EngageSmart, Inc. - Quarter Report: 2023 September (Form 10-Q)

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, 2023


☐	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, 2023, the registrant had 168,096,841 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	2
	Condensed Consolidated Statements of Stockholders' Equity	3
	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	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31

PART II.	OTHER INFORMATION	32

Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	36
Signatures		37

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of 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 are 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 proposed merger with an affiliate of Vista Equity Partners (the “Merger”) pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), including financial estimates and statements as to the expected timing, completion and effects of the proposed merger, future results of operations and financial position, industry and business trends, equity compensation, business strategy, plans, market growth and our objectives for future operations.

By their nature, forward-looking statements address matters that involve risks and uncertainties because they relate to events and depend upon future circumstances that may or may not occur, such as the consummation of the Merger and the anticipated benefits thereof. These and other forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed in any forward-looking statements. Important risk factors that may cause such a difference include, but are not limited to: uncertainties related to the consummation of the Merger; our ability to complete the Merger, if at all, on the anticipated terms and timing, including obtaining required stockholder and regulatory approvals, and the satisfaction of other conditions to the completion of the Merger; our obligation to pay a termination fee under certain circumstances if the Merger is terminated; uncertainties about the pendency of the Merger and the effect of the Merger on employees, customers and other third parties who deal with EngageSmart; the impact of certain interim covenants that we are subject to under the Merger Agreement; provisions in the Merger Agreement that limit our ability to pursue alternatives to the Merger, which might discourage a third party that has an interest in acquiring all or a significant part of EngageSmart from considering or proposing that acquisition; the fact that we and our directors and officers may be subject to lawsuits relating to the Merger; the substantial transaction-related costs we will continue to incur in connection with the Merger; our efforts to complete the Merger could disrupt our relationships with third parties and employees, divert management’s attention, or result in negative publicity or legal proceedings; the inability of stockholders to participate in any further upside of EngageSmart’s business if the Merger is consummate; our ability to retain and hire key personnel; continued availability of capital and financing and rating agency actions; legislative, regulatory and economic developments affecting our business; general economic and market developments and conditions; unpredictability and severity of catastrophic events, including but not limited to acts of terrorism, pandemics, outbreaks of war or hostilities, as well as our response to any of the aforementioned factors; competitive responses to the Merger; 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, 2022 (the “2022 Form 10-K”), filed on February 23, 2023 with the Securities and Exchange Commission (the “SEC”). Other risk factors that could cause actual results to differ materially from those anticipated in these forward-looking statements include, but are not limited to, the following: 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; and our ability to establish, grow and maintain strategic partnerships. While the list of factors presented here is considered representative, no such list should be considered a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements. Consequences of material differences in results as compared with those anticipated in the forward-looking statements could include, among other things, business disruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which could have a material impact on our financial condition, results of operations, credit rating or liquidity.

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.

iii

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

EngageSmart, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)


	September 30, 2023		December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	366,034	$	311,780
Accounts receivable, net of allowance for credit losses of $184 and $228 as of September 30, 2023 and December 31, 2022, respectively		10,672		10,971
Unbilled receivables		6,716		5,413
Prepaid expenses and other current assets		13,076		13,680
Total current assets		396,498		341,844
Operating lease right-of-use assets		24,020		26,907
Property and equipment, net		17,788		14,328
Goodwill		423,406		425,677
Acquired intangible assets, net		61,462		72,319
Other assets		6,536		5,422
Total assets	$	929,710	$	886,497
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,457	$	1,229
Accrued expenses and other current liabilities		43,697		38,423
Deferred revenue		9,126		8,237
Operating lease liabilities		4,837		4,632
Total current liabilities		59,117		52,521
Long-term operating lease liabilities		23,669		27,161
Deferred income taxes		657		1,322
Contingent consideration liability, net of current portion		1,475		—
Deferred revenue, net of current portion		345		335
Other long-term liabilities		2,214		186
Total liabilities		87,477		81,525
Commitments and contingencies (Note 14)
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, 2023 and December 31, 2022		—		—
Common stock, par value $0.001 per share, 650,000,000 shares authorized and 167,864,066 and 166,081,011 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively		168		166
Additional paid-in capital		831,586		814,319
Retained earnings (accumulated deficit)		10,479		(9,513	)
Total stockholders’ equity		842,233		804,972
Total liabilities and stockholders’ equity	$	929,710	$	886,497

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

EngageSmart, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income

(in thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Revenue	$	97,732		$	78,796		$	280,573		$	220,020
Cost of revenue		21,821			18,845			64,357			52,687
Gross profit		75,911			59,951			216,216			167,333
Operating expenses:
General and administrative		18,218			13,986			48,081			42,270
Selling and marketing		33,596			25,906			93,143			72,262
Research and development		17,889			12,978			49,402			34,011
Gain on sale of business		(10,511	)		—			(10,511	)		—
Amortization of intangible assets		2,402			2,363			7,126			7,087
Total operating expenses		61,594			55,233			187,241			155,630
Income from operations		14,317			4,718			28,975			11,703
Other income (expense), net:
Interest expense		(135	)		(121	)		(375	)		(361	)
Other income, net		3,683			1,116			9,544			1,466
Total other income (expense), net		3,548			995			9,169			1,105
Income before income taxes		17,865			5,713			38,144			12,808
Provision for (benefit from) income taxes		6,335			(1,057	)		18,152			(2,900	)
Net income and comprehensive income	$	11,530		$	6,770		$	19,992		$	15,708
Net income per share:
Basic	$	0.07		$	0.04		$	0.12		$	0.10
Diluted	$	0.07		$	0.04		$	0.12		$	0.09
Weighted-average number of shares outstanding:
Basic		167,546,450			164,427,770			166,940,589			163,195,976
Diluted		170,269,392			169,222,794			170,049,993			169,064,015

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)


									Retained Earnings			Total
	Common Stock					Additional			(Accumulated			Stockholders'
	Shares			Amount		Paid-in Capital			Deficit)			Equity
Balances as of December 31, 2022		166,081,011		$	166	$	814,319		$	(9,513	)	$	804,972
Issuance of common stock upon exercise of stock options		402,510			1		1,326			—			1,327
Vesting of restricted stock units		199,145			—		—			—			—
Shares withheld for employee taxes		(65,265	)		—		(1,198	)		—			(1,198	)
Stock-based compensation expense		—			—		4,900			—			4,900
Net income		—			—		—			4,124			4,124
Balances as of March 31, 2023		166,617,401		$	167	$	819,347		$	(5,389	)	$	814,125
Issuance of common stock upon exercise of stock options		375,400			—		1,077			—			1,077
Issuance of common stock in connection with employee stock purchase plan		67,359			—		981			—			981
Vesting of restricted stock units		228,166			—		—			—			—
Shares withheld for employee taxes		(72,159	)		—		(1,365	)		—			(1,365	)
Stock-based compensation expense		—			—		5,102			—			5,102
Net income		—			—		—			4,338			4,338
Balances as of June 30, 2023		167,216,167		$	167	$	825,142		$	(1,051	)	$	824,258
Issuance of common stock upon exercise of stock options		478,737			1		1,439			—			1,440
Vesting of restricted stock units		254,677			—		—			—			—
Shares withheld for employee taxes		(85,515	)		—		(1,611	)		—			(1,611	)
Stock-based compensation expense		—			—		6,616			—			6,616
Net income		—			—		—			11,530			11,530
Balances as of September 30, 2023		167,864,066		$	168	$	831,586		$	10,479		$	842,233

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

EngageSmart, Inc.

Condensed Consolidated Statements of Stockholders' Equity (Continued)

(in thousands, except share amounts)

(Unaudited)


												Total
	Common Stock					Additional			Accumulated			Stockholders'
	Shares			Amount		Paid-in 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,
	2023			2022
Cash flows from operating activities:
Net income	$	19,992		$	15,708
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		14,838			13,989
Amortization of deferred costs		692			277
Stock-based compensation expense		16,618			10,112
Non-cash operating lease expense		3,496			3,385
Deferred income taxes		(665	)		(2,900	)
Loss on disposal of property and equipment		503			22
Non-cash interest expense		175			175
Gain on sale of business		(10,511	)		—
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		(440	)		(3,850	)
Accounts receivable, net		(1,102	)		(2,106	)
Unbilled receivables		(1,880	)		(2,281	)
Other assets		(1,735	)		(1,382	)
Accounts payable		362			(1,253	)
Accrued expenses and other current liabilities		4,862			7,227
Deferred revenue		1,019			1,080
Operating lease liabilities		(3,886	)		(4,115	)
Other long-term liabilities		89			26
Net cash provided by operating activities		42,427			34,114
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired		(11,782	)		—
Proceeds from sale of business, net of cash sold		30,027			—
Purchases of property and equipment, including costs capitalized for development of internal-use software		(7,069	)		(4,759	)
Net cash provided by (used in) investing activities		11,176			(4,759	)
Cash flows from financing activities:
Payment of debt issuance costs		—			(23	)
Payments of contingent consideration		—			(1,066	)
Proceeds from exercise of stock-based options		3,844			11,187
Payments of taxes related to net share settlement of equity awards		(4,174	)		(468	)
Proceeds from issuance of common stock under employee stock purchase plan		981			463
Payment of initial public offering costs		—			(286	)
Net cash provided by financing activities		651			9,807
Net increase in cash, cash equivalents and restricted cash		54,254			39,162
Cash, cash equivalents and restricted cash at beginning of period		312,080			254,594
Cash, cash equivalents and restricted cash at end of period	$	366,334		$	293,756
Reconciliation of cash, cash equivalents, and restricted cash:
Cash and cash equivalents	$	366,034		$	293,456
Restricted cash within other assets		300			300
Total cash, cash equivalents, and restricted cash	$	366,334		$	293,756

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,
	2023		2022
Supplemental cash flow information:
Cash paid for interest	$	186	$	181
Cash paid for taxes	$	19,411	$	4,330
Cash paid for amounts included in the measurement of operating lease liabilities	$	4,406	$	4,246
Supplemental disclosure of non-cash transactions:
Additions to property and equipment included in accounts payable and accrued expenses	$	168	$	189
Right of use assets obtained in exchange for new operating lease liabilities	$	609	$	31,409
Fair value of contingent consideration recorded in purchase accounting	$	1,475	$	—

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, and DonorDrive, that are designed to simplify the Company's customers' engagement with its clients by driving digital adoption and self-service. On August 2, 2023, the Company divested the entity that operated the HealthPay24 solution, which was previously included in the Company's Enterprise Solutions segment. The Company serves customers across several core verticals: Health & Wellness, Government, Utilities, Financial Services, 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.

On October 23, 2023, EngageSmart entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Icefall Parent, LLC, a Delaware limited liability company and affiliate of Vista Equity Partners (“Parent”), and Icefall Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”, and together with Parent, the “Buyer Parties”), providing for the merger of Merger Sub with and into the Company, with the Company continuing as the surviving corporation (the “Merger”). Refer to Note 16 - Subsequent Events, for further information.

Secondary Offering

On February 28, 2023, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC, as representatives of the several underwriters named therein, and certain of the Company’s stockholders, including affiliates of General Atlantic, L.P ("General Atlantic") and Summit Partners and certain members of the Company’s management (collectively the “Selling Stockholders”), relating to an underwritten public offering (the “Secondary Offering”) of 8,000,000 shares of the Company’s common stock at a price to the public of $19.00 per share, with an option exercisable by the underwriters for 30 days to purchase up to an additional 1,200,000 shares of common stock from certain of the Selling Stockholders at the public offering price, less underwriting discounts and commissions.

In March 2023, pursuant to the Underwriting Agreement, the Selling Stockholders sold an aggregate of 9,200,000 shares of common stock in the Secondary Offering. The Company did not receive any of the proceeds from the sale of common stock, with all proceeds going to the Selling Stockholders.

In connection with the Secondary Offering, the Company incurred costs of $1.6 million during the nine months ended September 30, 2023, which are included within general and administrative expenses on the condensed consolidated statement of operations and comprehensive income.

Basis of Presentation

The accompanying condensed 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 conducted 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, 2022, included in the Company's 2022 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, 2022, included in the Company's 2022 Form 10-K. There have been no significant changes to these policies during the nine months ended September 30, 2023, 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. The Company's cash and cash equivalents are primarily maintained in accounts with three major financial institutions in the United States. At times, the Company may maintain cash and cash equivalent balances in excess of Federal Deposit Insurance Corporation ("FDIC") 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 nine months ended September 30, 2023 and 2022, no customer accounted for 10% or more of revenue. As of September 30, 2023 and December 31, 2022, no customer accounted for 10% or more of accounts receivable.

Recently Adopted 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 adopted this standard effective January 1, 2023 on a prospective basis, and it did not 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 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,
	2023		2022		2023		2022
Enterprise Solutions
Transaction and usage-based	$	39,783	$	32,620	$	113,337	$	90,928
Subscription		2,123		2,280		7,354		6,517
Other		345		966		1,513		2,298
Total Enterprise Solutions revenue		42,251		35,866		122,204		99,743
SMB Solutions
Transaction and usage-based		15,927		11,349		46,657		33,613
Subscription		39,289		31,216		110,821		85,493
Other		265		365		891		1,171
Total SMB Solutions revenue		55,481		42,930		158,369		120,277
Total revenue	$	97,732	$	78,796	$	280,573	$	220,020

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, 2023 or December 31, 2022.

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 subscription 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 $9.1 million and $8.2 million as of September 30, 2023 and December 31, 2022, respectively. Non-current deferred revenue was $0.3 million as of September 30, 2023 and December 31, 2022. During the nine months ended September 30, 2023, the Company recognized revenue of $7.9 million from the deferred revenue balance as of December 31, 2022. 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.

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 Per Share

Basic net income per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is calculated by dividing net income by the sum of the weighted average number of shares of common stock 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 per share:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands, except share and per share amounts)
Numerator:
Net income	$	11,530	$	6,770	$	19,992	$	15,708
Denominator:
Weighted average shares outstanding, basic		167,546,450		164,427,770		166,940,589		163,195,976
Effect of potential dilutive shares		2,722,942		4,795,024		3,109,404		5,868,039
Weighted average shares outstanding, diluted		170,269,392		169,222,794		170,049,993		169,064,015
Net income per share, basic	$	0.07	$	0.04	$	0.12	$	0.10
Net income per share, diluted	$	0.07	$	0.04	$	0.12	$	0.09

The Company excluded the following potential shares of common stock, presented based on amounts outstanding at each period end, from the computation of diluted net income 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,
	2023		2022		2023		2022
Options to purchase shares		304,976		383,666		313,462		473,392
Unvested restricted stock units		2,776,295		1,535,412		1,686,442		913,466
Total		3,081,271		1,919,078		1,999,904		1,386,858

5. Acquisitions and Divestitures

Luminello Acquisition

On August 2, 2023, SimplePractice, LLC ("SimplePractice"), a wholly owned subsidiary of the Company, entered into an asset purchase agreement (the “APA”) with Luminello, Inc., a California corporation, engaged in the sale, hosting, distribution and licensing of practice management software ("Luminello"), and certain key holders (collectively, the “Seller”), pursuant to which SimplePractice agreed to purchase certain assets of the Seller for aggregate base cash consideration of up to $16.0 million, subject to purchase price adjustments including working capital, indebtedness, and a holdback amount up to an aggregate of $3.6 million, consisting of $1.2 million to be paid one year after closing and $2.4 million to be paid two years after closing, pursuant to the terms of the APA. In addition, Seller may receive contingent payments up to $2.0 million, subject to the satisfactory achievement of certain defined performance metrics. In connection with the closing, SimplePractice and the Seller entered into certain intellectual property agreements pursuant to which SimplePractice licensed certain acquired assets back to Seller. In addition, the parties entered into a transition services agreement ("TSA") pursuant to which Seller will continue to operate its platform for a period of time.

The acquisition has been accounted for as a business combination and the Company has recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The purchase price allocation is considered preliminary subject to the finalization of the valuation and acquired working capital amounts. The Company may record adjustments to the purchase price allocation as additional information relevant to the acquisition becomes available during the remainder of the measurement period, which will not exceed 12 months from the acquisition date. The following tables summarizes the preliminary purchase price allocation (in thousands):


Fair value of consideration transferred:
Cash paid, net of cash acquired	$	11,782
Fair value of contingent consideration		1,475
Fair value of future holdback payments		3,300
Total purchase price consideration	$	16,557

Fair value of assets acquired and liabilities assumed:
Intangible assets	$	4,400
Goodwill		12,804
Total assets acquired	$	17,204
Deferred revenue		(647	)
Net assets acquired	$	16,557

The Company engaged a third-party valuation firm to assist in the valuation of intangible assets. The significant intangible assets identified in the purchase price allocation include customer relationships, developed technology, trade names and a favorable contract asset, each of which are amortized on a straight-line basis. Customer relationships represent the underlying relationships with certain customers to provide ongoing services for products sold, and were valued using the income approach, specifically a discounted cash-flow method known as the excess earnings method. Developed technology consists of products that have reached technological feasibility and trade names represent acquired company and product names, and were valued using a relief-from-royalty method. The favorable contract asset relates to the TSA, and was valued using an income approach. The significant assumptions and estimates utilized to value the intangible assets acquired include forecasted revenue and expenses, customer attrition rates, royalty rates, and discount rates.

The following table presents the fair values and useful lives of the identifiable intangible assets acquired and risk-adjusted discount rates used in the valuation:


	Amount		Weighted Average Useful Life		Risk-Adjusted Discount Rates Used in Valuation
	(in thousands)		(in years)
Customer relationships	$	3,600		10		22	%
Developed technology		400		1		17	%
Trade names		30		1		17	%
Other		370		1		17	%
Total identifiable intangible assets	$	4,400

In connection with the acquisition of Luminello, goodwill of $12.8 million was recognized for the excess purchase price over the fair value of the net assets acquired. The Company believes the goodwill from the acquisition is primarily

attributable to product and customer-related synergies. Goodwill from the acquisition of Luminello is included within the Company’s SMB Solutions segment and is deductible for tax purposes.

Additionally, the Company utilized a third-party valuation firm to assist in the valuation of the future contingent payments. The Company recognized a contingent consideration liability equal to the acquisition date fair value of expected contingent payments utilizing a Monte Carlo simulation model. The significant assumptions and estimates utilized in the model include forecasted revenue, subscribers, volume, and discount rates.

In connection with the acquisition of Luminello, the Company incurred acquisition-related expenses of $0.4 million and $0.6 million for the three and nine months ended September 30, 2023, respectively, which are primarily recorded within general and administrative expenses in the condensed consolidated statements of operations and comprehensive income.

The operating results of Luminello have been included in the Company's SMB Solutions segment and condensed consolidated statements of operations and comprehensive income since the date of acquisition. Revenue, earnings, and pro forma information have not been presented, as the operating results of Luminello are not significant.

HealthPay24 Divestiture

On August 2, 2023, Invoice Cloud, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“Invoice Cloud”), completed the divestiture of IMAGEVISION.NET, LLC, the entity that operates the HealthPay24 solution to Waystar, Inc. for $30.0 million, net of cash sold, in an all-cash transaction. The proceeds from this transaction were recorded within the proceeds from sale of business, net of cash sold line on the condensed consolidated statement of cash flows. The divestiture resulted in a gain of $10.5 million which was recorded within gain on sale of business on the condensed consolidated statements of operations and comprehensive income. As a result of the transaction, the Company disposed of $15.1 million of goodwill and $3.5 million of intangible assets, net from the Enterprise Solutions segment. The divestiture was not considered a strategic shift that would have a major effect on the Company’s operations or financial results, and as a result was not reported as discontinued operations.

6. Leases

The Company has operating leases for office space to support business operations. The Company's office leases expire at varying dates from 2024 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.

Lease Costs and Other Information

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Operating lease cost	$	1,181	$	1,184	$	3,548	$	3,549
Variable lease cost		74		79		238		224
Total	$	1,255	$	1,263	$	3,786	$	3,773

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


	September 30, 2023			December 31, 2022
Weighted-average remaining lease term		6.3			6.8
Weighted-average discount rate		2.31	%		2.26	%

Maturity of Lease Liabilities

The following table presents the future minimum lease payments under the Company's operating leases liabilities as of September 30, 2023 (in thousands):


Remainder of 2023	$	988
2024		5,873
2025		4,615
2026		4,209
2027		3,942
Thereafter		11,069
Total lease payments	$	30,696
Less: imputed interest		(2,190	)
Lease liabilities	$	28,506

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 $0.4 million over the remainder of 2023 and $0.9 million thereafter.

7. 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, 2023
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents - money market funds	$	276,604	$	—	$	—	$	276,604
Liabilities:
Contingent consideration liability	$	—	$	—	$	1,475	$	1,475


	December 31, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents - money market funds	$	225,712	$	—	$	—	$	225,712
Liabilities:
Contingent consideration liability	$	—	$	—	$	—	$	—

Money market funds held as of September 30, 2023 and December 31, 2022 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 related 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. Changes in the fair value of the Company’s contingent consideration liabilities were as follows (in thousands):


	Nine Months Ended September 30,
	2023		2022
Beginning balance	$	—	$	2,800
Contingent consideration recorded at acquisition		1,475		—
Payment of contingent consideration		—		(2,800	)
Change in fair value		—		—
Ending balance	$	1,475	$	—

8. Goodwill and Acquired Intangible Assets

The carrying amount of goodwill was $423.4 million and $425.7 million as of September 30, 2023 and December 31, 2022, respectively. Changes in the carrying amount of goodwill by reportable segment through September 30, 2023 were as follows (in thousands):


	Enterprise Solutions			SMB Solutions		Total
Balance as of December 31, 2022	$	218,658		$	207,019	$	425,677
Goodwill acquired		—			12,804		12,804
Goodwill divested		(15,075	)		—		(15,075	)
Balance as of September 30, 2023	$	203,583		$	219,823	$	423,406

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


			September 30, 2023
	Weighted Average Useful Life		Gross Carrying Value		Accumulated Amortization			Net Carrying Value
	(in years)
Customer relationships		10.0	$	81,643	$	(35,393	)	$	46,250
Developed technology		6.9		41,044		(26,641	)		14,403
Trade names		5.0		5,551		(5,050	)		501
Other		1.0		370		(62	)		308
Total			$	128,608	$	(67,146	)	$	61,462


			December 31, 2022
	Weighted Average Useful Life		Gross Carrying Value		Accumulated Amortization			Net Carrying Value
	(in years)
Customer relationships		10.0	$	82,841	$	(31,344	)	$	51,497
Developed technology		7.0		42,913		(23,463	)		19,450
Trade names		5.0		5,824		(4,452	)		1,372
Total			$	131,578	$	(59,259	)	$	72,319

The Company recorded amortization expense of $4.0 million for the three month period ended September 30, 2023 and $3.9 million for the three month period ended September 30, 2022. The Company recorded amortization expense of $11.8 million for the nine month period ended September 30, 2023 and $11.7 million for the nine month period ended September 30, 2022. Amortization of developed technology is recorded within cost of revenue, while amortization of customer relationships, trade names and other is recorded within amortization of intangible assets within operating expenses on the Company’s condensed consolidated statements of operations and comprehensive income. Future estimated amortization expense of the Company’s intangible assets as of September 30, 2023 is expected to be as follows (in thousands):


Remainder of 2023	$	3,974
2024		14,656
2025		13,939
2026		9,177
2027		8,164
Thereafter		11,552
Total	$	61,462

9. Accrued Expenses and Other Current Liabilities

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


	September 30, 2023		December 31, 2022
Accrued employee compensation and benefits	$	15,735	$	16,897
Accrued consulting and professional fees		2,991		2,560
Accrued processing fees		3,623		2,287
Accrued channel partner fees		4,789		2,679
Accrued license fees		6,079		3,629
Accrued marketing		2,297		2,169
Accrued tax liabilities		640		1,769
Short-term deferred purchase price		1,144		—
Other		6,399		6,433
Total	$	43,697	$	38,423

10. Debt

As of September 30, 2023 and December 31, 2022, 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. 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 term 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. On June 30, 2023, the Company amended the 2021 Revolving Credit Facility to transition from a London Interbank Overnight Rate ("LIBOR")-based interest rate to a Secured Overnight Financing Rate ("SOFR")-based interest rate. No change was made to the interest rate margin. As of September 30, 2023, 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.

11. Stockholders' Equity

Preferred Stock

In connection with the Company's initial public offering ("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 per share, with rights and preferences, including voting rights, designated from time to time by the Board of Directors. As of September 30, 2023, no shares of preferred stock were issued or outstanding.

Common Stock

The Company's amended and restated certificate of incorporation authorized the issuance of 650,000,000 shares of common stock with a par value of $0.001 per share. As of September 30, 2023, there were 167,864,066 shares of common stock issued and outstanding.

12. 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 Company's 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, 2023, there were 10,287,873 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 2021 ESPP will typically be administered through consecutive six-month offering periods, commencing on June 1st and December 1st of each fiscal year. As of September 30, 2023, there were 2,088,097 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 as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Cost of revenue	$	802	$	397	$	1,842	$	660
General and administrative		2,958		1,832		8,009		6,528
Selling and marketing		1,207		869		3,134		1,829
Research and development		1,649		700		3,633		1,095
Total	$	6,616	$	3,798	$	16,618	$	10,112

13. Income Taxes

The Company's effective income tax rates were 35.5% and (18.5)% for the three months ended September 30, 2023 and 2022, respectively. The Company's effective income tax rates were 47.6% and (22.6)% for the nine months ended September 30, 2023 and 2022, respectively. The effective tax rates for the three and nine months ended September 30, 2023 were higher than the statutory rate of 21.0% primarily due to the impact of the valuation allowance, partially offset by excess benefits from stock-based compensation. 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.

14. Commitments and Contingencies

Non-Cancellable Commitments

As of September 30, 2023, 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, 2023, future minimum payments under other non-cancellable agreements were as follows (in thousands):


Remainder of 2023	$	2,335
2024		3,438
2025		738
2026		184
2027		—
Thereafter		—
Total	$	6,695

Contingent Value Payments

In 2019, the CVR Bonus Award Plan ("CVR Plan") was established for the benefit of option holders as of February 11, 2019 in the event that holders of Class A-1 common shares of EngageSmart, LLC (the Company's predecessor) receive cash distributions in connection with certain exit events specified under EngageSmart, LLC's LLC Agreement of at least $889.1 million (the “Performance Threshold”). Subject to the achievement of the Performance Threshold, CVR Unit Awards ("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, $6.0 million remains outstanding as of September 30, 2023. No compensation expense has been recognized in relation to the CVR Plan as the Company has determined that achievement of the Performance Threshold is not probable as of September 30, 2023.

In connection with the Company’s IPO in 2021, the CVR Plan was amended to reflect the conversion of EngageSmart, LLC to EngageSmart, Inc. and the CVR Units otherwise remain subject to substantially the same terms and conditions applicable immediately prior to the Company’s IPO. Following the IPO and the conversion of EngageSmart, LLC to EngageSmart, Inc. (and related transactions), 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 events specified under the amended CVR Plan. 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 and/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 any 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, 2023 and December 31, 2022.

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.

15. 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, 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, 2023, this segment generated 44% of total revenue. On August 2, 2023, the Company divested the entity that operated the HealthPay24 solution, which was previously included in the Company's Enterprise Solutions segment.

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, 2023, this segment generated 56% 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 excluding interest income (expense), net; provision for (benefit from) income taxes; depreciation; and amortization of intangible assets, as further adjusted for gain on sale of business, transaction-related expenses and stock-based compensation. 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 (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Revenue
Enterprise Solutions	$	42,251		$	35,866		$	122,204		$	99,743
SMB Solutions		55,481			42,930			158,369			120,277
Total revenue		97,732			78,796			280,573			220,020
Adjusted EBITDA
Enterprise Solutions		5,860			4,577			19,481			13,338
SMB Solutions		21,217			16,314			59,882			45,239
Total Adjusted EBITDA from reportable segments		27,077			20,891			79,363			58,577
Unallocated corporate expenses		(8,230	)		(7,669	)		(23,815	)		(22,833	)
Total Adjusted EBITDA		18,847			13,222			55,548			35,744
Reconciling items:
Interest income (expense), net		3,555			1,005			9,180			1,127
Amortization of intangible assets		(3,954	)		(3,900	)		(11,754	)		(11,700	)
Depreciation		(1,061	)		(816	)		(3,084	)		(2,289	)
Gain on sale of business		10,511			—			10,511			—
Transaction-related expenses		(3,417	)		—			(5,639	)		38
Stock-based compensation		(6,616	)		(3,798	)		(16,618	)		(10,112	)
Income before income taxes		17,865			5,713			38,144			12,808
Provision for (benefit from) income taxes		6,335			(1,057	)		18,152			(2,900	)
Net income	$	11,530		$	6,770		$	19,992		$	15,708

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, 2023 and 2022, 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.

16. Subsequent Events

On October 23, 2023, the Company entered into a Merger Agreement with Parent and Merger Sub, providing for the acquisition of the Company, by affiliates of Vista Equity Partners Management, LLC (“Vista”) for $23.00 for each share not held by the Company, affiliates of Vista, including Parent and Merger Sub, and affiliates of General Atlantic, the current majority stockholder of the Company. General Atlantic plans to roll over a portion of its shares into the Surviving Corporation (as defined the Merger Agreement). The transaction is expected to close in the first calendar quarter of 2024, subject to the satisfaction of closing conditions contained the Merger Agreement, including the affirmative vote of the holders of a majority of the outstanding shares of common stock held by the Unaffiliated Company Stockholders (as defined the Merger Agreement). Upon completion of the transaction, the Company’s common stock will no longer be publicly listed and the Company will become a privately-held company. Vista intends to finance the transaction with fully committed equity financing that is not subject to any financing condition.

The Merger Agreement includes a “go-shop” period expiring at 11:59 p.m., Eastern time, on November 22, 2023 (the “No-Shop Period Start Date”), which allows the Company’s board of directors and its advisors to actively engage in certain activities, including discussions or negotiations with respect to acquisition proposals from third parties, subject to the terms and conditions set forth in the Merger Agreement. The Company’s board of directors will have the right to terminate the Merger Agreement to enter into a superior proposal.

The Merger Agreement also contains certain termination rights for Vista, with a termination fee payable by the Company to Vista for up to $144.4 million under certain circumstances. In addition, the Company or Vista may terminate the Merger Agreement if the Merger is not consummated by May 23, 2024.

The foregoing summary of the Merger Agreement and the Support Agreements (as defined the Merger Agreement) is not complete and is qualified in its entirety by the full text of the Merger Agreement and Support Agreements, which are attached as exhibits to this Quarterly Report on Form 10-Q, and described in more detail in Item 1.01 of the Company’s Form 8-K filed with the SEC on October 23, 2023.

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 2022 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 2022 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, 2023, we serve approximately 116,200 customers in the SMB Solutions segment and approximately 3,400 customers in the Enterprise Solutions segment across several core verticals: Health & Wellness, Government, Utilities, Financial Services, and Giving. On August 2, 2023, we divested the entity that operated the HealthPay24 solution, which was previously included in our Enterprise Solutions segment. 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 three 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 payment processing, as well as, insurance claim processing on one integrated platform. Our platform also helps our customers build and grow their practices through the use of our online marketplace.

•

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.

•

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 and DonorDrive solutions. Enterprise solutions are built to address the unique needs of specific verticals: Government, Utilities, Financial Services, and Giving. For the Enterprise Solutions segment, we typically 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, 2023, this segment generated 44% 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, 2023, this segment generated 56% 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. We are paid fees for transaction and usage-based revenue by our customers, our customers’ clients, or from partners on transactions for which we originate. 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.

Agreement and Plan of Merger

On October 23, 2023, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Icefall Parent, LLC, a Delaware limited liability company and affiliate of Vista Equity Partners (“Parent”), and Icefall Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”, and together with Parent, the “Buyer Parties”), providing for the merger of Merger Sub with and into the Company, with the Company continuing as the surviving corporation (the “Merger”). See Note 16 - Subsequent Events, appearing in this Quarterly Report on Form 10-Q for further information.

Impact of Economic and Inflationary Pressure on Our Business

We continued to operate in an environment of economic uncertainty and inflationary pressure, however inflation did not have a material impact on our results of operations during the nine months ended September 30, 2023.

The full extent to which economic 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. For further discussion of the potential impacts that inflationary pressure and economic uncertainty could have on our business, financial condition, and operating results, refer to Part I, Item 1A. “Risk Factors” in our 2022 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 is presented below.


	September 30, 2023		September 30, 2022
Customers in the SMB Solutions segment		116,221		94,528
Customers in the Enterprise Solutions segment (1)		3,406		3,268
Total		119,627		97,796

(1) On August 2, 2023, the Company divested the entity that operates the HealthPay24 solution. As of September 30, 2022, the Enterprise Solutions segment included 73 customers related to the HealthPay24 business.

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,
	2023		2022		2023		2022
	(in millions)
Transactions Processed		42.5		37.5		128.9		107.9

(1) On August 2, 2023, the Company divested the entity that operates the HealthPay24 solution. During the three months ended September 30, 2023 and September 30, 2022, there were 1.0 million and 2.5 million Transactions Processed related to the HealthPay24 business, respectively. During the nine months ended September 30, 2023 and September 30 2022, there were 7.2 million and 7.5 million Transactions Processed related to the HealthPay24 business, respectively.

Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA as net income excluding interest income (expense), net, provision for (benefit from) income taxes, depreciation, and amortization of intangible assets, as further adjusted for gain on sale of business, transaction-related expenses, and stock-based compensation. Transaction-related expenses typically consist of direct costs related to acquisitions, divestitures, and other strategic activities which are excluded from our non-GAAP measures because they relate to specific transactions which are not reflective of our ongoing operations. We define Adjusted EBITDA Margin as Adjusted EBITDA divided by 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,
	2023			2022			2023			2022
	(in thousands, except percentages)
Net income	$	11,530		$	6,770		$	19,992		$	15,708
Net income margin		11.8	%		8.6	%		7.1	%		7.1	%
Adjusted EBITDA	$	18,847		$	13,222		$	55,548		$	35,744
Adjusted EBITDA Margin		19.3	%		16.8	%		19.8	%		16.2	%

Adjusted Gross Profit and Adjusted Gross Margin

We define Adjusted Gross Profit as gross profit as adjusted for amortization of intangible assets, stock-based compensation and transaction-related expenses. We define Adjusted Gross Margin as Adjusted Gross Profit divided by 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,
	2023			2022			2023			2022
	(in thousands, except percentages)
Gross profit	$	75,911		$	59,951		$	216,216		$	167,333
Gross margin		77.7	%		76.1	%		77.1	%		76.1	%
Adjusted Gross Profit	$	78,269		$	61,885		$	222,690		$	172,606
Adjusted Gross Margin		80.1	%		78.5	%		79.4	%		78.5	%

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, net income margin, gross profit, gross margin, 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,
	2023			2022			2023			2022
	(in thousands, except percentages)
Net income	$	11,530		$	6,770		$	19,992		$	15,708
Net income margin		11.8	%		8.6	%		7.1	%		7.1	%
Adjustments:
Provision for (benefit from) income taxes		6,335			(1,057	)		18,152			(2,900	)
Interest (income) expense, net		(3,555	)		(1,005	)		(9,180	)		(1,127	)
Amortization of intangible assets		3,954			3,900			11,754			11,700
Depreciation		1,061			816			3,084			2,289
Stock-based compensation		6,616			3,798			16,618			10,112
Gain on sale of business		(10,511	)		—			(10,511	)		—
Transaction-related expense		3,417			—			5,639			(38	)
Adjusted EBITDA	$	18,847		$	13,222		$	55,548		$	35,744
Adjusted EBITDA Margin		19.3	%		16.8	%		19.8	%		16.2	%


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
	(in thousands, except percentages)
Gross profit	$	75,911		$	59,951		$	216,216		$	167,333
Gross margin		77.7	%		76.1	%		77.1	%		76.1	%
Adjustments:
Amortization of intangible assets		1,552			1,537			4,628			4,613
Stock-based compensation		802			397			1,842			660
Transaction-related expense		4			—			4			—
Adjusted Gross Profit	$	78,269		$	61,885		$	222,690		$	172,606
Adjusted Gross Margin		80.1	%		78.5	%		79.4	%		78.5	%

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 and on-demand learning courses.

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 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.

Gain on sale of business

Gain on sale of business is measured as the fair value of consideration received in excess of the carrying value of the assets and liabilities sold.

Amortization of intangible assets

Amortization of intangible assets, within operating expenses, consists primarily of amortization of customer relationship and trade name 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 amortization of debt issuance costs and fees associated with unused revolving credit facility commitments.

Other income, net

Other income, net consists primarily of interest income on our cash and cash equivalents.

Provision for (Benefit from) Income Taxes

Provision for (benefit from) income taxes consists of federal and state income taxes in the United States. The primary difference between our effective tax rate and the federal statutory rate is due to a valuation allowance against federal and state deferred tax assets.

We continue to maintain a full valuation allowance against our net deferred tax assets. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of this allowance. However, given our current positive earnings and anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to reach a conclusion that all or a portion of the valuation allowance may no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease in income tax expense for the period the release is recorded. The exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to achieve as well as our projected income levels in future periods.

Results of Operations

The following table sets forth, for the periods presented, each line item from our condensed consolidated statements of operations and comprehensive income 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,
	2023			2022			2023			2022
	(% of total revenue)
Revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenue		22.3	%		23.9	%		22.9	%		23.9	%
Gross profit		77.7	%		76.1	%		77.1	%		76.1	%
Operating expenses:
General and administrative		18.6	%		17.7	%		17.1	%		19.2	%
Selling and marketing		34.4	%		32.9	%		33.2	%		32.8	%
Research and development		18.3	%		16.5	%		17.6	%		15.5	%
Gain on sale of business		(10.8	)%		—	%		(3.7	)%		—	%
Amortization of intangible assets		2.5	%		3.0	%		2.5	%		3.2	%
Total operating expenses		63.0	%		70.1	%		66.7	%		70.7	%
Income from operations		14.6	%		6.0	%		10.3	%		5.3	%
Other income (expense), net:
Interest expense		(0.1	)%		(0.2	)%		(0.1	)%		(0.2	)%
Other income, net		3.8	%		1.4	%		3.4	%		0.7	%
Total other income (expense), net		3.6	%		1.3	%		3.3	%		0.5	%
Income before income taxes		18.3	%		7.3	%		13.6	%		5.8	%
Provision for (benefit from) income taxes		6.5	%		(1.3	)%		6.5	%		(1.3	)%
Net income and comprehensive income		11.8	%		8.6	%		7.1	%		7.1	%

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

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


	Three Months Ended September 30,												Nine Months Ended September 30,
	2023			2022			Change						2023			2022			Change
	Amount			Amount			Amount			%			Amount			Amount			Amount			%
	(in thousands, except percentages)
Revenue	$	97,732		$	78,796		$	18,936			24.0	%	$	280,573		$	220,020		$	60,553			27.5	%
Cost of revenue		21,821			18,845			2,976			15.8	%		64,357			52,687			11,670			22.1	%
Gross profit		75,911			59,951			15,960			26.6	%		216,216			167,333			48,883			29.2	%
Operating expenses:
General and administrative		18,218			13,986			4,232			30.3	%		48,081			42,270			5,811			13.7	%
Selling and marketing		33,596			25,906			7,690			29.7	%		93,143			72,262			20,881			28.9	%
Research and development		17,889			12,978			4,911			37.8	%		49,402			34,011			15,391			45.3	%
Gain on sale of business		(10,511	)		—			(10,511	)		100.0	%		(10,511	)		—			(10,511	)		100.0	%
Amortization of intangible assets		2,402			2,363			39			1.7	%		7,126			7,087			39			0.6	%
Total operating expenses		61,594			55,233			6,361			11.5	%		187,241			155,630			31,611			20.3	%
Income from operations		14,317			4,718			9,599			203.5	%		28,975			11,703			17,272			147.6	%
Other income (expense), net:
Interest expense		(135	)		(121	)		(14	)		11.6	%		(375	)		(361	)		(14	)		3.9	%
Other income, net		3,683			1,116			2,567			230.0	%		9,544			1,466			8,078			551.0	%
Total other income (expense), net		3,548			995			2,553			256.6	%		9,169			1,105			8,064			729.8	%
Income before income taxes		17,865			5,713			12,152			212.7	%		38,144			12,808			25,336			197.8	%
Provision for (benefit from) income taxes		6,335			(1,057	)		7,392			(699.3	)%		18,152			(2,900	)		21,052			(725.9	)%
Net income and comprehensive income	$	11,530		$	6,770		$	4,760			70.3	%	$	19,992		$	15,708		$	4,284			27.3	%

Revenue

Revenue increased $18.9 million for the three month period ended September 30, 2023, as compared to the corresponding period in 2022, primarily due to an increase of $11.7 million in transaction and usage-based revenue driven by an increase in the number of Transactions Processed, and an increase of $7.9 million in subscription revenue driven by an increase in the number of customers utilizing our solutions and existing customer expansion, offset by a decrease of $0.7 million in other revenue.

Revenue increased $60.6 million for the nine month period ended September 30, 2023, as compared to the corresponding period in 2022, primarily due to an increase of $35.5 million in transaction and usage-based revenue driven by an increase in the number of Transactions Processed, and an increase of $26.2 million in subscription revenue driven by an increase in the number of customers utilizing our solutions and existing customer expansion, offset by a decrease of $1.1 million in other revenue.

Cost of revenue

Cost of revenue increased $3.0 million for the three month period ended September 30, 2023, as compared to the corresponding period in 2022, primarily related to an increase of $2.2 million in personnel-related costs driven by headcount growth to sustain the increased demand for our solutions, and a $0.9 million increase in certain variable transaction, licensing and hosting costs due to higher usage of our solutions.

Cost of revenue increased $11.7 million for the nine month period ended September 30, 2023, as compared to the corresponding period in 2022, primarily related to an increase of $7.4 million in personnel-related costs driven by headcount growth to sustain the increased demand for our solutions, an increase of $3.5 million in certain variable transaction, licensing and hosting costs due to higher usage of our solutions, and an increase of $1.0 million in depreciation expense.

General and administrative expenses

General and administrative expenses increased $4.2 million for the three month period ended September 30, 2023, as compared to the corresponding period in 2022, primarily due to an increase of $2.5 million in professional and

consulting-related expenses driven by an increase in transaction-related costs. Additionally, personnel-related costs increased $1.8 million primarily driven by an increase in stock-based compensation expense.

General and administrative expenses increased $5.8 million for the nine month period ended September 30, 2023, as compared to the corresponding period in 2022, due to an increase of $2.8 million in personnel-related costs primarily driven by an increase in stock-based compensation expense. Additionally, professional and consulting-related expenses increased $2.5 million driven by an increase in transaction-related costs, and software costs increased $1.1 million.

Selling and marketing expenses

Selling and marketing expenses increased $7.7 million for the three month period ended September 30, 2023, as compared to the corresponding period in 2022, primarily due to an increase of $3.3 million in fees paid to third-party channel partners, an increase of $2.1 million in advertising and other marketing-related spend utilized to drive new customer additions, and an increase of $1.9 million in personnel-related costs associated with headcount growth.

Selling and marketing expenses increased $20.9 million for the nine month period ended September 30, 2023, as compared to the corresponding period in 2022, primarily due to an increase of $7.2 million in personnel-related costs associated with headcount growth, an increase of $6.7 million in fees paid to third-party channel partners, an increase of $5.6 million in advertising and other marketing-related spend utilized to drive new customer additions, and an increase of $0.9 million in professional and consulting-related expenses.

Research and development expenses

Research and development expenses increased $4.9 million for the three month period ended September 30, 2023, as compared to the corresponding period in 2022, primarily due to an increase of $3.4 million in personnel-related costs associated with headcount growth, and an increase of $0.7 million in third-party consulting costs. Headcount growth and the increase in usage of third-party consultants was associated with enhancing the functionality and ease of use of our solutions.

Research and development expenses increased $15.4 million for the nine month period ended September 30, 2023, as compared to the corresponding period in 2022, primarily due to an increase of $11.6 million in personnel-related costs associated with headcount growth, an increase of $2.0 million in third-party consulting costs, and an increase of $1.0 million in software costs. Headcount growth and the increase in usage of third-party consultants was associated with enhancing the functionality and ease of use of our solutions.

Gain on sale of business

Gain on sale of business was $10.5 million during the three and nine months ended September 30, 2023 and related to our divestiture of the entity that operates the HealthPay24 solution, in August 2023. The divestiture resulted in a gain on sale of business recorded within operating expenses, as the divesture was not considered a discontinued operation.

Amortization of intangible assets

Amortization of intangible assets, within operating expenses, remained consistent for the three and nine months ended September 30, 2023, as compared to the corresponding periods in 2022.

Interest expense

Interest expense remained consistent for the three and nine months ended September 30, 2023, as compared to the corresponding periods in 2022.

Other income, net

Other income, net increased $2.6 million for the three month period ended September 30, 2023, as compared to the corresponding period in 2022, due to an increase in interest income earned on our cash equivalents driven by higher interest rates.

Other income, net increased $8.1 million for the nine month period ended September 30, 2023, as compared to the corresponding period in 2022, due to an increase in interest income earned on our cash equivalents driven by higher interest rates.

Provision for (benefit from) income taxes

The provision for income taxes was $6.3 million during the three months ended September 30, 2023, as compared to a benefit from income taxes of $1.1 million for the three months ended September 30, 2022, resulting in an effective income tax rate of 35.5% and (18.5)%, respectively. The increase in income tax provision for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 was primarily due to an increase in pre-tax

income, the impact of the valuation allowance, and a reduction of excess tax benefits arising from stock-based compensation.

The provision for income taxes was $18.2 million for the nine months ended September 30, 2023, as compared to a benefit from income taxes of $2.9 million for the nine months ended September 30, 2022, resulting in an effective tax rate of 47.6% and (22.6)%, respectively. The increase in income tax provision for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was primarily due to an increase in pre-tax income, the impact of the valuation allowance, and a reduction of excess tax benefits arising from stock-based compensation.

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, excluding interest income (expense), net; provision for (benefit from) income taxes; depreciation; and amortization of intangible assets, as further adjusted for gain on sale of business, transaction-related expenses, and stock-based compensation. 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, the most directly comparable financial measure calculated and presented in accordance with GAAP.

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


		Three Months Ended September 30,						Nine Months Ended September 30,
		2023			2022			2023			2022
	(in thousands, except percentages)
Revenue
Enterprise Solutions		$	42,251		$	35,866		$	122,204		$	99,743
SMB Solutions			55,481			42,930			158,369			120,277
Total revenue			97,732			78,796			280,573			220,020
Adjusted EBITDA
Enterprise Solutions			5,860			4,577			19,481			13,338
SMB Solutions			21,217			16,314			59,882			45,239
Total Adjusted EBITDA from reportable segments			27,077			20,891			79,363			58,577
Unallocated corporate expenses			(8,230	)		(7,669	)		(23,815	)		(22,833	)
Total Adjusted EBITDA			18,847			13,222			55,548			35,744
Reconciling items:
Interest income (expense), net			3,555			1,005			9,180			1,127
Amortization of intangible assets			(3,954	)		(3,900	)		(11,754	)		(11,700	)
Depreciation			(1,061	)		(816	)		(3,084	)		(2,289	)
Gain on sale of business			10,511			—			10,511			—
Transaction-related expenses			(3,417	)		—			(5,639	)		38
Stock-based compensation			(6,616	)		(3,798	)		(16,618	)		(10,112	)
Income before income taxes			17,865			5,713			38,144			12,808
Provision for (benefit from) income taxes			6,335			(1,057	)		18,152			(2,900	)
Net income		$	11,530		$	6,770		$	19,992		$	15,708
Net income margin			11.8	%		8.6	%		7.1	%		7.1	%
Adjusted EBITDA Margin - Enterprise Solutions			13.9	%		12.8	%		15.9	%		13.4	%
Adjusted EBITDA Margin - SMB Solutions			38.2	%		38.0	%		37.8	%		37.6	%

Revenue

Revenue for the Enterprise Solutions segment increased $6.4 million for the three month period ended September 30, 2023, as compared to the corresponding period in 2022, primarily attributable to a $8.1 million increase in transaction and usage-based revenue from our continuing solutions driven by an increase in Transactions Processed, partially offset by a $1.8 million decrease in HealthPay24 revenue due to the divestiture.

Revenue for the Enterprise Solutions segment increased $22.5 million for the nine month period ended September 30, 2023, as compared to the corresponding period in 2022, 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 $12.6 million for the three month period ended September 30, 2023, as compared to the corresponding period in 2022, primarily attributable to an increase of $8.1 million in subscription revenue driven by an increase in the number of customers utilizing our solutions and expansion within our existing customers. Additionally, transaction and usage-based revenue increased $4.6 million driven by an increase in Transactions Processed, and to a lesser extent, the impact of a price increase that occurred in the first quarter of 2023.

Revenue for the SMB Solutions segment increased $38.1 million for the nine month period ended September 30, 2023, as compared to the corresponding period in 2022, primarily attributable to an increase of $25.3 million in subscription revenue driven by an increase in the number of customers utilizing our solutions and expansion within our existing customers. Additionally, transaction and usage-based revenue increased $13.0 million driven by an increase in Transactions Processed, and to a lesser extent, the impact of a price increase that occurred in the first quarter of 2023.

Adjusted EBITDA Margin

Adjusted EBITDA margin for the Enterprise Solutions segment increased to 13.9% and 15.9% for the three and nine month periods ended September 30, 2023, respectively, as compared to 12.8% and 13.4% in the corresponding periods in 2022, respectively. The increase in Adjusted EBITDA margin was primarily driven by cost of revenue efficiencies in delivering our products as well as efficiencies in general and administrative spend, partially offset by an increase in research and development expenses.

Adjusted EBITDA margin for the SMB Solutions segment increased slightly to 38.2% and 37.8% for the three and nine month periods ended September 30, 2023, respectively, as compared to 38.0% and 37.6% in the corresponding periods in 2022, respectively. The increase in Adjusted EBITDA margin was primarily driven by efficiencies in general and administrative spend, partially offset by an increase in research and development and sales and marketing spend associated with headcount growth and marketing-related spend to drive new customer additions.

Liquidity and Capital Resources

As of September 30, 2023, we had cash and cash equivalents of $366.0 million 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 the 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 expenditure needs for at least the next 12 months. We also expect our sources of liquidity will be sufficient to fund our long-term contractual obligations and capital needs. However, this is subject, to a certain extent, on general economic, financial, competitive, regulatory and other factors that are beyond our control.

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. On June 30, 2023, we amended the 2021 Revolving Credit Facility to transition from a London Interbank Overnight Rate ("LIBOR")-based interest rate to a Secured Overnight Financing Rate ("SOFR")-based interest rate. No change was made to the interest rate margin. As of September 30, 2023, 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, 2023, 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,
	2023		2022
	(in thousands)
Net cash provided by operating activities	$	42,427	$	34,114
Net cash provided by (used in) investing activities	$	11,176	$	(4,759	)
Net cash provided by financing activities	$	651	$	9,807

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, 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, amortization of deferred costs, stock-based compensation expense, deferred income taxes, loss on disposal of property and equipment, non-cash interest expense and gain on sale of business.

Net cash provided by operating activities increased $8.3 million for the nine month period ended September 30, 2023, as compared to the corresponding period in 2022, due to a $4.4 million increase in net income adjusted for non-cash expense items, and an increase of $3.9 million in cash generated from the change in operating asset and liability accounts.

Cash Flows from Investing Activities

Investing activities primarily consist of proceeds from divestitures, payments made related to business acquisitions and capital expenditures.

Net cash used in investing activities increased $15.9 million for the nine month period ended September 30, 2023, as compared to the corresponding period in 2022

During the nine months ended September 30, 2023, cash provided by investing activities was $11.2 million, which was driven by $30.0 million of proceeds from the divestiture of the entity that operates the HealthPay24 solution, offset by a $11.8 million payment for the acquisition of Luminello, Inc. and $7.1 million in capital expenditures.

During the nine months ended September 30, 2022, cash used in investing activities was $4.8 million related to capital expenditures.

Cash Flows from Financing Activities

Financing activities primarily consist of proceeds from the exercise of stock-based options, proceeds from the issuance of common stock under our employee stock purchase plan, contingent consideration payments and payments of taxes related to net share settlement of equity awards.

Net cash provided by financing activities decreased $9.2 million for the nine month period ended September 30, 2023, as compared to the corresponding period in 2022.

During the nine months ended September 30, 2023, cash provided by financing activities was $0.7 million, which was primarily driven by $3.8 million of proceeds from the exercise of stock options and $1.0 million of proceeds from the issuance of common stock under our employee stock purchase plan, offset by $4.2 million of tax payments related to net share settlement of equity awards.

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 the exercise of stock options, offset by contingent consideration payments of $1.1 million.

Contractual Obligations and Commitments

As of September 30, 2023, there were no material changes in our contractual obligations and commitments from those disclosed in our 2022 Form 10-K.

For additional discussion on our operating leases and other non-cancellable commitments, refer to Note 6 - Leases and Note 14 - 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 2022 Form 10-K, except as noted in Note 2 - Summary of Significant Accounting Policies 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. We expect to qualify as a large accelerated filer as of December 31, 2023. As a result, we will no longer qualify as an emerging growth company as of such date.

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 2022 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, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

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, 2023 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.

On October 27, 2023, a purported class action complaint was filed in the Court of Chancery of the State of Delaware, captioned Franchi v. EngageSmart, et al., No. 2023-1093-JTL. The complaint names as defendants the Company, the members of the Company’s board of directors, General Atlantic (IC), L.P., General Atlantic (IC) SPV., L.P. (collectively, “GA”), Vista Equity Partners Management, LLC, Vista Equity Partners Fund VIII, L.P., Icefall Parent, LLC, and Icefall Merger Sub, Inc. (collectively, “Vista”). The complaint alleges that the proposed merger with affiliates of Vista breaches the Company’s Amended and Restated Certificate of Incorporation (the “Certificate”) by providing for different treatment of the common shares owned by public stockholders as compared to the common shares owned by GA in connection with the proposed merger. The lawsuit alleges claims for breach of contract against the Company for breach of the Certificate, claims against GA and Vista for tortious interference with the Certificate, claims for breach of fiduciary duty against the members of the Company’s board of directors, claims for breach of fiduciary duty against GA, and a claim for aiding and abetting breaches of fiduciary duty against Vista. The lawsuit seeks an injunction against the closing of the proposed merger unless and until the merger complies with the Certificate, monetary damages, attorneys’ fees, and expenses. The Company believes the claims asserted in the action to be without merit and intends to vigorously defend the litigation. However, at this time, it is not possible to predict the outcome of the proceeding or its impact on the Company or the proposed merger.

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. Other than as described below, there have been no material changes to the risks and uncertainties previously identified in Part I, Item 1A. “Risk Factors", in our Annual Report on Form 10-K for the year ended December 31, 2022.

Risks Related to the Proposed Merger

On October 23, 2023, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Icefall Parent, LLC, a Delaware limited liability company and affiliate of Vista Equity Partners (“Parent”), and Icefall Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”, and together with Parent, the “Buyer Parties”), providing for the merger of Merger Sub with and into the Company, with the Company continuing as the surviving corporation (the “Merger”). Under the terms of the Merger Agreement, the Company’s stockholders will receive $23.00 per share in cash upon completion of the proposed transaction. See Note 16 - Subsequent Events, appearing in this Quarterly Report on Form 10-Q for further information.

The Merger Agreement was unanimously approved by our Board of Directors. The description of the Merger Agreement in these Risk Factors does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is filed as Exhibit 2.4 to this Quarterly Report on Form 10-Q.

We may fail to consummate the Merger, and uncertainties related to the consummation of the Merger may have a material adverse effect on our business, results of operations and financial condition and negatively impact the price of our common stock.

The Merger is subject to the satisfaction of a number of conditions beyond our control, including receiving stockholder approval and other customary closing conditions. Failure to satisfy the conditions to the Merger could prevent or delay the completion of the Merger. Further, regulators may impose conditions, obligations or restrictions on the Merger that may have the effect of delaying or preventing its completion. If the Merger does not close, we may suffer other consequences that could adversely affect our business, financial condition, operating results, and stock price, and our stockholders would be exposed to additional risks, including, but not limited to:

•

to the extent that the current market price of our common stock reflects an assumption that the Merger will be completed, the market price of our common stock could decrease if the Merger is not completed;

•

investor confidence in us could decline, stockholder litigation could be brought against us, relationships with existing and prospective customers, service providers, investors, lenders and other business partners may be

adversely impacted, we may be unable to retain key personnel, and our operating results may be adversely impacted due to costs incurred in connection with the Merger;

•

we have incurred, and will continue to incur, significant expenses for professional services in connection with the Merger for which we will have received little or no benefit if the Merger is not consummated;

•

any disruptions to our business resulting from the announcement and pendency of the Merger, including adverse changes in our relationships with customers, suppliers, partners and employees, may continue or intensify in the event the Merger is not consummated or is significantly delayed; and

•

the requirement that we pay a termination fee under certain circumstances.

In addition, the efforts and costs to satisfy the closing conditions of the Merger may place a significant burden on management and internal resources, and the Merger and related transactions, whether or not consummated, may result in a diversion of management’s attention from day-to-day operations. Any significant diversion of management’s attention away from ongoing business and difficulties encountered in the Merger process could have a material adverse effect on our business, results of operations and financial condition.

There also is no assurance that the Merger and the other transactions contemplated by the Merger Agreement will occur on the terms and timeline currently contemplated or at all.

If the proposed Merger is delayed or not completed, the price of our common stock may decline, including to the extent that the current market price of our common stock reflects an assumption that the Merger and the other transactions contemplated by the Merger Agreement will be consummated without further delays, which could have a material adverse effect on our business, results of operations and financial condition. If the Merger Agreement is terminated and we determine to seek another business combination, we may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the Merger.

If the Merger Agreement is terminated, we may, under certain circumstances, be obligated to pay a termination fee to Parent. These costs could require us to use available cash that would have otherwise been available for other uses.

If the Merger is not completed, in certain circumstances, we could be required to pay a termination fee of up to $144.4 million. If the Merger Agreement is terminated, the termination fee we may be required to pay, if any, under the Merger Agreement may require us to use available cash that would have otherwise been available for general corporate purposes or other uses. For these and other reasons, termination of the Merger Agreement could materially and adversely affect our business, results of operations or financial condition, which in turn would materially and adversely affect the price of our common stock.

We are subject to various uncertainties while the Merger is pending, which could have a material adverse effect on our business, results of operations and financial condition.

Uncertainty about the pendency of the Merger and the effect of the Merger on employees, customers and other third parties who deal with us may have a material adverse effect on our business, results of operations and financial condition. These uncertainties may impair our ability to attract, retain and motivate key personnel pending the consummation of the Merger, as such personnel may experience uncertainty about their future roles following the consummation of the Merger. Additionally, these uncertainties could cause customers and other third parties who deal with us to seek to change existing business relationships with us or fail to extend an existing relationship with us, all of which could have a material adverse effect on our business, results of operations, financial condition and market price of our common stock.

While the Merger Agreement is in effect, we are subject to certain interim covenants.

The Merger Agreement generally requires us to operate our business in the ordinary course, subject to certain exceptions, including as required by applicable law, pending consummation of the Merger, and subjects us to customary interim operating covenants that restrict us from taking certain specified actions until the Merger is completed or the Merger Agreement is terminated in accordance with its terms. These restrictions could prevent us from pursuing certain business opportunities that may arise prior to the consummation of the Merger and may affect our ability to execute our business strategies and attain financial and other goals and may impact our financial condition, results of operations and cash flows.

The Merger Agreement limits our ability to pursue alternatives to the Merger and may discourage other companies from trying to acquire us for greater consideration than what Parent has agreed to pay pursuant to the Merger Agreement.

The Merger Agreement contains provisions that make it more difficult for us to sell our business to a party other than Parent. Under the Merger Agreement, beginning on November 23, 2023 we will become subject to customary “no-shop”

restrictions on our ability to solicit alternative acquisition proposals from third parties and to provide information to, and participate in discussions and engage in negotiations with, third parties regarding any alternative acquisition proposals, subject to a customary “fiduciary out” provision. These restrictions, including the added expense of the termination fees that may become payable by us in certain circumstances, might discourage a third party that has an interest in acquiring all or a significant part of the Company from considering or proposing that acquisition, even if that party were prepared to pay consideration with a higher per share value than the consideration payable in the Merger pursuant to the Merger Agreement.

We and our directors and officers may be subject to lawsuits relating to the Merger.

Litigation is very common in connection with the sale of public companies, regardless of whether the claims have any merit. One of the conditions to consummating the Merger is that no material order preventing or materially delaying the consummation of the Merger shall have been issued by any court. Consequently, if any such lawsuit challenging the Merger is successful in obtaining an order preventing the consummation of the Merger, that order may delay or prevent the Merger from being completed. While we will evaluate and defend against any lawsuits, the time and costs of defending against litigation relating to the Merger may adversely affect our business.

We will continue to incur substantial transaction-related costs in connection with the Merger.

We have incurred significant legal, advisory and financial services fees in connection with Merger. We have incurred, and expect to continue to incur, additional costs in connection with the satisfaction of the various conditions to closing of the Merger, including seeking approval from our stockholders and from applicable regulatory agencies. If there is any delay in the consummation of the Merger, these costs could increase significantly.

Efforts to complete the Merger could disrupt our relationships with third parties and employees, divert management’s attention, or result in negative publicity or legal proceedings, any of which could negatively impact our operating results and ongoing business.

We have expended, and continue to expend, significant management time and resources in an effort to complete the Merger, which may have a negative impact on our ongoing business and operations. Uncertainty regarding the outcome of the Merger and our future could disrupt our business relationships with our existing and potential customers, suppliers, vendors and other business partners, who may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than us. Uncertainty regarding the outcome of the Merger could also adversely affect our ability to recruit and retain key personnel and other employees. The pendency of the Merger may also result in negative publicity and a negative impression of us in the financial markets, and may lead to litigation against us and our directors and officers. Such litigation would be distracting to management and, may, in the future, require us to incur significant costs. Such litigation could result in the Merger being delayed and/or enjoined by a court of competent jurisdiction, which could prevent the Merger from becoming effective. The occurrence of any of these events individually or in combination could have a material and adverse effect on our business, financial condition and results of operations.

If the Merger is consummated, our stockholders will not be able to participate in any further upside to our business.

If the Merger is consummated, our stockholders will receive $23.00 in cash per common share owned by them, without interest and subject to applicable tax withholding, and will not receive any equity interests of Parent. As a result, if our business following the Merger performs well, our current stockholders will not receive any additional consideration and will therefore not receive any benefit from any such future performance of our business.

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.

(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 initial public offering ("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.

Trading Arrangement

Name/Title

Action

Date

Rule 10b5-1*

Non-Rule 10b5‑1**

Total Shares to be Sold

Expiration Date

Robert P. Bennett

Terminate (1)

August 21, 2023

(2)

January 3, 2024

Chief Executive Officer

Cassandra Hudson

Terminate (3)

September 22, 2023

(4)

November 21, 2024

Chief Financial Officer

* Intended to satisfy the affirmative defense of Rule 10b5-1(c)

** Not intended to satisfy the affirmative defense of Rule 10b5-1(c)

(1) On August 21, 2023, Mr. Bennett terminated trading arrangements for each of Mr. Bennett, the Robert P. Bennett 2020 Guarantor Retained Trust, and The Bennett Family 2020 Trust that were, in each case, originally adopted on September 9, 2022.

(2) The terms of each plan described in footnote (1) provided for the sale of up to 252,000 shares of common stock. As of the date of termination, Mr. Bennett had sold 168,000 shares of common stock under each plan.

(3) On September 22, 2023, Ms. Hudson terminated the trading arrangement originally adopted on December 14, 2022 and subsequently modified on June 14, 2023.

(4) The terms of the modified plan described in footnote (3) provided for the sale of up to 387,002 shares of common stock. As of the date of termination, Ms. Hudson had not sold any shares of common stock under the modified plan.

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
2.4	Agreement and Plan of Merger, dated as of October 23, 2023, by and among EngageSmart, Inc., Icefall Parent, LLC and Icefall Merger Sub, Inc.+	8-K	001-40835	2.1	10/23/2023
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	Support Agreement, dated as of October 23, 2023, by and among EngageSmart, Inc., Parent and affiliates of General Atlantic.	8-K	001-40835	10.1	10/23/2023
10.2	Support Agreement, dated as of October 23, 2023, by and among EngageSmart, Inc., Parent and affiliates of Summit.	8-K	001-40835	10.2	10/23/2023
10.3	Amendment to EngageSmart, Inc. 2021 Incentive Award Plan.					*
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.
+	The schedules are exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally a copy of such schedules and exhibits, or any section thereof, to the SEC upon request.

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 2, 2023	By:	/s/ Robert P. Bennett
		Robert P. Bennett
		Chief Executive Officer

Date: November 2, 2023	By:	/s/ Cassandra Hudson
		Cassandra Hudson
		Chief Financial Officer