("IPO"), in which the Company issued and sold 13,620,054 shares of common stock at a public offering price of $26.00 per share, including 620,054 shares issued upon the exercise of the underwriters' option to purchase additional shares. The Company raised net proceeds of $326.4 million, after deducting the underwriting discount of $22.1 million and offering expenses of $5.6 million. Additionally, certain existing shareholders sold an aggregate of 3,112,446 shares in the IPO at the same price, resulting in net proceeds to the selling stockholders of $75.9 million. On September 27, 2021, the Company used a portion of the net proceeds from its IPO to repay in full the outstanding borrowings of $114.2 million under its Credit Facilities, as defined below under Note 9 - Debt.

Following the Company's IPO, General Atlantic (IC), L.P. ("General Atlantic") controls more than 50% of the combined voting power of the Company's outstanding common stock, and the Company is considered a "controlled company" within the meaning of the corporate governance standards of the New York Stock Exchange ("NYSE").

Corporate Conversion

Immediately prior to effectiveness of the Company's IPO registration statement on Form S-1, EngageSmart, LLC, a Delaware limited liability company, converted into a Delaware corporation pursuant to a statutory conversion, which changed the Company's name to EngageSmart, Inc. ("Corporate Conversion"). Refer to Note 10 - Stockholders' Equity for further discussion.

Stock Split

On September 10, 2021, the Company effected a 1-for-3 forward stock split of its common shares. In connection with the forward stock split, each issued and outstanding common share, automatically and without action on the part of the holders, became three common shares. All share, per share and related information presented in the consolidated financial statements and accompanying notes have been retroactively adjusted, where applicable, to reflect the impact of the forward stock split.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions between the Company and its subsidiaries have been eliminated in consolidation. For all the periods reported in these condensed consolidated financial statements, the Company has not and does not have any material revenue-generating operations on a standalone basis, and all the material revenue-generating operations of the Company are carried out by its subsidiaries.

Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Therefore, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2021, included in the Company's 2021 Form 10-K. In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position for the periods presented. The results for the interim periods presented are not necessarily indicative of future results.

2. Summary of Significant Accounting Policies

The Company’s significant accounting policies are discussed in Note 2 - Summary of Significant Accounting Policies within the notes to consolidated financial statements for the year ended December 31, 2021, included in the Company's 2021 Form 10-K. There have been no significant changes to these policies during the nine months ended September 30, 2022, except as noted below.

Risk of Concentrations of Credit and Significant Customers

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. At times, the Company may maintain cash balances in excess of federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

Significant customers are those that accounted for 10% or more of the Company’s total revenue or accounts receivable during any period presented herein. During the three and nine months ended September 30, 2022 and 2021, no customer accounted for 10% or more of revenue. As of September 30, 2022, the Company had one customer that accounted for 10% or more of its accounts receivable balance. As of December 31, 2021, no customer accounted for 10% or more of accounts receivable.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 requires lessees to recognize assets and liabilities on their balance sheet for the rights and obligations created by leases and to continue to recognize related expenses on their income statements over the lease term. It also requires disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted this standard effective January 1, 2022 using the modified retrospective transition method. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company elected the package of transition practical expedients for existing contracts. Adoption of the new standard resulted in the recording of operating lease right-of-use assets of $31.4 million and operating lease liabilities of $37.1 million, as of January 1, 2022. The difference between the operating lease right-of-use assets and operating lease liabilities relates to deferred rent balances, lease incentives, and liabilities recognized under Accounting Standards Codification ("ASC") 420, Exit or Disposal Cost Obligations, the net impact of which reduced the right-of-use assets. The adoption of the standard did not impact the Company's consolidated net earnings and had no impact on cash flows. Refer to Note 5 - Leases for additional information related to the Company’s lease obligations.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This replaces the existing incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates. Effective January 1, 2022, the Company adopted ASU 2016-13 on a modified retrospective basis. The adoption of ASU 2016-13 did not have a material impact on the Company's condensed consolidated balance sheets, statements of operations and comprehensive income (loss), or cash flows.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles as well as clarifying and amending existing guidance to improve consistent application. Effective January 1, 2022, the Company adopted ASU 2019-12 on a modified retrospective basis. The adoption of ASU 2019-12 did not have a material impact on the Company's condensed consolidated balance sheets, statements of operations and comprehensive income (loss), or cash flows.

Recently Issued Accounting Pronouncements

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08"), which requires the recognition and measurement of contract assets and liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers ("ASC 606"). ASU 2021-08 is effective for fiscal years beginning after December 15, 2022 and, if adopted early, requires the retrospective method of transition applied to transactions occurring on or after the beginning of the fiscal year of adoption. The Company is currently evaluating the timing of adoption of ASU 2021-08. The Company does not believe the adoption of ASU 2021-08 will have a material impact on its consolidated financial statements.

3. Revenue

Revenue Disaggregated

The Company disaggregates revenue from contracts with customers by reportable segment and revenue type, as the Company believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors and is consistent with the manner in which the Company operates the business. The Company generates a significant majority of its revenue in the Enterprise Solutions segment from transaction and usage-based revenue and a significant majority of its revenue in the SMB Solutions segment from subscription revenue.

The following table depicts disaggregated revenue by segment and revenue type (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Enterprise Solutions
Transaction and usage-based	$	32,620	$	24,977	$	90,928	$	69,517
Subscription		2,280		1,946		6,517		5,663
Other		966		354		2,298		1,811
Total Enterprise Solutions revenue		35,866		27,277		99,743		76,991
SMB Solutions
Transaction and usage-based		11,349		8,580		33,613		23,884
Subscription		31,216		19,324		85,493		52,980
Other		365		312		1,171		809
Total SMB Solutions revenue		42,930		28,216		120,277		77,673
Total revenue	$	78,796	$	55,493	$	220,020	$	154,664

Contract Assets and Liabilities

Contract assets are rights to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditional on something other than the passage of time. Contract assets are transferred to accounts receivable once the rights become unconditional. The Company did not have contract assets as of September 30, 2022 or December 31, 2021.

Contract liabilities (deferred revenue) primarily consist of billings and payments received in advance of revenue recognition. The Company primarily bills and collects payments from customers for its services in advance on a monthly, quarterly or annual basis. Contract liabilities are recognized as revenue when services are performed and all other revenue recognition criteria have been met. Amounts expected to be recognized as revenue within 12 months of the balance sheet date are classified as current deferred revenue and amounts expected to be recognized as revenue beyond 12 months of the balance sheet date are classified as non-current deferred revenue. The Company had current deferred revenue of $7.8 million and $6.8 million as of September 30, 2022 and December 31, 2021, respectively. Non-current deferred revenue was $0.3 million as of September 30, 2022 and $0.2 million as of December 31, 2021. During the nine months ended September 30, 2022, the Company recognized revenue of $6.5 million from the deferred revenue balance as of December 31, 2021. During the nine months ended September 30, 2021, the Company recognized revenue of $4.7 million from the deferred revenue balance as of December 31, 2020.

Remaining Performance Obligations

ASC 606 requires disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance obligations. As permitted by ASC 606, the Company has elected to exclude from this disclosure any contracts with an original duration of one year or less and any variable consideration that meets specified criteria. For contracts greater than one year in length, the Company's most significant performance obligations consist of variable consideration. Such variable consideration meets the specified criteria for the disclosure exclusion; therefore, the majority of the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied is variable consideration that is not required for this disclosure.

4. Net Income (Loss) Per Share

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing net income by the sum of the weighted average number of common shares and potentially dilutive securities outstanding during the period using the treasury stock method. For the periods in which the Company incurs a net loss, the dilutive effect of the Company’s outstanding common stock equivalents is not included in the calculation as the effect would be anti-dilutive. The following table sets forth the computation of basic and diluted net income (loss) per share:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2022		2021			2022		2021
	(in thousands, except share and per share amounts)
Numerator:
Net income (loss)	$	6,770	$	(8,292	)	$	15,708	$	(8,018	)
Denominator:
Weighted average common shares outstanding, basic		164,427,770		149,031,242			163,195,976		148,200,589
Effect of potential dilutive common shares		4,795,024		—			5,868,039		—
Weighted average common shares outstanding, diluted		169,222,794		149,031,242			169,064,015		148,200,589
Net income (loss) per share, basic	$	0.04	$	(0.06	)	$	0.10	$	(0.05	)
Net income (loss) per share, diluted	$	0.04	$	(0.06	)	$	0.09	$	(0.05	)

The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net income (loss) per share for the periods indicated because including them would have had an anti-dilutive effect:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Options to purchase common shares		383,666		11,205,066		473,392		11,205,066
Unvested restricted stock units		1,535,412		288,455		913,466		288,455
Total		1,919,078		11,493,521		1,386,858		11,493,521

5. Leases

On January 1, 2022, the Company adopted ASU 2016-02, using the modified retrospective transition method. The Company has elected to adopt the package of practical expedients which apply to leases that commenced before the adoption date. By electing the package of practical expedients, the Company did not reassess: whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases, and the initial direct costs for any existing leases. The Company has also elected to combine lease and non-lease components when calculating minimum lease payments on new leases for all asset classes.

The Company has elected an accounting policy to forgo the recognition of lease assets or liabilities for short-term leases. Short-term leases are defined, in accordance with the standard, as those with terms of one year or less and do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise.

The Company determines if an arrangement is or contains a lease at contract inception. The Company accounts for a contract as a lease when it has the right to direct the use of the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial classification and measurement of right-of-use ("ROU") assets and lease liabilities at the lease commencement date and thereafter at the modification date, if modified.

ROU assets represent the Company's right to control the underlying assets under lease, and the lease liability is the Company's obligation to make the lease payments related to the underlying assets under lease, over the contractual term. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of future minimum fixed lease payments to be made over the lease term. The Company uses the non-cancellable lease term unless it is reasonably certain that a renewal or termination option will be exercised. When available, the Company will use the rate implicit in the lease to discount lease payments to present value. As most leases do not provide an implicit rate, the Company will estimate the incremental borrowing rate to discount the lease payments. The Company estimates

the incremental borrowing rate based on the rates of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis, over a similar term, and in a similar economic environment. The ROU asset also includes any lease prepayments and initial direct costs, offset by lease incentives.

Certain lease agreements contain variable lease payments which are not included in the measurement of the lease liability. Variable lease payments relate to taxes, insurance, utilities, and common area maintenance ("CAM"). These variable lease payments are recognized in the condensed consolidated statements of operations and comprehensive income (loss) in the period in which the obligation for those payments is incurred.

The Company has operating leases for office space to support business operations. The Company's office leases expire at varying dates from 2023 through 2030. The Company's leases do not contain any material residual value guarantees or restrictive covenants. Operating leases are recognized on the condensed consolidated balance sheets as operating lease right-of-use assets, operating lease liabilities and long-term operating lease liabilities. Operating lease expense is recognized on a straight-line basis over the lease term within the Company’s condensed consolidated statements of operations and comprehensive income (loss).

Lease Costs and Other Information

The following table summarizes the components of operating lease expense (in thousands):


	Three Months Ended		Nine Months Ended
	September 30, 2022		September 30, 2022
Operating lease cost	$	1,184	$	3,549
Variable lease cost		79		224
Total	$	1,263	$	3,773

The weighted average remaining lease term (in years) and discount rate were as follows:


	As of September 30,
	2022
Weighted-Average remaining lease term		7.0
Weighted-Average discount rate		2.26	%

Supplemental Cash Flow Information

The following table presents supplemental information relating to cash flows arising from lease transactions. Cash payments made for variable lease cost and short-term leases are not included in the measurement of operating lease liabilities, and, as such, are excluded from the amounts below (in thousands):


	Nine Months Ended
	September 30, 2022
Cash paid for amounts included in the measurement of operating lease liabilities	$	4,246
Right of use assets obtained in exchange for new operating lease liabilities	$	31,409

Maturity of Lease Liabilities

The following table presents the future minimum lease payments under the Company's operating leases liabilities as of September 30, 2022 (in thousands):


Remainder of 2022	$	958
2023		5,741
2024		5,750
2025		4,489
2026		4,079
Thereafter		14,810
Total lease payments	$	35,827
Less: imputed interest		(2,820	)
Lease liabilities	$	33,007

The Company has subleased certain office space for which incoming sublease amounts will offset the future lease payments in the table above. Under the executed sublease agreement, the Company expects to receive future sublease payments of $0.2 million over the remainder of 2022 and $1.5 million thereafter.

ASC 840 Disclosures

Under the previous lease accounting standard, ASC 840, Leases, (“ASC 840”), as previously disclosed in the 2021 Form 10-K for the year ended December 31, 2021, the total future minimum payments under non-cancellable operating leases as of December 31, 2021 were as follows (in thousands):


2022	$	5,674
2023		5,716
2024		5,743
2025		4,481
2026		4,071
Thereafter		14,766
Total	$	40,451

Rent expense was $0.8 million and $3.1 million for the three and nine months ended September 30, 2021, respectively. As of December 31, 2021, the Company had total deferred rent of $4.5 million, which was included in accrued expenses and other current liabilities and other long-term liabilities on the Company’s condensed consolidated balance sheets.

6. Fair Value Measurements

The following tables present the Company’s fair value hierarchy for its assets and liabilities that were measured at fair value on a recurring basis (in thousands):


	September 30, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents - money market funds	$	224,064	$	—	$	—	$	224,064
Liabilities:
Contingent consideration liability	$	—	$	—	$	—	$	—


	December 31, 2021
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents - money market funds	$	205,010	$	—	$	—	$	205,010
Liabilities:
Contingent consideration liability	$	—	$	—	$	2,800	$	2,800

Money market funds held as of September 30, 2022 and December 31, 2021 were valued by the Company based on quoted market prices, which represent a Level 1 measurement within the fair value hierarchy. The carrying values of the Company’s accounts receivable, unbilled receivables, accounts payable, and accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities. There were no transfers into or out of Level 3 during the periods presented.

The Company’s recurring fair value measurements using Level 3 inputs relate to the Company’s contingent consideration liability, as the significant inputs to the valuation are not observable in the market. The Company determined the fair value of the contingent consideration liability using a Monte Carlo simulation model, and the significant assumptions and estimates utilized in the model include forecasted net recurring revenue, net recurring revenue volatility, and discount rate. Changes in the fair value of the Company’s contingent consideration liability were as follows (in thousands):


Balance as of December 31, 2021	$	2,800
Payment of contingent consideration		(2,800	)
Change in fair value		—
Balance as of September 30, 2022	$	—

7. Goodwill and Acquired Intangible Assets

The carrying amount of goodwill was $425.7 million as of September 30, 2022 and December 31, 2021, related to goodwill from the Company’s acquisitions. Changes in the carrying amount of goodwill by reportable segment through September 30, 2022 are as follows (in thousands):


	Enterprise Solutions		SMB Solutions		Total
Balance as of December 31, 2021	$	218,658	$	207,019	$	425,677
Goodwill acquired		—		—		—
Balance as of September 30, 2022	$	218,658	$	207,019	$	425,677

Acquired intangible assets of the Company consisted of the following (in thousands):


			September 30, 2022
	Weighted Average Useful Life		Gross Carrying Value		Accumulated Amortization			Net Carrying Value
	(in years)
Customer relationships		10.0	$	82,841	$	(29,273	)	$	53,568
Developed technology		7.0		42,913		(21,925	)		20,988
Tradenames		5.0		5,824		(4,161	)		1,663
Total			$	131,578	$	(55,359	)	$	76,219


			December 31, 2021
	Weighted Average Useful Life		Gross Carrying Value		Accumulated Amortization			Net Carrying Value
	(in years)
Customer relationships		10.0	$	82,841	$	(23,059	)	$	59,782
Developed technology		7.0		42,913		(17,311	)		25,602
Tradenames		5.0		5,824		(3,288	)		2,536
Total			$	131,578	$	(43,658	)	$	87,920

The Company recorded amortization expense of $3.9 million for each of the three month periods ended September 30, 2022 and 2021, and $11.7 million for each of the nine month periods ended September 30, 2022 and 2021. Amortization of developed technology is recorded within cost of revenue, while amortization of customer relationships and tradenames is recorded within amortization of intangible assets within the Company’s condensed consolidated statements of operations and comprehensive income (loss). Future estimated amortization expense of the Company’s intangible assets as of September 30, 2022 is expected to be as follows (in thousands):


Remainder of 2022	$	3,900
2023		15,601
2024		14,640
2025		14,383
2026		9,335
Thereafter		18,360
Total	$	76,219

8. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):


	September 30, 2022		December 31, 2021
Accrued employee compensation and benefits	$	13,494	$	12,437
Accrued consulting and professional fees		3,147		2,619
Accrued processing fees		3,471		1,626
Accrued channel partner fees		2,495		2,081
Accrued license fees		2,955		1,154
Accrued marketing		1,552		926
Accrued sales tax		656		615
Accrued restructuring		—		387
Other		5,851		3,384
Total	$	33,621	$	25,229

9. Debt

As of September 30, 2022 and December 31, 2021, the Company had no long-term debt outstanding.

2021 Revolving Credit Facility

On September 27, 2021, the Company entered into a revolving credit agreement (“2021 Revolving Credit Facility”) with JPMorgan Chase Bank, N.A. as administrative agent and certain other lenders. The 2021 Revolving Credit Facility allows the Company to borrow up to $75.0 million, $7.5 million of which may be comprised of a letter of credit facility. The 2021 Revolving Credit Facility will mature on September 27, 2026 and proceeds of the borrowings under the 2021 Revolving Credit Facility will be used for general corporate purposes. In conjunction with the 2021 Revolving Credit Facility, the Company incurred debt issuance costs in the amount of $1.2 million, which were recorded within other assets on the condensed consolidated balance sheets and are being amortized into interest expense over the life of the 2021 Revolving Credit Facility. The 2021 Revolving Credit Facility requires the Company to pay a commitment fee in respect to unused revolving credit facility commitments of 0.25% per annum. The commitment fee is recorded as a component of interest expense on the Company's condensed consolidated statements of operations and comprehensive income (loss). As of September 30, 2022, the Company has not yet drawn upon the 2021 Revolving Credit Facility, although $2.1 million has been utilized against the 2021 Revolving Credit Facility in the form of a line of credit, reducing the Company's borrowing capacity to $72.9 million.

The 2021 Revolving Credit Facility contains certain financial maintenance covenants, which require the Company to not exceed certain specified total net leverage ratios at the end of each fiscal quarter.

Credit Facilities

On February 11, 2019, the Company entered into a credit agreement (“Credit Agreement”) with Ares Capital Corporation as administrative agent and collateral agent, and certain other lenders, which provided for a $75.0 million aggregate principal amount senior secured term loan facility, a $35.0 million senior secured delayed draw term loan facility, and a $7.5 million senior secured revolving credit facility, collectively referred to as the Credit Facilities. On September 27, 2021, the Company used a portion of the net proceeds from its IPO to repay in full the outstanding borrowings of $114.2 million under the Credit Facilities. In connection with this repayment, the Company incurred a loss on debt extinguishment of $1.2 million. The loss on debt extinguishment primarily consists of a write-off of unamortized debt issuance costs associated with the Credit Facilities.

In September 2019, under the Credit Facilities, a letter of credit was issued related to one of the Company’s leases in the amount of $2.1 million. As of September 27, 2021, the Credit Agreement was terminated and the outstanding letter of credit was cash collateralized. In December 2021, the cash collateral was returned along with the cancellation of the prior letter of credit, and a new letter of credit for $2.1 million was issued under the 2021 Revolving Credit Facility.

10. Stockholders' Equity

Initial Public Offering

On September 27, 2021, the Company completed its IPO, in which the Company issued and sold 13,620,054 shares of common stock at a public offering price of $26.00 per share, including 620,054 shares issued upon the exercise of the underwriters' option to purchase additional shares. The Company raised net proceeds of $326.4 million after deducting the underwriting discounts of $22.1 million and offering expenses of $5.6 million.

Corporate Conversion

Immediately prior to effectiveness of the Company’s IPO registration statement on Form S-1, EngageSmart, LLC, a Delaware limited liability company, converted into a Delaware corporation pursuant to a statutory conversion, which changed the Company’s name to EngageSmart, Inc. As part of the Corporate Conversion, each Class A-1 share, Class A-2 share, and Class A-3 share, in each case, of EngageSmart, LLC was converted on a 1:1 basis into Class A-1 common stock, Class A-2 common stock and Class A-3 common stock, in each case, of the Company, respectively, with the same rights and obligations that existed under the limited liability company agreement of EngageSmart, LLC (the “LLC Agreement”).

Under the LLC Agreement, Class A-2 holders, were entitled to certain cash distributions that General Atlantic would have otherwise been entitled to receive if General Atlantic had received a pre-established dollar threshold in connection with and/or following certain exit events (“CVR Obligation”). Following the Corporate Conversion, each share of (i) Class A-1 common stock was reclassified into 0.9398 shares of common stock, (ii) Class A-2 common stock was reclassified into 1.1102 shares of common stock, and (iii) Class A-3 common stock was reclassified into 1 share of common stock (collectively, the “Common Stock Reclassifications”). The conversion ratio for each Common Stock Reclassification reflected the difference in value of the shares as a result of the CVR Obligation. Pursuant to the Company’s amended and restated certificate of incorporation, no fractional shares resulting from the conversion of Class A-2 common stock to common stock were to be issued and, in lieu of the fractional shares, each holder of Class A-2 common stock who would otherwise be entitled to fractional shares were entitled to an amount in cash (the “Fractional Share Payout”).

Following the Common Stock Reclassifications, General Atlantic, the sole former holder of Class A-1 common stock (which were formerly Class A-1 shares of EngageSmart, LLC) subscribed for 1,662,917 additional shares of common stock in the Company, with the value of each share based on the public offering price of the shares of common stock sold by the Company in the IPO. As consideration for the additional shares of common stock, General Atlantic contributed capital to the Company in an amount equal to $43.2 million in order for the Company to satisfy its obligation in full for the Fractional Share Payout. The Fractional Share Payout settled the former CVR Obligation of the Company under the LLC Agreement.

Additionally, certain of the Company's executive officers and other employees, among others, currently hold CVR Unit Awards ("CVR Units"), under the CVR Bonus Award Plan (the "CVR Plan"). The CVR Plan was amended to reflect the Corporate Conversion and the CVR Units will otherwise remain subject to the same terms and conditions applicable to the CVR Units immediately prior to the Company’s IPO. Following the Common Stock Reclassifications, General Atlantic subscribed for 288,344 additional shares of common stock in the Company, with the value of each share based on the public offering price of the shares of common stock sold by the Company in the IPO. As consideration for the additional shares of common stock, General Atlantic entered into a promissory note with the Company which requires General Atlantic to make a capital contribution to the Company equal to the amount of any payments made by the Company to holders of CVR Units pursuant to the CVR Plan, which such payments would be triggered by the same exit events specified under the LLC Agreement.

Stock Split

Preferred Stock

In connection with the Company's IPO in September 2021, the Company's amended and restated certificate of incorporation and amended and restated bylaws became effective, which authorized the issuance of 10,000,000 shares of preferred stock with a par value of $0.001 with rights and preferences, including voting rights, designated from time to time by the Board of Directors. As of September 30, 2022, no shares of preferred stock were issued or outstanding.

Common Stock

In connection with the Company's IPO in September 2021, the Company's amended and restated certificate of incorporation and amended and restated bylaws became effective, which authorized the issuance of 650,000,000 shares of common stock with a par value of $0.001. As of September 30, 2022, there were 165,268,125 shares of common stock issued and outstanding.

11. Stock-based Compensation

2021 Incentive Award Plan

In September 2021, the Company’s Board of Directors adopted, and its stockholders approved, the 2021 Incentive Award Plan (“2021 Plan”), which became effective in connection with the IPO. The 2021 Plan provides for granting stock options, including incentive stock options ("ISOs") and nonqualified stock options ("NSOs"), restricted stock, dividend equivalents, restricted stock units ("RSUs"), other stock-based awards, and cash awards to eligible employees, consultants and directors. A total of 14,798,186 shares of the Company’s common stock have been reserved for issuance under the 2021 Plan. The number of shares initially available for issuance will be increased annually on January 1 of each calendar year beginning in 2022 and ending in 2031 by an amount equal to the lesser of (i) 5% of the shares of the Company's common stock outstanding on the final day of the immediately preceding calendar year or (ii) a smaller number of shares as determined by the Company's Board of Directors. As of September 30, 2022, there were 12,486,500 remaining shares available for the Company to grant under the 2021 Plan.

The Company’s Amended and Restated 2015 Stock Option Plan ("2015 Plan”) provided for the granting of ISOs and NSOs to the Company's employees, consultants, and nonemployee directors. In conjunction with the effectiveness of the 2021 Plan, the Company’s Board of Directors voted that no further awards would be granted under the 2015 Plan but any awards under the 2015 Plan that were outstanding as of the date of the IPO shall remain outstanding and continue to be subject to the terms and conditions of the 2015 Plan.

Stock-based awards granted to employees generally vest over a four-year period, and, in the case of stock options, expire ten years from the date of grant.

2021 Employee Stock Purchase Plan

In September 2021, the Company’s Board of Directors adopted, and its stockholders approved, the 2021 Employee Stock Purchase Plan (“2021 ESPP”), which became effective in connection with the IPO. The 2021 ESPP authorizes the issuance of shares of common stock pursuant to purchase rights granted to employees. A total of 2,219,728 shares of the Company’s common stock have been reserved for future issuance under the 2021 ESPP. The number of shares available for issuance under the 2021 ESPP will be annually increased on January 1 of each calendar year beginning in 2022 and ending in 2031, by an amount equal to the lesser of: (i) 1% of the aggregate number of shares of the Company's common stock outstanding on the final day of the immediately preceding calendar year or (ii) such smaller number of shares as is determined by the Company's Board of Directors.

The 2021 ESPP permits eligible participants to purchase common stock through payroll deductions of up to 15% of their eligible compensation during the offering period. The purchase price of the shares will be 85% of the lesser of the fair market value of the Company's common stock on the first day of the offering period or the fair market value on the last day of the offering period. The Company's first offering period commenced on February 1, 2022 and ended on May 31, 2022. Following the completion of the first offering period, the 2021 ESPP will typically be administered through consecutive six-month offering periods. As of September 30, 2022, there were 2,193,798 shares of common stock available for issuance under the 2021 ESPP.

Stock-based Compensation Expense

Stock-based compensation expense is reflected in the condensed consolidated statements of operations and comprehensive income (loss) as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Cost of revenue	$	397	$	152	$	660	$	160
General and administrative		1,832		5,738		6,528		6,192
Selling and marketing		869		506		1,829		569
Research and development		700		207		1,095		242
Total	$	3,798	$	6,603	$	10,112	$	7,163

Award Modification and Acceleration of Expense

In June 2021, the Company entered into an amended employment agreement with an employee. Under the terms of the amended agreement, the employee would continue to vest in his outstanding equity awards, despite changes to his day-to-day responsibilities over time. As a result of the employment change, certain awards were considered to be modified in accordance with ASC 718, Compensation - Stock Compensation. As of the modification date, this resulted in a $12.1 million increase in unamortized stock-based compensation expense.

Upon the Company's IPO in September 2021, as specified in the 2015 Plan, all awards with performance-based vesting conditions converted into awards with service-based vesting, with vesting measured from each awards' respective grant date. During the third quarter of 2021, the Company recognized $5.7 million of accelerated stock-based compensation expense related to awards with performance-based vesting conditions that converted into service-based vesting, of which $3.6 million related to the above-mentioned modified awards.

12. Income Taxes

The Company's effective income tax rates were (18.5)% and 7.5% for the three months ended September 30, 2022 and 2021, respectively. The Company's effective income tax rates were (22.6)% and 7.2% for the nine months ended September 30, 2022 and 2021, respectively. The effective tax rates for the three and nine months ended September 30, 2022 were lower than the statutory rate of 21.0% primarily due to excess benefits from stock-based compensation. The effective tax rates for the three and nine months ended September 30, 2021 were lower than the statutory rate of 21.0% due to stock-based compensation adjustments, acquisition earnout payments, and other permanent items.

13. Commitments and Contingencies

Non-Cancellable Commitments

As of September 30, 2022, the Company had non-cancellable commitments to vendors primarily consisting of subscriptions to third party software products. Obligations under contracts that are cancellable or with a remaining term of 12 months or less are not included. As of September 30, 2022, future minimum payments under other non-cancellable agreements were as follows (in thousands):


Remainder of 2022	$	1,275
2023		3,445
2024		1,652
2025		140
2026		83
Thereafter		—
Total	$	6,595

Contingent Value Payments

In 2019, the CVR Plan was established for the benefit of option holders as of February 11, 2019 in the event that holders of the Company’s Class A-1 common shares receive cash distributions in connection with certain exit events specified under the LLC Agreement of at least $889.1 million (the “Performance Threshold”). Subject to the achievement of the Performance Threshold, CVR Units entitle the holder, subject generally to the holder’s continued employment through the date of payment, to a pro-rata portion of a bonus pool (based on a participant’s share of CVR Units held). The maximum amount of this bonus pool was capped at $9.5 million, of which, $6.2 million remains outstanding as of September 30, 2022. No compensation expense has been recognized in relation to the CVR Plan as the Company has determined that certain exit events specified under the LLC Agreement are not probable as of September 30, 2022.

In connection with the Company’s IPO, the CVR Plan was amended to reflect the Corporate Conversion (refer to Note 10 - Stockholders' Equity) and the CVR Units will remain subject to the same terms and conditions applicable immediately prior to the Company’s IPO. Following the Common Stock Reclassifications, General Atlantic subscribed and received 288,344 additional shares of common stock in the Company, with the value of each share based on the public offering price of the shares of common stock sold by the Company in the IPO. As consideration for the additional shares of common stock, General Atlantic entered into a promissory note with the Company, which requires General Atlantic to make a capital contribution to the Company equal to the amount of any future payments to be made by the Company to holders of CVR Units pursuant to the CVR Plan, which such payments would be triggered by the same exit events specified under the LLC Agreement. In the event the CVR Units are forfeited or the Performance Threshold is not met, General Atlantic will not be required to make any payments under the promissory note and will keep the shares issued.

Indemnification Agreements

In the normal course of business, the Company may provide indemnification of varying scope and terms to third parties and may enter into commitments and guarantees (“Agreements”) under which it may be required to make payments. The duration of these Agreements varies, and in certain cases, may be indefinite with no limit to the Company’s maximum potential payment exposure. In addition, the Company has obligations with certain members of its board of directors and certain executive officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. To date, the Company has not incurred any material costs as a result of such indemnifications. The Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities related to such obligations in its condensed consolidated financial statements as of September 30, 2022 and December 31, 2021.

Legal Proceedings

The Company is from time to time subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. The Company routinely assesses its current litigation and/or threatened litigation as to the probability of ultimately incurring a liability. In situations where the Company assesses the likelihood of loss as probable, the Company records its best estimate of the ultimate loss if reasonably possible to estimate. While the outcome of these claims cannot be predicted with certainty, the Company believes that these pending or threatened legal proceedings or claims could not have a material impact on the Company’s condensed consolidated financial statements.

14. Restructuring

In 2020, the Company relocated certain of its operations and abandoned office space in Los Angeles, California. During the nine months ended September 30, 2021, the Company recorded a reversal of restructuring expense of $0.2 million, associated with a change to sublease assumptions, following the execution of a sublease agreement in August 2021. Upon adoption of ASU 2016-12 on January 1, 2022, the outstanding restructuring liability was reclassified as a reduction to the Company's operating lease right-of-use asset. There were no restructuring charges recorded during the three and nine months ended September 30, 2022.

As of December 31, 2021, the restructuring liability was $1.2 million, of which $0.4 million was included within accrued expenses and other current liabilities and $0.8 million was included within other long-term liabilities within the Company’s condensed consolidated balance sheets.

15. Related Parties

In 2019, the Company assumed unsecured notes payable in the aggregate amount of $3.0 million (the “GC Notes”) and $2.9 million (“IVR Note”), respectively, with two individuals that are former shareholders, one of which is a former employee and the other is a current employee of Global Cloud, Ltd. (“GC”) and individuals that are former shareholders and former employees of IVR Technologies Group, LLC (“IVR”), respectively. The GC Notes and IVR Note bore interest at a rate of 7% and 8% per annum, respectively, and required interest-only payments with the outstanding principal amount and any accrued but unpaid interest due on the maturity date of March 12, 2021 and January 16, 2021, respectively. During the nine months ended September 30, 2021, the Company repaid in full the outstanding principal balance of the GC Notes and IVR Note, which totaled $5.9 million. These amounts are disclosed within cash flows from financing activities within the condensed consolidated statements of cash flows.

Within its condensed consolidated statements of operations and comprehensive income (loss), the Company recognized interest expense related to the GC Notes and IVR Note of less than $0.1 million during the nine months ended September 30, 2021. The Company made cash interest payments related to the GC Notes and IVR Note of $0.2 million during the nine months ended September 30, 2021.

16. Segment and Geographic Information

Segment Information

The Company has determined that its chief executive officer is its chief operating decision maker (“CODM”) and the Company is organized into two reportable segments: Enterprise Solutions and SMB Solutions. The reportable segments were determined based on how the CODM reviews business performance and makes decisions about resources to be allocated.

The Enterprise Solutions segment is primarily engaged in providing SaaS solutions that simplify customer-client engagement primarily through electronic billing and digital payments. Enterprise solutions are built to address the unique

needs of specific verticals: Government, Utilities, Financial Services, Healthcare and Giving. For the Enterprise Solutions segment, the Company integrates directly with its customers’ core software systems and utilizes a partner-assisted direct sales model for purposes of its go-to-market strategy. The Company generates a significant majority of its revenue in this segment from transaction and usage-based revenue. For the nine months ended September 30, 2022, this segment generated 45% of total revenue.

The SMB Solutions segment is primarily engaged in providing end-to-end practice management solutions geared toward the Health & Wellness industry. For the Company's SMB Solutions segment, the Company primarily relies on a free trial to paid customer sales model. The Company generates interest for its offerings in the Company's SMB Solutions segment through a combination of search engine optimization, word-of-mouth, paid customer referrals, and search engine marketing. The Company generates a majority of its revenue in this segment from subscription revenue. For the nine months ended September 30, 2022, this segment generated 55% of total revenue.

The CODM evaluates segment operating performance using revenue and Adjusted EBITDA, as defined below, from reportable segments to make resource allocation decisions and to evaluate segment performance. Adjusted EBITDA assists management in comparing the Company’s performance on a consistent basis for purposes of business decision-making. The Company defines Adjusted EBITDA as net income (loss) excluding interest income (expense), net; benefit from income taxes; depreciation; and amortization of intangible assets, as further adjusted for transaction-related expenses, fair value adjustment of acquired deferred revenue, stock/equity-based compensation and restructuring charges. Adjusted EBITDA from reportable segments excludes unallocated corporate costs which are primarily comprised of costs for accounting, finance, legal, human resources and costs for certain executives supporting overall business strategy and execution.

The following table sets forth the revenue and Adjusted EBITDA results attributable to each reportable segment and includes a reconciliation of the totals reported for the reportable segments to the applicable line items in the Company’s accompanying condensed consolidated statements of operations and comprehensive income (loss) (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Revenue
Enterprise Solutions	$	35,866		$	27,277		$	99,743		$	76,991
SMB Solutions		42,930			28,216			120,277			77,673
Total revenue		78,796			55,493			220,020			154,664
Adjusted EBITDA
Enterprise Solutions		4,577			3,119			13,338			9,695
SMB Solutions		16,314			10,080			45,239			27,402
Total Adjusted EBITDA from reportable segments		20,891			13,199			58,577			37,097
Unallocated corporate expenses		(7,669	)		(4,527	)		(22,833	)		(12,742	)
Total Adjusted EBITDA		13,222			8,672			35,744			24,355
Reconciling items:
Interest income (expense), net		1,005			(3,486	)		1,127			(8,086	)
Amortization of intangible assets		(3,900	)		(3,901	)		(11,700	)		(11,701	)
Depreciation		(816	)		(933	)		(2,289	)		(1,919	)
Transaction-related expenses		—			(3,014	)		38			(4,246	)
Fair value adjustment of acquired deferred revenue		—			(28	)		—			(122	)
Stock/equity-based compensation		(3,798	)		(6,603	)		(10,112	)		(7,163	)
Restructuring charges		—			330			—			241
Income (loss) before income taxes		5,713			(8,963	)		12,808			(8,641	)
Benefit from income taxes		(1,057	)		(671	)		(2,900	)		(623	)
Net income (loss)	$	6,770		$	(8,292	)	$	15,708		$	(8,018	)

The Company’s CODM does not separately evaluate assets by segment, and therefore assets by segment are not presented.

Geographic Information

For the nine months ended September 30, 2022 and 2021, revenues by geographic region are not disclosed as revenue outside the United States does not exceed 10% of total revenue.

The Company does not disclose geographic information for long-lived assets as long-lived assets located outside the United States do not exceed 10% of total assets.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, as well as our consolidated financial statements and related notes included in our 2021 Form 10-K. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q. You should review the disclosure in Part I, Item 1A. "Risk Factors" in our 2021 Form 10-K for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.

Overview

We are a leading provider of vertically tailored customer engagement software and integrated payments solutions. At EngageSmart, our mission is to simplify customer and client engagement to allow our customers to focus resources on initiatives that improve their businesses and better serve their communities. We offer single instance, multi-tenant, true Software-as-a-Service ("SaaS") vertical solutions that are designed to simplify our customers’ engagement with their clients by driving digital adoption and self-service. As of September 30, 2022, we serve 94,500 customers in the SMB Solutions segment and 3,300 customers in the Enterprise Solutions segment across several core verticals: Health & Wellness, Government, Utilities, Financial Services, Healthcare and Giving. Our SaaS solutions are purpose-built for each of our verticals and they simplify and automate mission-critical workflows such as scheduling, client onboarding, client communication, paperless billing, and electronic payment processing. Our solutions transform our customers’ digital engagement and empower them to manage, improve, and grow their businesses.

Our vertically tailored solutions include software and payment tools that automate mission-critical business workflows for customers across our verticals. Our value proposition is focused on transforming our customers’ digital engagement through four core SaaS solutions, including:

•

SimplePractice. An end-to-end practice management and electronic health record ("EHR") platform that health and wellness professionals use to manage their practices. SimplePractice serves practitioners, who are our customers, throughout their career journey, allowing them to manage their practice development from licensure to private practice. SimplePractice enables customers to engage with their clients across both virtual and in-person settings, schedule appointments, document cases, and handle all aspects of billing and insurance processing on one integrated platform. Our platform also helps our customers build and grow their practices through the use of our online marketplace, Monarch.

•

InvoiceCloud. An electronic bill presentment and payment solution that helps our Government, Utility, and Financial Services customers digitize billing, client communications, and collections. We believe InvoiceCloud drives superior client digital adoption, which increases engagement and drives operational efficiency for our customers.

•

HealthPay24. A patient engagement and payment platform that helps health systems, physician groups, dental practices, and medical billers efficiently drive patient self-pay collections.

•

DonorDrive. A fundraising software platform that helps non-profits, healthcare organizations, and higher education institutions produce virtual events, launch branded donation campaigns, and create peer-to-peer fundraising experiences.

Our Business Segments

We organize our solutions into two reportable segments, Enterprise Solutions and SMB Solutions. The chief operating decision maker (“CODM”), which is our chief executive officer, evaluates segment operating performance using revenue and Adjusted EBITDA from reportable segments to make resource allocation decisions and to evaluate segment performance.

•

Enterprise Solutions. The Enterprise Solutions segment is primarily engaged in providing SaaS solutions that simplify customer-client engagement primarily through electronic billing and digital payments, and includes our InvoiceCloud, HealthPay24 and DonorDrive solutions. Enterprise solutions are built to address the unique needs of specific verticals: Government, Utilities, Financial Services, Healthcare and Giving. For the Enterprise Solutions segment, we integrate directly with our customers’ core software systems and utilize a partner-assisted direct sales model for purposes of our go-to-market strategy. We generate a significant majority of our revenue in this segment

from transaction and usage-based revenue. For the nine months ended September 30, 2022, this segment generated 45% of total revenue.

•

SMB Solutions. The SMB Solutions segment is primarily engaged in providing end-to-end practice management solutions geared toward the Health & Wellness industry and includes our SimplePractice solution. For our SMB Solutions segment, we primarily rely on a free trial to paid customer sales model. We generate interest for our offerings in our SMB Solutions segment through a combination of search engine optimization, word-of-mouth, paid customer referrals, and search engine marketing. We generate a majority of our revenue in this segment from subscription revenue. For the nine months ended September 30, 2022, this segment generated 55% of total revenue.

Our Revenue Model

We primarily generate two types of revenue: (i) subscription revenue and (ii) transaction and usage-based revenue.

•

Subscription revenue. Generally consists of recurring monthly SaaS subscriptions from the sale of our solutions.

•

Transaction and usage-based revenue. Generally based on the number of Transactions Processed, as defined below, or the dollar value of the Transactions Processed within our software solutions, which is paid to us by our customers, our customers’ clients, or a combination of both. For our transaction and usage-based revenue that is derived from the facilitation of payment processing, in general, we receive more revenue for card-based payments than for electronic check and ACH payments.

Impact of COVID-19 and Inflationary Pressure on Our Business

The COVID-19 pandemic continues to affect global economic activity and create macroeconomic uncertainty, and has impacted our customers and partners, which has in the past and may in the future ultimately affect our business operations and results. As described in our 2021 Form 10-K, during the second half of 2021, the impact of the COVID-19 pandemic on our solutions began to decrease and our operating results began to normalize. To date, the COVID-19 pandemic has not had a material adverse effect on our results of operations in 2022. We will continue to prioritize the safety of our employees, customers, their clients and communities in which we operate.

In 2022, rates of inflation have been rising across many jurisdictions around the world, including the United States. We believe our business is resilient against the impacts of rising inflation and, to date, inflation has not had a material impact on our 2022 financial results.

The full extent to which the COVID-19 pandemic and inflationary pressure will directly or indirectly impact our business, results of operations, cash flows, and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted. Given the evolving nature of the COVID-19 pandemic and inflationary pressure, we will continue to closely monitor the impact on the verticals we serve and our business specifically. For further discussion of the potential impacts of the COVID-19 pandemic and inflationary pressure on our business, financial condition, and operating results, refer to Part I, Item 1A. “Risk Factors” in our 2021 Form 10-K.

Key Business Metrics and Non-GAAP Financial Measures

We review the following key business metrics and non-GAAP financial measures to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. Accordingly, we believe our key business metrics and non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management team. Our key business metrics and non-GAAP financial measures are presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with accounting principles generally accepted in the United States ("GAAP") and may be calculated differently than similarly titled metrics or measures presented by other companies.

Number of Customers

We serve a wide variety of customers across our verticals. The majority of our customers are based in the United States. For the purpose of measuring our key business metrics, we define customers as individuals or entities with whom we directly contract to use our solutions. The total number of customers for each of our segments are presented below.


	September 30, 2022		September 30, 2021
Customers in the SMB Solutions segment		94,500		74,300
Customers in the Enterprise Solutions segment		3,300		3,100
Total		97,800		77,400

Transactions Processed

We define Transactions Processed as the number of accepted payment transactions, such as credit card and debit card transactions, ACH payments, emerging electronic payments, other communication, text messaging and interactive voice response transactions, and other payment transaction types, which are facilitated through our solutions during a given period. We believe Transactions Processed is a useful key business metric for investors because it directly correlates with transaction and usage-based revenue. We use Transactions Processed to evaluate changes in transaction and usage-based revenue over time.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(in millions)
Transactions Processed		37.5		28.6		107.9		80.2

Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA as net income (loss) excluding interest income (expense), net, benefit from income taxes, depreciation, and amortization of intangible assets, as further adjusted for transaction-related expenses, the fair value adjustment of acquired deferred revenue, stock/equity-based compensation, and restructuring charges. We define Adjusted EBITDA Margin as Adjusted EBITDA divided by revenue plus the fair value adjustment of acquired deferred revenue. We believe that Adjusted EBITDA and Adjusted EBITDA Margin, when taken collectively with our GAAP results, may be helpful to investors because they provide consistency and comparability with past financial performance and assist in comparisons with other companies, some of which use similar non-GAAP financial measures to supplement their GAAP results.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
	(in thousands, except percentages)
Net income (loss)	$	6,770		$	(8,292	)	$	15,708		$	(8,018	)
Net income (loss) margin		8.6	%		(14.9	)%		7.1	%		(5.2	)%
Adjusted EBITDA	$	13,222		$	8,672		$	35,744		$	24,355
Adjusted EBITDA Margin		16.8	%		15.6	%		16.2	%		15.7	%

Adjusted Gross Profit and Adjusted Gross Margin

We define Adjusted Gross Profit as gross profit as adjusted for the fair value adjustment of acquired deferred revenue, amortization of intangible assets, stock/equity-based compensation, and transaction-related expenses. We define Adjusted Gross Margin as Adjusted Gross Profit divided by revenue plus the fair value adjustment of acquired deferred revenue. We believe that Adjusted Gross Profit and Adjusted Gross Margin, when taken collectively with our GAAP results, may be helpful to investors because they provide consistency and comparability with past financial performance and assist in comparisons with other companies, some of which use similar non-GAAP financial measures to supplement their GAAP results.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
	(in thousands, except percentages)
Gross profit	$	59,951		$	41,256		$	167,333		$	114,929
Gross profit margin		76.1	%		74.3	%		76.1	%		74.3	%
Adjusted Gross Profit	$	61,885		$	43,004		$	172,606		$	119,907
Adjusted Gross Margin		78.5	%		77.5	%		78.5	%		77.5	%

Management uses Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Gross Profit, and Adjusted Gross Margin:

•

as measures of operating performance because they assist us in comparing the operating performance of our business on a consistent basis, as they remove the impact of items not directly resulting from our core operations;

•

for planning purposes, including the preparation of our internal annual operating budget and financial projections;

•

to evaluate the performance and effectiveness of our operational strategies; and

•

to evaluate our capacity to expand our business.

By providing these non-GAAP financial measures, together with a reconciliation to the most directly comparable GAAP measure, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Gross Profit, and Adjusted Gross Margin have limitations as analytical tools, and should not be considered in isolation, or as an alternative to, or a substitute for net income (loss), gross profit, or other financial statement data presented in our consolidated financial statements as indicators of financial performance. Some of the limitations are:

•

such measures do not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;

•

such measures do not reflect our tax expense or the cash requirements to pay our taxes;

•

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and

•

other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures.

Reconciliations of Non-GAAP Financial Measures

The following tables present the reconciliations for each non-GAAP financial measure to the most directly comparable financial measure calculated and presented in accordance with GAAP.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
	(in thousands, except percentages)
Net income (loss)	$	6,770		$	(8,292	)	$	15,708		$	(8,018	)
Net income (loss) margin		8.6	%		(14.9	)%		7.1	%		(5.2	)%
Adjustments:
Benefit from income taxes		(1,057	)		(671	)		(2,900	)		(623	)
Interest (income) expense, net		(1,005	)		3,486			(1,127	)		8,086
Amortization of intangible assets		3,900			3,901			11,700			11,701
Depreciation		816			933			2,289			1,919
Fair value adjustment of acquired deferred revenue		—			28			—			122
Stock/equity-based compensation		3,798			6,603			10,112			7,163
Restructuring charges		—			(330	)		—			(241	)
Transaction-related expense		—			3,014			(38	)		4,246
Adjusted EBITDA	$	13,222		$	8,672		$	35,744		$	24,355
Adjusted EBITDA Margin		16.8	%		15.6	%		16.2	%		15.7	%


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
	(in thousands, except percentages)
Gross profit	$	59,951		$	41,256		$	167,333		$	114,929
Gross margin		76.1	%		74.3	%		76.1	%		74.3	%
Adjustments:
Fair value adjustment of acquired deferred revenue		—			28			—			122
Amortization of intangible assets		1,537			1,539			4,613			4,615
Stock/equity-based compensation		397			152			660			160
Transaction-related expense		—			29			—			81
Adjusted Gross Profit	$	61,885		$	43,004		$	172,606		$	119,907
Adjusted Gross Margin		78.5	%		77.5	%		78.5	%		77.5	%

Components of Results of Operations

Revenue

We generate revenue primarily from providing access to our SaaS solutions via subscription and transaction and usage-based fees for services provided through such solutions. To a lesser extent, we also generate revenue from the sale of implementation services, sale of on-demand learning courses and the sale of hardware.

Cost of Revenue

Cost of revenue primarily consists of personnel-related expenses for our customer support and operations teams, certain variable transaction and licensing costs, amortization of intangible assets related to acquired developed technology, and hosting and data storage costs associated with our infrastructure and platform environments. We expect that cost of revenue will increase in absolute dollars, but it may fluctuate as a percentage of revenue from period to period as we continue to invest in growing our business across our segments.

Operating Expenses

General and administrative

General and administrative expenses consist primarily of personnel-related expenses, professional and consulting-related expenses, and software costs. We expect to incur additional general and administrative expenses as a result of operating as a public company and to support the anticipated growth of our business. We expect that general and administrative expenses will increase, but they may fluctuate as a percentage of revenue from period to period. Over the longer term, we expect general and administrative expenses to decrease as a percentage of revenue as we leverage the scale of our business.

Selling and marketing

Selling and marketing expenses consist primarily of personnel-related expenses, inclusive of sales commission expense, fees paid to third-party partners, and costs to market and promote our solutions through advertisements and marketing events. We expect our selling and marketing expenses to increase in absolute dollars as we continue to invest in new customer acquisition and retention efforts, but they may fluctuate as a percentage of revenue from period to period.

Research and development

Research and development expenses consist primarily of personnel-related expenses, third-party consulting costs, and costs for software tools for product management and software development. Costs associated with developing new products and features that qualify as internal use software are capitalized and amortized. We expect our research and development expenses to increase in absolute dollars, but they may fluctuate as a percentage of revenue from period to period as we expand our research and development team to develop new products and enhance existing products.

Contingent consideration expense

Contingent consideration expense consists of increases or decreases in the fair value of our contingent consideration liabilities. We remeasure the fair value of potential future payments based upon the achievement levels of remaining targets at each subsequent reporting period until the contingent liabilities are settled or have expired. The contingent consideration liability was fully settled in the first quarter of 2022.

Restructuring charges

Restructuring charges consist of charges related to our restructuring efforts associated with relocating certain operations. Refer to Note 14 - Restructuring to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.

Amortization of intangible assets

Amortization of intangible assets, within operating expenses, consists primarily of amortization of customer relationship and tradename assets acquired as part of business combinations. We amortize acquired intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis.

Other Income (Expense), Net

Interest expense

Interest expense consists of interest expense on our long-term and related party debt, costs incurred to extinguish debt, amortization of debt issuance costs and fees associated with unused revolving credit facility commitments.

Other income (expense), net

Other income (expense), net consists primarily of interest income on our cash and cash equivalents and our short and long-term investments.

Results of Operations

The following table sets forth, for the periods presented, each line item from our condensed consolidated statements of operations on a percentage of revenue basis. The period-to-period comparison of financial results is not necessarily indicative of future results. The information contained in the table below should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
	(% of total revenue)
Revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenue		23.9	%		25.7	%		23.9	%		25.7	%
Gross profit		76.1	%		74.3	%		76.1	%		74.3	%
Operating expenses:
General and administrative		17.7	%		27.5	%		19.2	%		20.7	%
Selling and marketing		32.9	%		34.4	%		32.8	%		33.1	%
Research and development		16.5	%		16.5	%		15.5	%		15.5	%
Contingent consideration expense		—	%		2.1	%		—	%		0.9	%
Restructuring charges		—	%		(0.6	)%		—	%		(0.2	)%
Amortization of intangible assets		3.0	%		4.3	%		3.2	%		4.6	%
Total operating expenses		70.1	%		84.2	%		70.7	%		74.6	%
Income (loss) from operations		6.0	%		(9.8	)%		5.3	%		(0.3	)%
Other income (expense), net:
Interest expense, including related party interest		(0.2	)%		(6.3	)%		(0.2	)%		(5.2	)%
Other income (expense), net		1.4	%		(0.1	)%		0.7	%		(0.1	)%
Total other income (expense), net		1.3	%		(6.3	)%		0.5	%		(5.3	)%
Income (loss) before income taxes		7.3	%		(16.2	)%		5.8	%		(5.6	)%
Benefit from income taxes		(1.3	)%		(1.2	)%		(1.3	)%		(0.4	)%
Net income (loss) and comprehensive income (loss)		8.6	%		(14.9	)%		7.1	%		(5.2	)%

Comparison of the Three and Nine Months Ended September 30, 2022 and 2021

The following tables set forth our results of operations for the periods presented:


	Three Months Ended September 30,												Nine Months Ended September 30,
	2022			2021			Change						2022			2021			Change
	Amount			Amount			Amount			%			Amount			Amount			Amount			%
	(in thousands, except percentages)
Revenue	$	78,796		$	55,493		$	23,303			42.0	%	$	220,020		$	154,664		$	65,356			42.3	%
Cost of revenue		18,845			14,237			4,608			32.4	%		52,687			39,735			12,952			32.6	%
Gross profit		59,951			41,256			18,695			45.3	%		167,333			114,929			52,404			45.6	%
Operating expenses:
General and administrative		13,986			15,287			(1,301	)		(8.5	)%		42,270			31,990			10,280			32.1	%
Selling and marketing		25,906			19,096			6,810			35.7	%		72,262			51,224			21,038			41.1	%
Research and development		12,978			9,132			3,846			42.1	%		34,011			23,947			10,064			42.0	%
Contingent consideration expense		—			1,157			(1,157	)		(100.0	)%		—			1,370			(1,370	)		(100.0	)%
Restructuring charges		—			(330	)		330			(100.0	)%		—			(241	)		241			(100.0	)%
Amortization of intangible assets		2,363			2,362			1			0.0	%		7,087			7,086			1			0.0	%
Total operating expenses		55,233			46,704			8,529			18.3	%		155,630			115,376			40,254			34.9	%
Income (loss) from operations		4,718			(5,448	)		10,166			(186.6	)%		11,703			(447	)		12,150			(2,718.1	)%
Other income (expense), net:
Interest expense, including related party interest		(121	)		(3,487	)		3,366			(96.5	)%		(361	)		(8,087	)		7,726			(95.5	)%
Other income (expense), net		1,116			(28	)		1,144			(4,085.7	)%		1,466			(107	)		1,573			(1,470.1	)%
Total other income (expense), net		995			(3,515	)		4,510			(128.3	)%		1,105			(8,194	)		9,299			(113.5	)%
Income (loss) before income taxes		5,713			(8,963	)		14,676			(163.7	)%		12,808			(8,641	)		21,449			(248.2	)%
Benefit from income taxes		(1,057	)		(671	)		(386	)		57.5	%		(2,900	)		(623	)		(2,277	)		365.5	%
Net income (loss) and comprehensive income (loss)	$	6,770		$	(8,292	)	$	15,062			(181.6	)%	$	15,708		$	(8,018	)	$	23,726			(295.9	)%

Revenue

Revenue increased $23.3 million for the three month period ended September 30, 2022, as compared to the corresponding period in 2021, primarily due to an increase of $12.2 million in subscription revenue driven by an increase in the number of customers utilizing our solutions, higher revenue from existing customer expansion and the impact of the pricing and packaging changes in our SMB Solutions segment that occurred in the first quarter of 2022. Additionally, transaction and usage-based revenue increased $10.4 million driven by an increase in the number of Transactions Processed.

Revenue increased $65.4 million for the nine month period ended September 30, 2022, as compared to the corresponding period in 2021, primarily due to an increase of $33.4 million in subscription revenue driven by an increase in the number of customers utilizing our solutions, higher revenue from existing customer expansion and the impact of the pricing and packaging changes in our SMB Solutions segment that occurred in the first quarter of 2022. Additionally, transaction and usage-based revenue increased $31.1 million driven by an increase in the number of Transactions Processed.

Cost of revenue

Cost of revenue increased $4.6 million for the three month period ended September 30, 2022, as compared to the corresponding period in 2021, primarily related to an increase of $2.1 million in certain variable transaction, licensing and hosting costs due to higher usage of our solutions, and a $1.7 million increase in personnel-related costs, driven by headcount growth within our customer support departments needed to sustain the increased demand for our solutions.

Cost of revenue increased $13.0 million for the nine month period ended September 30, 2022, as compared to the corresponding period in 2021, primarily related to an increase of $5.7 million in certain variable transaction, licensing and hosting costs due to higher usage of our solutions, and a $5.0 million increase in personnel-related costs, driven by headcount growth within our customer support departments needed to sustain the increased demand for our solutions.

General and administrative expenses

General and administrative expenses decreased $1.3 million for the three month period ended September 30, 2022, as compared to the corresponding period in 2021, primarily due to a decrease of $2.9 million in personnel-related costs, driven by a decrease in stock-based compensation expense, offset by an increase of $1.2 million in professional and consulting-related expenses, including legal and insurance, related to increased costs required to support operating as a public company.

General and administrative expenses increased $10.3 million for the nine month period ended September 30, 2022, as compared to the corresponding period in 2021, primarily due to an increase of $4.8 million in personnel-related costs, driven by increased headcount to support overall growth and public company operations. In addition, professional and consulting-related expenses, including legal and insurance, increased $4.6 million related to increased costs required to support operating as a public company.

Selling and marketing expenses

Selling and marketing expenses increased $6.8 million for the three month period ended September 30, 2022, as compared to the corresponding period in 2021, primarily due to an increase of $2.6 million in personnel-related costs associated with headcount growth, an increase of $1.8 million in advertising and other marketing-related spend utilized to drive new customer additions, and an increase of $1.8 million in fees paid to third-party channel partners.

Selling and marketing expenses increased $21.0 million for the nine month period ended September 30, 2022, as compared to the corresponding period in 2021, primarily due to an increase of $7.3 million in personnel-related costs associated with headcount growth, an increase of $5.8 million in advertising and other marketing-related spend utilized to drive new customer additions, and an increase of $4.6 million in fees paid to third-party channel partners.

Research and development expenses

Research and development expenses increased $3.8 million for the three month period ended September 30, 2022, as compared to the corresponding period in 2021, primarily due to an increase of $3.0 million in personnel-related costs associated with headcount growth needed to enhance the functionality and ease of use of our solutions.

Research and development expenses increased $10.1 million for the nine month period ended September 30, 2022, as compared to the corresponding period in 2021, primarily due to an increase of $8.2 million in personnel-related costs associated with headcount growth needed to enhance the functionality and ease of use of our solutions.

Contingent consideration expense

The contingent consideration liability was fully settled in the first quarter of 2022, therefore there was no contingent consideration expense recorded for the three or nine month periods ended September 30, 2022. Contingent consideration expense was $1.2 million and $1.4 million for the three and nine months ended September 30, 2021, respectively, and relates to the change in fair value of the contingent consideration liability.

Restructuring charges

During the three and nine month periods ended September 30, 2022, there were no restructuring charges recorded. During the three and nine month periods ended September 30, 2021, we recorded a reversal of restructuring expense of $0.3 million and $0.2 million, respectively, associated with a change to sublease assumptions used to calculate the revised restructuring liability, following the execution of a sublease agreement in August 2021.

Amortization of intangible assets

Amortization of intangible assets, within operating expenses, remained consistent for the three and nine months ended September 30, 2022, as compared to the corresponding periods in 2021.

Interest expense

During the three and nine month periods ended September 30, 2022, interest expense was $0.1 million and $0.4 million, respectively, associated with our 2021 Revolving Credit Facility, as defined below.

During the three and nine month periods ended September 30, 2021, interest expense was $3.5 million and $8.1 million, respectively, which primarily related to our prior credit facility which was extinguished on September 27, 2021.

Other income (expense), net

Other income (expense), net increased $1.1 million and $1.6 million for the three and nine month periods ended September 30, 2022, as compared to the corresponding periods in 2021, respectively, due to an increase in interest income.

Benefit from income taxes

The benefit from income taxes was $1.1 million during the three months ended September 30, 2022, as compared to $0.7 million benefit for the three months ended September 30, 2021. Our effective income tax rate was (18.5)% for the three months ended September 30, 2022, compared to 7.5% for the three months ended September 30, 2021. The effective tax rate for the three months ended September 30, 2022 was lower than the statutory rate of 21.0% primarily due to excess benefits from stock-based compensation. The effective tax rate for the three months ended September 30, 2021 was lower than the statutory rate of 21.0% due to stock-based compensation adjustments and other permanent items.

The benefit from income taxes was $2.9 million during the nine months ended September 30, 2022, as compared to $0.6 million benefit for the nine months ended September 30, 2021. Our effective income tax rate was (22.6)% for the nine months ended September 30, 2022, compared to 7.2% for the nine months ended September 30, 2021. The effective tax rate for the nine months ended September 30, 2022 was lower than the statutory rate of 21.0% primarily due to excess benefits from stock-based compensation. The effective tax rate for the nine months ended September 30, 2021 was lower than the statutory rate of 21.0% due to stock-based compensation adjustments, acquisition earnout payments, and other permanent items.

Segment Information

Our reportable segments have been determined in accordance with Accounting Standards Codification ("ASC"), ASC 280, Segment Reporting. Currently, we have two reportable segments: Enterprise Solutions and SMB Solutions. The CODM, which is our chief executive officer, evaluates segment operating performance using revenue and Adjusted EBITDA from reportable segments to make resource allocation decisions and to evaluate segment performance. We define Adjusted EBITDA as net income (loss) excluding interest income (expense), net; benefit from income taxes; depreciation; and amortization of intangible assets, as further adjusted for transaction-related expenses, the fair value adjustment of acquired deferred revenue, stock/equity-based compensation, and restructuring charges. Adjusted EBITDA from reportable segments excludes unallocated corporate costs which are primarily comprised of costs for accounting, finance, legal, human resources and costs for certain executives supporting overall business strategy and execution.

Adjusted EBITDA from reportable segments is a non-GAAP measure. Refer to “Key Business Metrics and Non-GAAP Financial Measures” for a reconciliation of Adjusted EBITDA, a non-GAAP measure, to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.

Comparison of the Three and Nine Months Ended September 30, 2022 and 2021


		Three Months Ended September 30,						Nine Months Ended September 30,
		2022			2021			2022			2021
	(in thousands, except percentages)
Revenue
Enterprise Solutions		$	35,866		$	27,277		$	99,743		$	76,991
SMB Solutions			42,930			28,216			120,277			77,673
Total revenue			78,796			55,493			220,020			154,664
Adjusted EBITDA
Enterprise Solutions			4,577			3,119			13,338			9,695
SMB Solutions			16,314			10,080			45,239			27,402
Total Adjusted EBITDA from reportable segments			20,891			13,199			58,577			37,097
Unallocated corporate expenses			(7,669	)		(4,527	)		(22,833	)		(12,742	)
Total Adjusted EBITDA			13,222			8,672			35,744			24,355
Reconciling items:
Interest income (expense), net			1,005			(3,486	)		1,127			(8,086	)
Amortization of intangible assets			(3,900	)		(3,901	)		(11,700	)		(11,701	)
Depreciation			(816	)		(933	)		(2,289	)		(1,919	)
Transaction-related expenses			—			(3,014	)		38			(4,246	)
Fair value adjustment of acquired deferred revenue			—			(28	)		—			(122	)
Stock/equity-based compensation			(3,798	)		(6,603	)		(10,112	)		(7,163	)
Restructuring charges			—			330			—			241
Income (loss) before income taxes			5,713			(8,963	)		12,808			(8,641	)
Benefit from income taxes			(1,057	)		(671	)		(2,900	)		(623	)
Net income (loss)		$	6,770		$	(8,292	)	$	15,708		$	(8,018	)
Net income (loss) margin			8.6	%		(14.9	)%		7.1	%		(5.2	)%
Adjusted EBITDA Margin - Enterprise Solutions			12.8	%		11.4	%		13.4	%		12.6	%
Adjusted EBITDA Margin - SMB Solutions			38.0	%		35.7	%		37.6	%		35.2	%

Revenue

Revenue for the Enterprise Solutions segment increased $8.6 million and $22.8 million for the three and nine month periods ended September 30, 2022, as compared to the corresponding periods in 2021, respectively, primarily attributable to an increase in transaction and usage-based revenue driven by an increase in Transactions Processed.

Revenue for the SMB Solutions segment increased $14.7 million for the three month period ended September 30, 2022, as compared to the corresponding period in 2021, primarily attributable to an increase of $11.9 million in subscription revenue driven by an increase in the number of customers utilizing our solutions, higher revenue from existing customer expansion and the impact of the pricing and packaging changes that occurred in the first quarter of 2022. Additionally, transaction and usage-based revenue increased $2.8 million driven by an increase in Transactions Processed.

Revenue for the SMB Solutions segment increased $42.6 million for the nine month period ended September 30, 2022, as compared to the corresponding period in 2021, primarily attributable to an increase of $32.5 million in subscription revenue driven by an increase in the number of customers utilizing our solutions, higher revenue from existing customer expansion and the impact of the pricing and packaging changes that occurred in the first quarter of 2022. Additionally, transaction and usage-based revenue increased $9.7 million driven by an increase in Transactions Processed.

Adjusted EBITDA

Adjusted EBITDA margin for the Enterprise Solutions segment increased to 12.8% and 13.4% for the three and nine month periods ended September 30, 2022, as compared to 11.4% and 12.6% in the corresponding periods in 2021, respectively. The increase in Adjusted EBITDA margin was primarily driven by revenue growth outpacing headcount spend, partially offset by an increase in travel and entertainment costs as travel resumed following waning travel restrictions.

Adjusted EBITDA margin for the SMB Solutions segment increased to 38.0% and 37.6% for the three and nine month periods ended September 30, 2022, as compared to 35.7% and 35.2% in the corresponding periods in 2021, respectively.

The increase in Adjusted EBITDA margin was primarily driven by revenue growth outpacing headcount and consulting spend, partially offset by an increase in marketing spend to drive higher trial volumes.

Liquidity and Capital Resources

As of September 30, 2022 and December 31, 2021, we had cash and cash equivalents of $293.5 million and $254.3 million, respectively, which were primarily held for working capital purposes. Our primary source of funds has been, and we expect it to continue to be, cash generated from our net revenues, supplemented through debt financing and sale of our equity securities. We believe our existing cash and cash equivalents, cash provided by operations and access to our 2021 Revolving Credit Facility, as defined below, will be sufficient to meet our working capital and capital expenditures needs for at least the next 12 months.

On September 27, 2021, we completed our initial public offering ("IPO"), in which we issued and sold 13,620,054 shares of common stock at a price of $26.00 per share. We raised net proceeds of $326.4 million from the IPO after deducting the underwriting discounts of $22.1 million and offering expenses of $5.6 million. On September 27, 2021, we used a portion of the net proceeds from our IPO to repay in full the outstanding borrowings of $114.2 million under our prior credit facility.

On September 27, 2021, we entered into a revolving credit agreement ("2021 Revolving Credit Facility") which allows us to borrow up to $75.0 million, $7.5 million of which may be comprised of a letter of credit facility. The 2021 Revolving Credit Facility matures on September 27, 2026 and proceeds of any borrowings under the 2021 Revolving Credit Facility will be used for general corporate purposes. As of September 30, 2022, we have not drawn upon the 2021 Revolving Credit Facility, although $2.1 million has been utilized against the 2021 Revolving Credit Facility in the form of a line of credit, reducing our borrowing capacity to $72.9 million. The 2021 Revolving Credit Facility contains certain financial maintenance covenants, which require us to not exceed certain specified total net leverage ratios at the end of each fiscal quarter. As of September 30, 2022, we were in compliance with all financial covenants under the 2021 Revolving Credit Facility.

To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity by us would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. There can be no assurances that we will be able to raise additional capital. In the event that additional financing is required from outside sources, we may not be able to negotiate terms acceptable to us or at all or access the capital markets due to volatility. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, financial condition, and cash flows would be adversely affected.

Cash Flows

The following table summarizes our cash flows for the periods presented:


	Nine Months Ended September 30,
	2022			2021
	(in thousands)
Net cash provided by operating activities	$	34,114		$	20,354
Net cash used in investing activities		(4,759	)		(3,190	)
Net cash provided by financing activities		9,807			207,310

Cash Flows from Operating Activities

Our primary source of operating cash is revenue generated from subscription and transaction and usage-based fees associated with our SaaS solutions. Our primary uses of operating cash are personnel-related costs and payments to our vendors. Our cash flows from operating activities are impacted by the amount of our net income (loss), revenue and customer growth, volume of transactions, changes in working capital accounts, the timing of payments to vendors and add-backs of non-cash expense items such as depreciation and amortization, stock/equity-based compensation expense, deferred income taxes, non-cash operating lease expense and non-cash interest expense.

Net cash provided by operating activities increased $13.8 million for the nine month period ended September 30, 2022, as compared to the corresponding period in 2021, due to a $22.9 million increase in net income adjusted for non-cash expense items, offset by a decrease of $9.1 million in cash generated from the change in operating asset and liability accounts.

Cash Flows from Investing Activities

Investing activities primarily consist of payments made related to capital expenditures.

Net cash used in investing activities increased $1.6 million for the nine month period ended September 30, 2022, as compared to the corresponding period in 2021, driven by an increase in capital expenditures.

Cash Flows from Financing Activities

Financing activities primarily consist of net proceeds from the issuance of common stock, payment of IPO costs, proceeds and repayments on long-term and related party debt, proceeds from the exercise of stock/equity-based options, contingent consideration payments, payments of taxes related to net share settlement of equity awards, and proceeds from issuance of common stock under our employee stock purchase plan.

Net cash provided by financing activities decreased $197.5 million for the nine month period ended September 30, 2022, as compared to the corresponding period in 2021.

During the nine months ended September 30, 2022, cash provided by financing activities was $9.8 million, which was primarily driven by $11.2 million of proceeds from exercise of stock options, offset by contingent consideration payments of $1.1 million.

During the nine months ended September 30, 2021, cash provided by financing activities was $207.3 million, which was primarily driven by $332.0 million of net proceeds from the issuance of common stock upon our IPO and $1.1 million of proceeds from issuance of stock options, offset by $114.2 million used to repay long-term debt, $5.9 million used to repay related party notes, $2.9 million of payments related to our offering costs, contingent consideration payments of $1.9 million, and payments of debt issuance costs of $0.7 million.

Contractual Obligations and Commitments

As of September 30, 2022, there were no material changes in our contractual obligations and commitments from those disclosed in our 2021 Form 10-K.

For additional discussion on our operating leases and other non-cancellable commitments, refer to Note 5 - Leases and Note 13 - Commitments and Contingencies to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods, as well as related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and the amount of revenue and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and any such differences may be material.

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates as described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our 2021 Form 10-K, except as noted in Note 2 - Summary of Significant Accounting Policies and Note 5 - Leases to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Recent Accounting Pronouncements

Refer to Note 2 - Summary of Significant Accounting Policies to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a description of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.

JOBS Act

We currently qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Accordingly, we have the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. We have elected to delay the adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Our utilization of these transition periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the transition periods afforded under the JOBS Act.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in our market risk exposure as described under the heading "Item 7A. Quantitative and Qualitative Disclosures about Market Risk" in our 2021 Form 10-K.

Item 4. Controls and Procedures.

Inherent Limitations on Effectiveness of Controls

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, and as a result of the material weakness described below, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2022, our disclosure controls and procedures were not effective at the reasonable assurance level. However, after giving full consideration to this material weakness, and the additional analyses and other procedures that we performed to ensure that our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q were prepared in accordance with GAAP, our management has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods disclosed in conformity with GAAP.

Material Weaknesses

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual and interim financial statements will not be detected or prevented on a timely basis.

In connection with the preparation of our consolidated financial statements for the years ended December 31, 2021 and 2020, as previously reported in our 2021 Form 10-K, we identified deficiencies related to a lack of certain defined processes and controls over information technology, in the areas of access management, segregation of duties, change management, data governance and program development, and a lack of certain defined processes and controls over the financial statement close process. These deficiencies, when aggregated, are material weaknesses and could result in a material misstatement to our financial statements that may not be able to be prevented or detected.

Remediation Measures

We are compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404(a) of Sarbanes-Oxley Act and we are taking steps to remediate the material weaknesses. The finalization of our remediation measures is ongoing and includes the following:

•

the hiring of additional accounting and finance and information technology resources with public company experience;

•

centralizing key accounting and finance procedures within the financial close and reporting process;

•

broadening the scope and improving the effectiveness of existing information technology general controls for identity and access management, segregation of duties, change management, data governance, and program development;

•

reviewing, strengthening, and developing policies related to each of these areas of information technology general controls;

•

engaging internal and external resources to assist us with remediation and monitoring remediation progress;

•

delivering periodic training to our team members, including but not limited to technology and accounting staff, on internal controls over financial reporting; and

•

strengthening our information technology compliance and accounting functions with additional experienced hires to assist in the expansion and effectiveness of the existing risk assessment, management processes and the design and implementation of controls responsive to those deficiencies.

While we believe these efforts will remediate the material weaknesses, these material weaknesses cannot be considered fully remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Changes in Internal Control over Financial Reporting

We are taking actions to remediate the material weakness relating to our internal control over financial reporting. Other than the changes to our internal control over financial reporting described in “Remediation Measures” above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are subject to legal and regulatory proceedings in the ordinary course of business. We believe that there is no pending or threatened legal proceeding that has arisen from these matters that individually is likely to have a material impact on our business, financial condition, results of operations or cash flows. However, management’s views and estimates related to these matters may change in the future, as new events and circumstances arise and the matters continue to develop. Moreover, results of litigation and claims are inherently unpredictable, and legal proceedings related to such accidents or incidents could, in the aggregate, have a material impact on our business, financial condition, results of operations, and cash flows.

Item 1A. Risk Factors.

Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, liquidity and results of operations. There have been no material changes to the risks and uncertainties previously identified in Part I, Item 1A. “Risk Factors", in our 2021 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a) Sale of Unregistered Securities; Purchases of Equity Securities by the Issuer or Affiliated Purchaser

Not Applicable.

(b) Use of Proceeds

On September 27, 2021 we completed our IPO, in which we issued and sold 13,620,054 shares of our common stock. All shares sold were registered pursuant to a registration statement on Form S-1 (File No. 333-259101), as amended, declared effective by the SEC on September 22, 2021. There has been no material change in the expected use of the net proceeds from our IPO as described in our final prospectus dated September 22, 2021, filed with the SEC in accordance with Rule 424(b) of the Securities Act on September 24, 2021.

Not Applicable.

Item 3. Defaults Upon Senior Securities.

Not Applicable.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

Not Applicable.

Item 6. Exhibits.


		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed / Furnished Herewith
2.1	Plan of Conversion.	10-Q	001-40835	2.1	11/10/2021
2.2	Plan of Reorganization.	10-Q	001-40835	2.2	11/10/2021
2.3	Certificate of Conversion of EngageSmart, Inc.	10-Q	001-40835	2.3	11/10/2021
3.1	Amended and Restated Certificate of Incorporation of EngageSmart, Inc.	10-Q	001-40835	3.1	11/10/2021
3.2	Bylaws of EngageSmart, Inc.	10-Q	001-40835	3.2	11/10/2021
4.1	Specimen Common Stock Certificate Evidencing the Shares of Common Stock.	S-1/A	333-259101	4.3	9/13/2021
10.1	Amendment No. 1 to Registration Rights Agreement, dated November 2, 2022.					*
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).					*
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).					*
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.					**
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.					**
101.INS	Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.					*
101.SCH	Inline XBRL Taxonomy Extension Schema Document					*
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document					*
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document					*
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document					*
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document					*
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)					*

*	Filed herewith.
**	Furnished herewith.

SIGNATURES

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.


	EngageSmart, Inc.

Date: November 3, 2022	By:	/s/ Robert P. Bennett
		Robert P. Bennett
		Chief Executive Officer

Date: November 3, 2022	By:	/s/ Cassandra Hudson
		Cassandra Hudson
		Chief Financial Officer