EverCommerce Inc. 10-K

Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID 00 42 ) II- 21 Consolidated Balance Sheets as of December 31, 2023 and 2022 II- 22 Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2023, 2022 and 2021 II- 23 Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the years ended December 31, 2023, 2022 and 2021 II- 24 Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022 and 2021 II- 26 Notes to Consolidated Financial Statements II- 27 II-20 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of EverCommerce Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of EverCommerce Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young We have served as the Company’s auditor since 2020. Denver, Colorado March 14, 2024 II-21 EverCommerce Inc. Consolidated Balance Sheets (in thousands, except per share and share amounts) December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 92,609 $ 92,625 Restricted cash 3,570 3,199 Accounts receivable, net of allowance for expected credit losses of $ 6.2 million and $ 4.7 million at December 31, 2023 and 2022, respectively 45,417 48,032 Contract assets 16,117 12,971 Prepaid expenses and other current assets 22,434 23,760 Total current assets 180,147 180,587 Property and equipment, net 9,734 11,930 Capitalized software, net 42,511 32,554 Other non-current assets 42,722 46,855 Intangible assets, net 315,519 405,720 Goodwill 927,431 914,082 Total assets $ 1,518,064 $ 1,591,728 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 8,638 $ 8,373 Accrued expenses and other 66,265 56,963 Deferred revenue 24,082 22,885 Customer deposits 12,891 11,360 Current maturities of long-term debt 5,500 5,500 Total current liabilities 117,376 105,081 Long-term debt, net of current maturities and deferred financing costs 526,696 530,946 Other non-current liabilities 47,956 49,008 Total liabilities 692,028 685,035 Commitments and contingencies (Note 17) Stockholders’ equity: Preferred stock, $ 0.00001 par value, 50,000,000 shares authorized and no shares issued or outstanding as of December 31, 2023 and 2022 — — Common stock, $ 0.00001 par value, 2,000,000,000 shares authorized and 186,934,031 and 191,447,237 shares issued and outstanding at December 31, 2023 and 2022, respectively 2 2 Accumulated other comprehensive loss ( 8,017 ) ( 10,198 ) Additional paid-in capital 1,454,026 1,489,935 Accumulated deficit ( 619,975 ) ( 573,046 ) Total stockholders’ equity 826,036 906,693 Total liabilities and stockholders’ equity $ 1,518,064 $ 1,591,728 The accompanying notes are an integral part of these consolidated financial statements. II-22 EverCommerce Inc. Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share and share amounts) Year Ended December 31, 2023 2022 2021 Revenues: Subscription and transaction fees $ 520,234 $ 465,345 $ 351,831 Marketing technology solutions 133,162 134,596 118,275 Other 21,973 20,805 20,033 Total revenues 675,369 620,746 490,139 Operating expenses: Cost of revenues (exclusive of depreciation and amortization presented separately below) 231,007 217,375 162,230 Sales and marketing 123,561 119,059 93,789 Product development 75,614 71,622 49,506 General and administrative 132,235 132,483 110,369 Depreciation and amortization 104,201 110,801 101,437 Impairment 6,325 — — Total operating expenses 672,943 651,340 517,331 Operating income (loss) 2,426 ( 30,594 ) ( 27,192 ) Interest and other expense, net ( 46,407 ) ( 33,902 ) ( 36,111 ) Loss on debt extinguishment — — ( 28,714 ) Net loss before income tax (expense) benefit ( 43,981 ) ( 64,496 ) ( 92,017 ) Income tax (expense) benefit ( 1,639 ) 4,680 10,051 Net loss ( 45,620 ) ( 59,816 ) ( 81,966 ) Other comprehensive gain (loss): Foreign currency translation gain (loss), net 2,181 ( 8,431 ) ( 3,313 ) Comprehensive loss $ ( 43,439 ) $ ( 68,247 ) $ ( 85,279 ) Net loss attributable to common stockholders: Net loss $ ( 45,620 ) $ ( 59,816 ) $ ( 81,966 ) Adjustments to net loss (see Note 13) — — ( 15,105 ) Net loss attributable to common stockholders $ ( 45,620 ) $ ( 59,816 ) $ ( 97,071 ) Basic and diluted net loss per share attributable to common stockholders $ ( 0.24 ) $ ( 0.31 ) $ ( 0.82 ) Basic and diluted weighted-average shares of common stock outstanding used in computing net loss per share 188,938,892 194,624,968 117,795,280 The accompanying notes are an integral part of these consolidated financial statements. II-23 EverCommerce Inc. Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (in thousands) Total (1) Convertible Preferred Stock Preferred Stock Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders’ Equity Shares Amount Shares Amount Balance at January 1, 2021 $ 908,310 — $ — 43,074 $ — $ 40,564 $ ( 431,264 ) $ 1,546 $ ( 389,154 ) Accretion of Series B convertible preferred stock to redemption value 15,105 — — — — ( 15,105 ) — — ( 15,105 ) Issuance of convertible preferred stock, net 109,782 — — — — — — — — Conversion of convertible preferred stock to common stock upon closing of initial public offering ( 1,033,197 ) — — 125,041 2 1,033,195 — — 1,033,197 Issuance of common stock upon closing of initial public offering, net of issuance costs and underwriters fees of $ 31,278 thousand — — — 21,882 — 340,708 — — 340,708 Issuance of common stock in a private placement — — — 4,412 — 75,000 — — 75,000 Rollover equity in consideration of net assets acquired — — — 45 — 726 — — 726 Stock-based compensation — — — 571 — 22,095 — — 22,095 Stock option exercises — — — 359 — 1,319 — — 1,319 Release of valuation allowance related to prior equity transactions — — — — — 2,141 — — 2,141 Foreign currency translation loss, net — — — — — — — ( 3,313 ) ( 3,313 ) Net loss — — — — — — ( 81,966 ) — ( 81,966 ) Balance at December 31, 2021 $ — — $ — 195,384 $ 2 $ 1,500,643 $ ( 513,230 ) $ ( 1,767 ) $ 985,648 (1) Represents the aggregate activity for Series A, B and C convertible preferred stock that was converted as a result of the IPO (See Note 11. Equity). The accompanying notes are an integral part of these consolidated financial statements. II-24 EverCommerce Inc. Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Cont’d) (in thousands) Total Convertible Preferred Stock Preferred Stock Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders’ Equity Shares Amount Shares Amount Balance at January 1, 2022 $ — — $ — 195,384 $ 2 $ 1,500,643 $ ( 513,230 ) $ ( 1,767 ) $ 985,648 Issuance of common stock for Employee Stock Purchase Plan — — — 502 — 3,366 — — 3,366 Common stock issued upon vesting of restricted stock units — — — 162 — — — — — Stock-based compensation — — — — — 26,818 — — 26,818 Stock option exercises — — — 351 — 1,819 — — 1,819 Repurchase and retirement of common stock — — — ( 4,952 ) — ( 42,994 ) — — ( 42,994 ) Release of valuation allowance related to prior equity transactions — — — — — 283 — — 283 Foreign currency translation loss, net — — — — — — — ( 8,431 ) ( 8,431 ) Net loss — — — — — — ( 59,816 ) — ( 59,816 ) Balance at December 31, 2022 $ — — $ — 191,447 $ 2 $ 1,489,935 $ ( 573,046 ) $ ( 10,198 ) $ 906,693 Issuance of common stock for Employee Stock Purchase Plan $ — — — 550 — 3,550 — — 3,550 Common stock issued upon vesting of restricted stock units — — — 1,335 — — — — — Stock-based compensation — — — — — 25,559 — — 25,559 Stock option exercises — — — 482 — 2,603 — — 2,603 Repurchase and retirement of common stock including taxes — — — ( 6,880 ) — ( 67,621 ) — — ( 67,621 ) Adoption of ASC 326, Current Expected Credit Losses — — — — — — ( 1,309 ) — ( 1,309 ) Foreign currency translation gain, net — — — — — — — 2,181 2,181 Net loss — — — — — — ( 45,620 ) — ( 45,620 ) Balance at December 31, 2023 $ — — $ — 186,934 $ 2 $ 1,454,026 $ ( 619,975 ) $ ( 8,017 ) $ 826,036 The accompanying notes are an integral part of these consolidated financial statements. II-25 EverCommerce Inc. Consolidated Statements of Cash Flows (in thousands) Year ended December 31, 2023 2022 2021 Cash flows provided by operating activities: Net loss $ ( 45,620 ) $ ( 59,816 ) $ ( 81,966 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 104,201 110,801 101,437 Stock-based compensation 25,559 26,818 22,095 Deferred taxes ( 1,657 ) ( 7,477 ) ( 12,026 ) Amortization of deferred financing costs and non-cash interest 1,651 2,093 4,843 Impairment of long lived assets 6,325 — — Bad debt expense 6,016 5,578 2,044 Loss on debt extinguishment — — 28,714 Other non-cash items 2,738 4,747 700 Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable, net ( 5,011 ) ( 13,206 ) ( 13,342 ) Prepaid expenses and other current assets ( 2,261 ) ( 3,823 ) ( 8,009 ) Other non-current assets 4,183 4,937 ( 10,514 ) Accounts payable 179 ( 1,868 ) ( 3,961 ) Accrued expenses and other 10,423 3,076 ( 3,267 ) Deferred revenue 868 160 8,646 Other non-current liabilities ( 2,989 ) ( 7,218 ) 2,088 Net cash provided by operating activities 104,605 64,802 37,482 Cash flows used in investing activities: Purchases of property and equipment ( 3,037 ) ( 2,566 ) ( 3,103 ) Capitalization of software costs ( 20,043 ) ( 15,514 ) ( 11,692 ) Acquisition of companies, net of cash acquired ( 14,940 ) — ( 364,873 ) Net cash used in investing activities ( 38,020 ) ( 18,080 ) ( 379,668 ) Cash flows (used in) provided by financing activities: Payments on long-term debt ( 5,500 ) ( 9,500 ) ( 1,028,457 ) Proceeds from long-term debt — — 850,966 Deferred financing costs — — ( 8,135 ) Exercise of stock options 2,603 1,819 1,319 Proceeds from preferred stock issuance, net — — 109,782 Proceeds from common stock issuance, net — — 415,708 Proceeds from common stock issuance for Employee Stock Purchase Plan 3,550 3,366 — Repurchase and retirement of common stock ( 67,283 ) ( 42,994 ) — Net cash (used in) provided by financing activities ( 66,630 ) ( 47,309 ) 341,183 Effect of foreign currency exchange rate changes on cash 400 ( 1,148 ) 224 Net increase (decrease) in cash and cash equivalents and restricted cash 355 ( 1,735 ) ( 779 ) Cash and cash equivalents and restricted cash: Beginning of period 95,824 97,559 98,338 End of period $ 96,179 $ 95,824 $ 97,559 Supplemental disclosures of cash flow information: Cash paid for interest $ 46,011 $ 30,077 $ 30,847 Cash paid for income taxes $ 3,107 $ 2,511 $ 1,495 Supplemental disclosures of noncash investing and financing activities: Rollover equity in consideration of net assets acquired $ — $ — $ 726 Accretion of Series B preferred stock to redemption value $ — $ — $ 15,105 The accompanying notes are an integral part of these consolidated financial statements. II-26 EverCommerce Inc. Notes to Consolidated Financial Statements Note 1. Nature of the Business EverCommerce Inc. and subsidiaries (the “Company” or “EverCommerce”) is a leading provider of integrated software-as-a-service (“SaaS”) solutions or services for service-based small- and medium-sized businesses (“service SMBs”). Our platforms span across the full lifecycle of interactions between consumers and service professionals with vertical-specific applications. Today, the Company serves more than 708,000 customers across three core verticals: Home Services; Health Services; and Fitness & Wellness Services. Within the core verticals, customers operate within numerous micro-verticals, ranging from home service professionals, such as construction contractors and home maintenance technicians, to physician practices and therapists in the Health Services industry, to personal trainers and salon owners in the Fitness & Wellness sectors. The platform provides vertically-tailored SaaS solutions that address service SMBs’ increasingly nuanced demands, as well as highly complementary solutions that provide fully-integrated offerings, allowing service SMBs and EverCommerce to succeed in the market, and provide end consumers more convenient service experiences. The Company is headquartered in Denver, Colorado, and has operations across the United States, Canada, Jordan, United Kingdom, Australia and New Zealand. Initial Public Offering On July 6, 2021, the Company completed its Initial Public Offering (“IPO”), in which the Company issued and sold 19.1 million shares of its common stock at a public offering price of $ 17.00 per share (see Note 11. Equity). Note 2. Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation The Company’s consolidated financial statements (collectively, the “financial statements”) include the operations of EverCommerce and all wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All material intercompany transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates are subject to uncertainties due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change. Significant items subject to such estimates include: valuing identified intangible assets and acquired goodwill and establishing estimated useful lives for intangible assets in connection with business combinations; the estimation of the recoverability of goodwill and other intangible assets; income tax uncertainties, including valuation allowance for deferred tax assets and value of any uncertain tax positions; recognizing bad debt expense from expected credit losses; recognizing stock-based compensation expens e and estimating standalone selling price, when applicable, for the allocation of transaction price when multiple performance obligations are included in a contract with a customer. We evaluate our estimates on an ongoing basis. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recognized revenue and expenses that are not readily apparent from other sources. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates and assumptions. Segment Information The Company’s Chief Operating Decision Maker (“CODM”), its Chief Executive Officer (“CEO”), evaluates financial performance and allocates resources on a consolidated basis. Accordingly, the Company has determined that it operates in a single reportable segment. See Notes 4. Revenue and 18. Geographic Areas for disaggregated information regarding the Company's revenues and long-lived assets by geography, respectively. Business Combinations The results of a business acquired in a business combination are included in the Company’s financial statements from the date of acquisition with the associated purchase price allocated to the identifiable assets and liabilities of the acquired business at their acquisition date fair values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill. Based on the nature of the businesses that the Company acquires, goodwill arising from acquisitions typically consists of synergies with previously acquired businesses and economies of scale resulting from centralizing shared service functions. Acquisition-related transaction costs are expensed in the period in which the costs are incurred. II-27 EverCommerce Inc. Notes to Consolidated Financial Statements Determining the fair value of assets acquired and liabilities assumed requires management to make significant judgments and estimates, including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies. Concentrations of Risk The Company maintains cash accounts at domestic and foreign financial institutions. At times and for cash maintained at domestic institutions, certain account balances may exceed Federal Deposit Insurance Corporation (“FDIC”) insurance coverage. The Company has not experienced any losses on such accounts, and management believes that the Company’s risk of loss is remote. Market conditions can impact the viability of these institutions. In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we will be able to access uninsured funds in a timely manner or at all. Cash and Cash Equivalents and Restricted Cash The Company considers all highly liquid investments with an original maturity of three months or less when acquired to be cash equivalents. Restricted cash consists of funds that are contractually restricted as to usage or withdrawal. Restricted cash relates to cash collected from our customers’ clients that will be remitted to our customers subsequent to period-end, generally within a time period no longer than one month. Accounts Receivable, net Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for estimated credit losses inherent in its accounts receivable portfolio. In establishing the expected credit loss, management considers historical losses adjusted to take into account current market conditions and the customers’ financial condition, the amount of receivables in dispute and customer paying patterns. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Property and Equipment, net Property and equipment are recorded at cost, net of accumulated depreciation. Property and equipment acquired in purchase accounting are recorded at fair value at the date of acquisition. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the following estimated useful lives. Property and Equipment Estimated Useful Life Computer equipment and software 3 years Furniture and fixtures 5 years Leasehold improvements Lesser of estimated useful life or remaining lease term Upon disposition, the cost of disposed assets and the related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is credited or charged to earnings/loss. Capitalized Software, net The Company capitalizes certain costs related to software developed for internal use for which it has no plans to market externally. Internal use software includes the software used for the Company’s SaaS offerings. The Company expenses the costs of developing computer software until the software has reached the application development stage and capitalizes all costs incurred from that time until the software has been placed in service, at which time amortization of the capitalized costs begins. Determination of when the software has reached the application development stage is based upon completion of conceptual designs, evaluation of alternative designs and performance requirements. Costs of major enhancements to internal use software are capitalized while routine maintenance of existing software is charged to product development expense as incurred. The Company also capitalizes certain costs related to software developed for external use for which it plans to sell to customers, i.e. on-premise software to be installed on customer computers at the customer site. Costs incurred prior to reaching technological feasibility are charged to product development expense as incurred. Capitalization ceases when the product is available for general release to the customers. Such costs have not been material. The Company amortizes software costs, using the straight-line method, over its estimated useful life of five years . II-28 EverCommerce Inc. Notes to Consolidated Financial Statements Intangible Assets, net Intangible assets primarily consist of customer relationships which include government contracts, developed technology, trademarks and trade names and non-compete agreements, which are recorded at acquisition date fair value, less accumulated amortization. The Company determines the appropriate useful life of intangible assets by performing an analysis of expected cash flows of the acquired assets. Developed technology, trademarks and trade names and non-compete agreements acquired through acquisitions are amortized over their estimated useful lives using the straight-line method and customer relationship intangibles are amortized over their estimated useful lives using present value of future cash flows, which approximates the pattern in which the economic benefits are expected to be consumed. Long-Lived Assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of the asset is measured by comparison of its carrying amount to undiscounted future net cash flows the asset is expected to generate. If such assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying amount of the asset exceeds its estimated fair value. Estimates of expected future cash flows represent management’s best estimate based on currently available information and reasonable and supportable assumptions. Any impairment recognized is permanent and may not be restored. Impairment of Long-Lived Assets During the fourth quarter of 2023, the Company evaluated the recoverability of our fitness asset group. As a result of our evaluation, we determined that the estimated fair value of our fitness asset group was insufficient to recover the net carrying value of the asset group resulting in an impairment charge of approximately $ 5.1 million during the three months ended December 31, 2023, of which $ 3.1 million related to intangible assets (see Note 19. Subsequent Event). Additionally, the Company ceased use of certain leased premises and subleased certain facilities resulting in an impairment charge of $ 1.2 million to impair the right-of-use lease assets to their fair value during the year ended December 31, 2023. The impairment charges are recorded in impairment expense on the consolidated statements of operations and comprehensive loss. There were no impairments of long-lived assets during the years ended December 31, 2022 and 2021 other than the abandonment of certain features of its capitalized software as more fully described in Note 8. Capitalized Software. Goodwill Goodwill represents the excess of purchase price over amounts allocated to identifiable assets acquired and liabilities assumed in business combinations. The carrying value of goodwill is evaluated for impairment at least annually or more frequently whenever events or changes in circumstances indicate the carrying value of these assets may not be recoverable. The Company performs an annual impairment review of its goodwill balance during the fourth quarter or more frequently if business factors indicate. Prior to performing a quantitative evaluation, an assessment of qualitative factors may be performed to determine whether it is more likely than not that the fair value of the reporting unit exceeds its carrying value. In the event the Company determines that it is more likely than not the carrying value of a reporting unit is higher than its estimated fair value, quantitative testing is performed comparing recorded values to estimated fair values. Alternatively, the Company may perform a quantitative assessment for the annual review of recoverability rather than a qualitative assessment. If the carrying value, including goodwill, exceeds the reporting unit’s fair value, we will recognize an impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value. We did not incur any goodwill impairment losses in any of the periods presented. Leases The Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) as of January 1, 2022 and recognized right-of-use (“ROU”) lease assets and lease liabilities on the balance sheet representing the rights and obligations created by those leases and disclosed key information about leasing arrangements. Lease expense is recognized on a straight-line basis over the non-cancelable lease term and is recorded to general and administrative expense on the statements of operations and comprehensive loss. Operating ROU lease assets are included in other non-current assets and operating lease liabilities are included in accrued expenses and other and other non-current liabilities on our consolidated balance sheets. Lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. We do not recognize ROU lease assets and lease liabilities for leases with a term of 12 months or less. For all other leases, operating lease assets and liabilities are recognized at commencement based on the present value of lease payments over the lease term. The Company determines if an arrangement is or contains a lease at inception, which is the date on which the terms of the contract are agreed to, and the agreement creates enforceable rights and obligations. We also consider whether our service arrangements include the right to control the use of an asset. The ROU lease assets also include any initial direct costs incurred and lease payments made at or before the commencement date and are adjusted for lease incentives. II-29 EverCommerce Inc. Notes to Consolidated Financial Statements The Company’s leases do not provide a readily determinable implicit interest rate and we use our incremental borrowing rate to measure the lease liability and corresponding ROU lease assets. Our incremental borrowing rate is the rate of interest the Company would have to pay to borrow on a collateralized basis adjusted for market conditions and the length of the lease term. Judgement is applied in assessing factors such as Company-specific credit risk, lease term, nature and quality of the underlying collateral, currency, and economic environment in determining the incremental borrowing rate to apply to each lease. The Company’s leases may include a non-lease component representing additional services transferred to the Company, such as common area maintenance for real estate. We elected the practical expedient to not separate lease from fixed non-lease components for our real estate leases. We account for the lease and fixed non-lease components of our operating ROU lease assets as a single lease component. The non-lease components are usually variable in nature and recorded in variable lease expense in the period incurred. Future lease payments may include fixed rent escalation clauses or payments that depend on an index (such as the consumer price index) measured using the index or applicable rate at lease commencement. Subsequent changes in index and other periodic market-rate adjustments to base rent are recorded in variable lease expense in the period incurred. In addition, certain leases include options to extend or terminate a lease, which are recognized when it is reasonably certain that we will exercise that option. The Company’s leases generally do not contain any material restrictive covenants or residual value guarantees. The Company does not have any leases classified as finance leases. Deferred Financing and Credit Facility Costs Deferred financing costs and discounts on long-term debt are capitalized and netted with long-term debt and amortized over the term of the related debt, using the effective interest method. Costs incurred in connection with the establishment of revolving credit facilities are capitalized and amortized over the term of the related facility period, using the straight-line method. Amortization of debt issuance costs, noncash discounts and other credit facility costs are included in interest expense on the consolidated statements of operations and comprehensive loss. Series A, B and C Convertible Preferred Stock The Company accounted for its Series A Convertible Preferred Stock (“Series A”), Series B Convertible Preferred Stock (“Series B”) and Series C Convertible Preferred Stock (“Series C”) shares subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480, Distinguishing Liabilities from Equity . Series A shares, Series B shares and Series C shares were conditionally redeemable preferred stock shares (with redemption rights that were either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) that were classified as Convertible Preferred Stock separate from the stockholders’ equity (deficit) section of the Company’s consolidated balance sheets. The Series A shares and Series C shares were redeemable upon the occurrence of uncertain events not solely within the Company’s control and these uncertain events were deemed not probable. Therefore, Series A shares and Series C shares were presented at fair value at the time of issuance and were not subsequently re-measured. The Company’s Series B shares featured certain redemption rights that were considered to be outside of the Company’s control and these redemption rights were deemed probable of occurrence through March 15, 2021. Accordingly, Series B shares were presented at redemption value through that date. In connection with the IPO, all of the Company’s then outstanding convertible preferred stock converted into shares of common stock on a one-for-one basis. Upon conversion of the convertible preferred stock, the Company reclassified the carrying value of the convertible preferred stock to common stock and additional paid-in capital. Revenue Recognition In accordance with U.S. GAAP, the Company performs the following steps in determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its contracts with customers: (i) identification of the contract with a customer; (ii) determination of whether the promised goods or services are performance obligations; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when, or as each performance obligation is satisfied. The Company assesses the goods or services promised within each contract to determine if they are distinct and represent a performance obligation. The Company then allocates the transaction price to the respective performance obligations, and recognizes revenue when (or as) the performance obligations are satisfied. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services. The Company maintains three primary categories of revenue sources: Subscription and Transaction Fees: Subscription revenue primarily consists of the sale of SaaS offerings or the sale of software licenses. Through the S aaS offerings and II-30 EverCommerce Inc. Notes to Consolidated Financial Statements related support services, customers are granted access to a hosted software application over the contract period, generally ranging from one month to five years, without a contractual right to possession of the software. Alternatively, through the sale of software licenses the customer is provided with a right to use software that provides functionality to the customer on a stand-alone basis, and related support services, which include telephone/technical support, when-and-if available software updates and, in certain instances, hosting services. The software licenses are both perpetual, providing the customer with the right-of-use for an indefinite period, and term, which generally range for a defined period of time from one month to five years. Contracts may contain termination for convenience provisions that allow the Company, customer or both parties the ability to terminate for convenience, either at any time or upon providing a specified notice period, without a penalty. The contract term for accounting purposes is determined to be the period in which parties to the contract have present enforceable rights and obligations, therefore the contract term for accounting purposes may be shorter than the stated term. • SaaS and related support services : Revenues from the sale of hosted software applications and related support services are generally recognized ratably over the contractual period that the services are delivered, beginning on the date the service is made available to customers. Revenue is recognized ratably because the customer simultaneously receives and consumes the benefits of the services throughout the contract period. Contracts are generally fixed price and may be invoiced on a monthly, quarterly or annual basis, with standard payment terms ranging from 30 to 60 days. • License and related support services: Revenues from the sale of distinct on-premise licenses are generally recognized at the point in time when the software is made available to the customer to download or use. Revenues from the sale of license related support services are generally recognized ratably over the contractual period that the services are delivered. Within these arrangements, the Company is obligated to make the support services available continuously throughout the contract and the customer simultaneously receives and consumes the benefit of making these services available throughout the contract period. Contracts are generally fixed price and may be invoiced on a monthly, quarterly or annual basis, with standard payment terms ranging from 30 to 60 days. The timing of revenue recognition may differ from the timing of invoicing customers due to the existence of these invoicing practices as well as the requirement to recognize revenue on a relative stand-alone selling price basis. Transaction fees relate to payment processing and group purchasing program administration services. In fulfillment of payment processing services, the Company partners with third-party merchants and processors who assist in the fulfillment of the Company’s obligations to customers. Payment processing services enable customers to accept payments via credit card, electronic check and other similar methods through facilitation of payment information within the cloud-based applications. Group purchasing program administration services relate to facilitation of group purchasing programs for members through which the Company aggregates member purchasing power to negotiate pricing discounts with suppliers. • Payment processing services: The Company has concluded that it does not possess the ability to control the underlying services provided by third parties in the fulfillment of its obligations to customers and therefore recognizes revenue net of interchange fees retained by the card issuing financial institutions and fees charged by payment networks. The Company recognizes revenue from these transaction services as the services are provided and ascribes the transaction consideration to the distinct services utilizing the variable consideration allocation exception. Payment for transaction services is received in arrears, typically within one month of when the services have been provided. Transaction services contracts with customers are generally for a term of one month and renew automatically each month. • Purchasing program administration services: The Company receives rebates from contracted suppliers in exchange for program administration services. Rebates earned are based on a defined percentage of the purchase price of goods and services sold to program members under the contract the Company has negotiated with its suppliers. Administration services contracts with customers are generally for an annual or monthly term and renew automatically upon lapse of the current term. Marketing Technology Solutions: Marketing technology solutions consist of digital advertising management and consumer connection services. Digital advertising management services include content creation, search engine optimization and paid media management services. The nature of the performance obligation within advertising management contracts is to stand-ready and provide management services on a continuous basis over the contract term. As a result, revenue associated with advertising management services is recognized on a ratable basis over the service period as the customer simultaneously receives and consumes the benefits of the management services evenly throughout the contract period . The Company typically earns a fixed recurring fee in exchange for advertising management services; however, in certain instances, the transaction consideration to which the Company is entitled may be variable. The Company applies the variable consideration allocation exception to these arrangements. Advertising management services are typically invoiced on a monthly basis either in arrears or in advance. Certain arrangements may be invoiced on a quarterly or annual basis. II-31 EverCommerce Inc. Notes to Consolidated Financial Statements Consumer connection services relate to the sourcing and delivery of service requests from consumers to home service providers. Revenue for consumer connection services may be recognized at either a point-in-time or on an over-time basis as each connection is delivered. Revenue is derived from fees paid by service professionals for consumer matches. Fees associated with each consumer match generated may be either fixed price or variable. The variable consideration, subject to being constrained by Company estimates, is allocated to the connection from which it was derived. Payment for consumer connection services is received in arrears, typically within one month of when the services have been provided. The Company records a contract asset or unbilled receivable for this difference on the consolidated balance sheets. Marketing technology solutions service related contracts are typically short-term with stated contract terms that are less than one year. Other: Other revenues generally consist of fees associated with the sale of distinct professional services, either in support of subscription revenue or marketing technology revenue, and hardware. Professional service offerings are typically sold as part of an arrangement for products or services included within subscription or marketing revenue. Professional services associated with subscription revenue generally relate to standard implementation, configuration, installation or training services applied to both SaaS and on-premise deployment models and those services associated with marketing technology are derived from website design, creation or enhancement services. Professional service revenue is recognized over time as the services are performed, as the customer simultaneously receives and consumes the benefit of these services. Professional service contracts are offered at either a fixed or a variable price and may be invoiced in advance or arrears of the services being provided. Standard payment terms for these arrangements range from 30 to 60 days. Contract terms for other revenue arrangements are generally short-term, with stated contract terms that are less than one year. Performance Obligations and Standalone Selling Price: The Company’s contracts at times include the sale of multiple promised goods or services that have been determined to be distinct. The transaction price for contracts with multiple performance obligations is allocated based on the relative stand-alone selling price of each performance obligation within the contract. The Company’s contracts may include standard warranty or service level provisions that state promised goods and services will perform and operate in all material respects as defined in the respective agreements. The Company has determined that these represent assurance-type warranties, and the Company has not incurred any material costs as a result of such commitments. Cost to Obtain and Fulfill a Contract: The Company incurs certain costs to obtain contracts, principally sales, third-party commissions and third-party fulfillment fees, which the Company capitalizes when the liability has been incurred if they are (i) incremental costs of obtaining a contract, (ii) expected to be recovered and (iii) have an expected amortization period that is greater than one year (as the Company has elected the practical expedient to expense any costs to obtain a contract when the liability is incurred if the amortization period of such costs would be one year or less). Material Rights: The Company’s contracts with customers may include renewal or other options at stated prices. Determining whether these options provide the customer with a material right and therefore need to be accounted for as separate performance obligations requires judgment. The price of each option must be assessed to determine whether it is reflective of the stand-alone selling price or is reflective of a discount that the customer only received as a result of its prior purchase (a material right). Other considerations: The Company has elected a policy to exclude from the transaction price all sales taxes assessed by governmental authorities and as a result, revenue is presented net of tax. Cost of Revenues Cost of revenues consists of expenses related to delivering our services and products and providing support to our customers and includes employee costs and related overhead, customer credit card processing fees, targeted mail costs, third party fulfillment costs and software hosting expenses. Advertising We expense the cost of advertising as incurred, which is primarily for internet-based advertising to market our products and services. For the years ended December 31, 2023, 2022 and 2021, advertising expenses included in sales and marketing expenses on the II-32 EverCommerce Inc. Notes to Consolidated Financial Statements consolidated statements of operations and comprehensive loss were $ 23.7 million, $ 21.4 million and $ 19.3 million, respectively. Stock-based Compensation We measure stock-based compensation awards made to employees and directors based on the estimated grant date fair value of the awards and recognize the compensation expense on a straight-line basis over the applicable service period. We use the Black-Scholes option-pricing model to estimate the fair value of options granted with time-based vesting and market-based vesting terms, respectively, which requires the use of assumptions, including the fair value of the common stock, expected volatility, expected term, risk-free interest rate and expected dividends. The Company does not have a sufficient third-party history of market prices of its common stock, and as such volatility is estimated, using historical volatilities of comparable public entities for the valuation of its stock options. At the point when the Company has sufficient and meaningful trading history of its stock, as is the case for the Company’s 2021 Employee Stock Purchase Plan (the “ESPP”) (see Note 12. Stock-Based Compensation), it will calculate volatility based on its own trading history. The expected term represents the estimated average period of time that the option will remain outstanding. Since the Company does not have sufficient historical data for the exercise of stock options, the expected term is based on the “simplified” method that measures the expected term as the average of the vesting period and the contractual term. Once the Company has sufficient historical data for the exercise of its options it will use Company-specific data. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of the awards. The dividend yield assumption is based on history and the expectation of paying no dividends. We estimate forfeitures at the date of grant and adjust these estimates to actual forfeitures as they occur. These assumptions involve inherent uncertainties including market conditions and employee behavior that are generally outside of the Company’s control. Stock-based compensation expense is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Income Taxes The Company is a C corporation for federal income tax purposes. Deferred taxes are provided whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company's total provision for taxes includes income taxes on the Company's corporate subsidiaries. The Company records uncertain tax positions based on the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority when it is determined that the tax position will more likely than not be sustained on the basis of the technical merits of the position. When applicable, interest and penalties relating to any such uncertain tax positions are recorded as part of income tax expense. Comprehensive Loss Comprehensive loss includes net loss as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events other than those with stockholders. The Company includes cumulative foreign currency translation adjustments in comprehensive loss as described below. Net Loss per Share Attributable to Common Stockholders The Company computes net loss per share attributable to its common stockholders using the two-class method required for participating securities, which determines net loss per common share and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. The Company’s convertible preferred stock contractually entitled the holders of such shares to participate in dividends, but did not contractually require the holders of such shares to participate in the Company’s losses. As such, net losses for the periods presented were not allocated to these securities. In connection with the IPO, all of the Company’s then outstanding convertible preferred stock converted into shares of common stock on a one-for-one basis. Diluted net loss per common share attributable to common stockholders is the same as basic net loss per common share attributable to common stockholders, because potentially dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. Foreign Currency Translation The functional currency of our foreign subsidiaries is primarily the local currency in which the entity is located. The financial results of all subsidiaries with a functional currency other than the U.S. dollar are translated into U.S. dollars upon consolidation. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at the current exchange rate in effect as of the date of the consolidated II-33 EverCommerce Inc. Notes to Consolidated Financial Statements balance sheets (the “Spot Rate”). Revenues and expenses are translated at the average exchange rates during the respective periods. Translation adjustments resulting from fluctuations in exchange rates are included in the cumulative currency translation adjustments in accumulated other comprehensive loss in stockholders’ equity. The functional currencies of the Company’s significant foreign operations include the Canadian dollar, Great British Pound, Australian dollar and New Zealand dollar. For the Company’s subsidiaries that operate primarily in the U.S. dollar, foreign currency denominated monetary assets and liabilities are remeasured into U.S. dollars at the Spot Rate in effect as of the date of the consolidated balance sheets. Non-monetary assets and liabilities are remeasured using historical exchange rates. Income and expense elements are remeasured at the average exchange rates during the respective periods in which the elements are recognized within the consolidated statements of operations and comprehensive loss. Emerging Growth Company As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are applicable to private companies. The Company has elected to use the extended transition period under the JOBS Act until the earlier of the date that it is (i) no longer an EGC or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, the financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. The adoption dates are discussed below to reflect this election within the Recently Issued Accounting Pronouncements section. Recently Issued Accounting Pronouncements We evaluate all ASUs issued by the FASB for consideration of their applicability. ASUs not included in the disclosures in this report were assessed and determined to be either not applicable or are not expected to have a material impact on our consolidated financial statements. Accounting pronouncements issued and adopted In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326); Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, which includes the Company’s accounts receivable and contract assets. This updated standard is effective for annual reporting periods beginning after December 15, 2022. The Company adopted this ASU for the year ending December 31, 2023 and it did not have a material impact on the financial statements. In October 2021, the FASB issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which amends the guidance in ASC 805 to require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. FASB’s objective in issuing the ASU is to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity and inconsistency related to both the recognition of an acquired contract liability and payment terms’ effects on subsequent revenue recognized by the acquirer. This updated standard is effective for annual reporting periods beginning after December 15, 2022. The Company adopted this ASU on January 1, 2023 and it is prospectively applicable to all business combinations from the adoption date. The adoption of this standard was not material to the Kickserv Acquisition (see Note 3. Acquisitions). In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2024. There was no material impact to our financial statements from the adoption of this standard. Accounting pronouncements not yet adopted In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting - Improving Reportable Segment Disclosures (Topic 280) . The update is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant expenses. The ASU requires disclosures to include significant segment expenses that are regularly provided to the CODM, an amount and description of the composition of other segment items by reportable segment, and any additional measures of a segment's profit or loss used by the CODM when deciding how to allocate resources. The ASU also requires all annual disclosures currently required by Topic 280 to be included in interim periods. All disclosure requirements under ASU 2023-07 are also required for public entities with a single reportable segment. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The II-34 EverCommerce Inc. Notes to Consolidated Financial Statements amendments should be applied retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the impact of adopting the amendments in this update on its consolidated financial statements and disclosures. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . This update is intended to improve transparency of income tax disclosure by requiring consistent categories and greater disaggregation within the rate reconciliation and disaggregation of income taxes paid by jurisdiction. The amendments in this update are effective for annual periods beginning after December 15, 2024 with early adoption permitted. The amendments in this update should be applied on a prospective basis with retrospective application permitted. The Company is currently evaluating the impact of adopting this update on its consolidated financial statements and disclosures. Note 3. Acquisitions 2023 Acquisition On August 10, 2023, the Company acquired 100 % of the interest of Norman’s Dojo Inc. (“Kickserv”), a provider of field service management software for home service businesses for approximately $ 15 million in cash. The acquisition adds offerings for SMBs across diversified portfolios with an opportunity to capture a broader segment of new customers within the Home Services vertical. We accounted for the acquisition as a business combination under ASC 805, Business Combinations . Accordingly, the Company recorded identifiable assets acquired and liabilities assumed at their acquisition date estimated fair values, with any excess consideration recognized as goodwill. Goodwill primarily represents the value associated with the assembled workforce and expected synergies subsumed into goodwill. The goodwill recognized as a result of the acquisition of Kickserv is not deductible for tax purposes. We measured the identifiable assets and liabilities assumed at their acquisition date estimated fair values separately from goodwill, which represent Level 3 fair value measurements as defined in ASC 820, Fair Value Measurement . The estimated fair values were determined by management using the assistance of third-party valuation specialists. The valuation methods used to determine the estimated fair value of intangible assets included the income approach—relief from royalty method for developed technology with an estimated useful life of five years , and the income approach—multi period excess earnings method for customer relationships with an estimated useful life of 13 years. A number of assumptions and estimates were involved in the application of these valuation methods, including revenue forecasts, expected competition, costs of revenues, obsolescence, tax rates, capital spending, customer attrition rates, discount rates and working capital changes. Cash flow forecasts were generally based on pre-acquisition forecasts coupled with estimated revenues and cost synergies available to a market participant. Our purchase price allocation for the acquisition is preliminary and subject to revision with provisional amounts related to tax-related and other items. Additional information that existed as of the acquisition date but at the time was unknown to us may become known to us during the remainder of the measurement period, which is not to exceed 12 months from the acquisition date. The financial results of Kickserv since the closing through December 31, 2023, were not material to our consolidated financial statements, nor were they material to our prior period consolidated results on a pro forma basis. The following table summarizes the estimated fair values of consideration transferred, assets acquired and liabilities assumed at the acquisition date: August 10, 2023 (in thousands) Total consideration transferred: Cash $ 14,974 Net assets acquired: Prepaid expenses and other assets $ 51 Intangibles—definite lived 3,155 Goodwill 12,497 Accounts payable, accrued expenses and other ( 11 ) Deferred tax liability, net ( 397 ) Deferred revenue ( 274 ) Other non-current liabilities ( 47 ) Total net assets acquired $ 14,974 II-35 EverCommerce Inc. Notes to Consolidated Financial Statements 2021 Acquisitions During 2021, the Company completed the acquisition of five unrelated businesses in conjunction with the execution of its long-term plans and objectives in building a service commerce platform supporting the success of SMBs. Total purchase consideration was $ 367.1 million, including $ 366.4 million in cash consideration, and $ 0.7 million of rollover equity. In connection with these acquisitions, the Company allocated approximately $ 1.4 million of the consideration to cash and cash equivalents, $ 0.5 million to property and equipment, $ 3.4 million to deferred tax asset, $ 20.9 million to developed technology, $ 105.9 million to customer relationships, $ 5.6 million to trade name and non-compete agreements, $ 255.7 million of goodwill, of which $ 36.1 million was deductible for tax purposes, a liability of $ 1.6 million to net working capital and $ 24.7 million to deferred tax liability. The Company’s consolidated statements of operations and comprehensive loss includes $ 8.4 million of acquisition-related transaction costs in general and administrative for acquisitions consummated in 2021. For the year ended December 31, 2021 the Company recognized revenue of $ 21.6 million related to acquisitions consummated in 2021. Note 4. Revenue Disaggregation of Revenue The following tables present a disaggregation of our revenue from contracts with customers by revenue recognition pattern and geographical market: Year Ended December 31, 2023 2022 2021 (in thousands) By pattern of recognition (timing of transfer of services): Point in time $ 61,445 $ 56,056 $ 49,338 Over time 613,924 564,690 440,801 Total $ 675,369 $ 620,746 $ 490,139 By Geographical Market: United States $ 614,782 $ 567,041 $ 447,232 International 60,587 53,705 42,907 Total $ 675,369 $ 620,746 $ 490,139 Contract Balances Supplemental balance sheet information related to contracts from customers is as follows: December 31, 2023 2022 (in thousands) Accounts receivables $ 45,417 $ 48,032 Contract assets $ 16,117 $ 12,971 Deferred revenue $ 24,082 $ 22,885 Customer deposits $ 12,891 $ 11,360 Long-term deferred revenue $ 2,168 $ 2,496 Accounts receivable, net: Accounts receivable represent rights to consideration in exchange for products or services that have been transferred by us, when payment is unconditional and only the passage of time is required before payment is due. Contract assets: Contract assets represent rights to consideration in exchange for products or services that have been transferred (i.e., the performance obligation or portion of the performance obligation has been satisfied), but payment is conditional on something other than the passage of time. These amounts typically relate to contracts that include on-premise licenses and professional services where II-36 EverCommerce Inc. Notes to Consolidated Financial Statements the right to payment is not present until completion of the contract or achievement of specified milestones and the fair value of products or services transferred exceed this constraint. Contract liabilities : Contract liabilities, or deferred revenue, represent our obligation to transfer products or services to a customer for which consideration has been received in advance of the satisfaction of performance obligations. Long-term deferred revenue is included within other non-current liabilities on the consolidated balance sheets. Revenue recognized from the contract liability balance at December 31, 2022 was $ 22.9 million for the year ended December 31, 2023. Revenue recognized from the contract liability balance at December 31, 2021 was $ 23.0 million for the year ended December 31, 2022. Customer deposits : Customer deposits relate to payments received in advance for contracts, which allow the customer to terminate a contract and receive a pro rata refund for the unused portion of payments received to date. Accounts Receivable Activity in our allowance for expected credit losses is as follows for the years ended December 31, 2023 and 2022 (in thousands): Balance, December 31, 2021 $ 1,929 Bad debt expense 5,578 Write-offs, net of recoveries ( 2,837 ) Balance, December 31, 2022 4,670 Beginning balance adjustment due to implementation of the new credit loss standard 1,309 Bad debt expense 6,016 Write-offs, net of recoveries ( 5,812 ) Balance, December 31, 2023 $ 6,183 Remaining Performance Obligations Remaining performance obligations represent the transaction price of unsatisfied or partially satisfied performance obligations within contracts with an original expected contract term that is greater than one year for which fulfillment of the contract has started as of the end of the reporting period. Remaining performance obligations generally relate to those which are stand-ready in nature, as found within the subscription and marketing technology solutions revenue streams. The aggregate amount of transaction consideration allocated to remaining performance obligations as of December 31, 2023 was $ 20.4 million. The Company expects to recognize approximately 63 % of its remaining performance obligations as revenue within the next year, 28 % of its remaining performance obligations as revenue the subsequent year, 8 % of its remaining performance obligations as revenue in the third year, and the remainder during the two-year period thereafter. Cost to Obtain and Fulfill a Contract Assets resulting from costs to obtain contracts are included within prepaid expenses and other current assets for short-term balances and other non-current assets for long-term balances on the Company’s consolidated balance sheets. The costs to obtain contracts are amortized over five years , which corresponds with the useful life of the related technology. Short-term assets were $ 8.6 million and $ 6.6 million at December 31, 2023 and 2022, respectively, and long-term assets were $ 17.9 million and $ 15.1 million at December 31, 2023 and 2022, respectively. The Company recorded $ 5.7 million, $ 4.3 million and $ 2.9 million of amortization expense related to assets for the years ended December 31, 2023, 2022 and 2021, respectively, which is included in sales and marketing expense on the consolidated statements of operations and comprehensive loss, as well as $ 2.3 million, $ 1.7 million and $ 1.0 million, respectively, which is included in cost of revenues expense on the consolidated statements of operations and comprehensive loss. Note 5. Goodwill Goodwill consisted of the following as of December 31, 2023 and 2022 (in thousands): Balance, January 1, 2022 $ 921,416 Measurement period adjustments (1) ( 573 ) Effect of foreign currency exchange rate changes ( 6,761 ) Balance, December 31, 2022 914,082 Acquired goodwill 12,497 Effect of foreign currency exchange rate changes 852 Balance, December 31, 2023 $ 927,431 (1) The measurement period adjustments of $ 0.6 million relate to acquisitions consummated during the years ended December 31, 2021. II-37 EverCommerce Inc. Notes to Consolidated Financial Statements Note 6. Intangible Assets Intangible assets consisted of the following: December 31, 2023 Useful Life Gross Carrying Value Accumulated Amortization Net Book Value (in thousands) Customer relationships (1) 3 - 20 years $ 605,908 $ 336,558 $ 269,350 Developed technology (1) 2 - 12 years 106,482 74,717 31,765 Trade names (1) 3 - 10 years 38,627 24,293 14,334 Non-compete agreements 2 - 5 years 2,408 2,338 70 Total $ 753,425 $ 437,906 $ 315,519 (1) During the quarter ended December 31, 2023, we recognized an impairment charge including $ 2.7 million of customer relationships, $ 0.3 million of developed technology and $ 0.1 million of trade names included in impairment expense on the consolidated statements of operations and comprehensive loss (see Note 2. Summary of Significant Accounting Policies). December 31, 2022 Useful Life Gross Carrying Value Accumulated Amortization Net Book Value (in thousands) Customer relationships 3 - 20 years $ 605,753 $ 265,342 $ 340,411 Developed technology 2 - 12 years 105,766 59,208 46,558 Trade names 3 - 10 years 38,131 19,725 18,406 Non-compete agreements 2 - 5 years 2,402 2,057 345 Total $ 752,052 $ 346,332 $ 405,720 Amortization expense was $ 91.2 million, $ 101.0 million and $ 93.4 million for the years ended December 31, 2023, 2022 and 2021, respectively. The weighted average remaining useful life of intangible assets acquired is 8.6 years, 9.6 years and 10.5 years for the years ended December 31, 2023, 2022 and 2021, respectively. In determining the useful life for each category of intangible asset, the Company considered the following: the expected use of the intangible, the longevity of the brand and considerations for obsolescence, demand, competition and other economic factors. Amortization expense for the Company’s intangible assets are as follows (in thousands): Year Ended December 31, 2024 $ 73,869 2025 62,258 2026 48,709 2027 37,650 2028 29,888 Thereafter 63,145 Total amortization expense for the Company’s intangible assets $ 315,519 II-38 EverCommerce Inc. Notes to Consolidated Financial Statements Note 7. Property and Equipment Property and equipment consisted of the following: December 31, 2023 2022 (in thousands) Computer equipment and software $ 11,628 $ 9,327 Furniture and fixtures 3,794 3,570 Leasehold improvements 11,756 11,941 Total property and equipment 27,178 24,838 Less accumulated depreciation ( 17,444 ) ( 12,908 ) Property and equipment, net $ 9,734 $ 11,930 Depreciation expense was $ 4.6 million for the year ended December 31, 2023 and $ 4.1 million for each of the years ended December 31, 2022 and 2021. During the three months ended December 31, 2023, we recorded an impairment charge of $ 0.2 million to leasehold improvements, which is included in impairment expense on our consolidated statements of operations and comprehensive loss (see Note 2. Summary of Significant Accounting Policies). Note 8. Capitalized Software Capitalized software consisted of the following: December 31, 2023 2022 (in thousands) Capitalized software $ 64,137 $ 45,872 Less accumulated amortization ( 21,626 ) ( 13,318 ) Capitalized software, net $ 42,511 $ 32,554 Amortization expense was $ 8.4 million, $ 5.7 million and $ 3.7 million for the years ended December 31, 2023, 2022 and 2021, respectively. During the ordinary course of business, the Company may determine that certain capitalized features of its software will no longer be used either internally or to deliver value to its customers. During the years ended December 31, 2023, 2022 and 2021, we recorded a charge of $ 0.6 million, $ 1.2 million and $ 0.7 million, respectively, related to capitalized costs associated with abandoned projects, which were included in general and administrative expense on the consolidated statements of operations and comprehensive loss. During the three months ended December 31, 2023, we recorded an impairment charge of $ 1.1 million, which is included in impairment expense on our consolidated statements of operations and comprehensive loss (see Note 2. Summary of Significant Accounting Policies). Note 9. Leases The Company leases real estate from unrelated parties under operating lease agreements that have initial terms ranging from one year to 11 years. Some leases include one or more options to renew, generally at our sole discretion, of five additional years each. The components of lease expense are as follows: Year Ended December 31, 2023 2022 (in thousands) Operating lease cost $ 6,419 $ 7,859 Variable lease cost 2,046 1,495 Short-term lease cost 356 340 Total lease cost $ 8,821 $ 9,694 Included in the consolidated statements of operations and comprehensive loss is total rent expense of $ 9.7 million for the year ended December 31, 2021. II-39 EverCommerce Inc. Notes to Consolidated Financial Statements During the three months ended December 31, 2023, we recorded a $ 0.6 million impairment charge related to ROU lease assets, which is included in impairment expense on our consolidated statement of operations and comprehensive loss (See Note 2. Summary of Significant Accounting Policies). Additionally, the Company ceased use of certain leased premises and subleased certain facilities resulting in an impairment charge of $ 1.2 million to impair the right-of-use lease assets to their fair value during the year ended December 31, 2023. Supplemental cash flow information related to leases is as follows: Year Ended December 31, 2023 2022 (in thousands) Cash paid for operating lease liabilities $ 6,218 $ 8,010 Operating lease assets obtained in exchange for operating lease liabilities $ 1,602 $ 772 Supplemental balance sheet information, included in other non-current assets , accrued expenses and other and other non-current liabilities on the consolidated balance sheet, related to leases is as follows: Year Ended December 31, 2023 2022 (in thousands) Operating lease right-of-use assets $ 15,861 $ 21,756 Current operating lease liabilities 3,789 5,239 Long-term operating lease liabilities 19,400 22,500 Total operating lease liabilities $ 23,189 $ 27,739 At December 31, 2023 and 2022, the weighted average remaining lease term for operating leases was 5.75 years and 6.34 years, and the weighted average discount rate w as 5.1 % and 4.8 %, respectively. Future undiscounted cash flows for each of the next five years and thereafter and reconciliation to the lease liabilities recognized on the balance sheet as of December 31, 2023 is as follows (in thousands): Year ended December 31, 2024 $ 5,321 2025 4,944 2026 4,747 2027 3,966 2028 3,212 Thereafter 5,310 Total lease payments 27,500 Less: imputed interest 4,311 Total present value of lease liabilities $ 23,189 II-40 EverCommerce Inc. Notes to Consolidated Financial Statements Note 10. Long-Term Debt Long-term debt consisted of the following: December 31, 2023 2022 (in thousands) Term notes with interest payable monthly, interest rate at Adjusted SOFR or Alternative Base Rate (“ABR”), plus an applicable margin of 3.25 % ( 8.46283 % at December 31, 2023) quarterly principal payments of 0.25 % of original principal balance with balloon payment due July 2028 $ 537,625 $ 543,125 Revolver with interest payable monthly, interest rate at Adjusted SOFR or ABR, plus an applicable margin of 3.25 % ( 8.47044 % at December 31, 2023), and outstanding balance due July 2026 — — Principal debt 537,625 543,125 Deferred financing costs on long-term debt ( 3,983 ) ( 4,900 ) Discount on long-term debt ( 1,446 ) ( 1,779 ) Total debt 532,196 536,446 Less current maturities 5,500 5,500 Long-term portion $ 526,696 $ 530,946 The Company is party to a credit agreement, as amended, that provides for two term loans for an aggregate principal amount of $ 550.0 million (“Term Loans”), a revolver with a capacity of $ 190.0 million (“Revolver”) and a sub-limit of the Revolver available for letters of credit up to an aggregate face amount of $ 20.0 million. These debt arrangements are collectively referred to herein as the “Credit Facilities”. Prior to July 1, 2023, borrowings under the Credit Facilities were available as ABR or Eurocurrency borrowings. ABR borrowings under the Credit Facilities accrued interest at an alternate base rate plus an applicable rate, and Eurocurrency borrowings accrued interest at an adjusted LIBOR rate plus an applicable rate. The ABR rate represented the greater of the prime rate, Federal Reserve Bank of New York rate plus ½ of 1%, and an adjusted LIBOR rate for a one month interest period plus 1 %. Effective as of July 1, 2023, borrowings under the Credit Facilities bear interest at the Company’s option at ABR plus an applicable rate, or at a forward-looking term rate based upon the secured overnight financing rate (“SOFR”), plus (i) (a) with respect to Term Loans, credit spread adjustments of 0.11448 %, 0.26161 %, 0.42826 % and 0.71513 % for interest periods of one, three, six and twelve months, respectively, and (b) with respect to revolving loans, a credit spread adjustment of 0.0 % (“Adjusted SOFR”) plus (ii) an applicable rate, in each case with such applicable rate based on the Company’s first lien net leverage ratio. The ABR represents the highest of the prime rate, Federal Reserve Bank of New York rate plus ½ of 1%, and the Adjusted SOFR for a one month interest period plus 1 %. The applicable rate for the Term Loans and the Revolver is 3.0 % for Adjusted SOFR borrowings and 2.0 % for ABR borrowings, in each case subject to change based on our first lien net leverage ratio. The Company determines the fair value of long-term debt based on trading prices for its debt if available. As of December 31, 2023, the Company obtained trading prices for the term notes outstanding. However, as such trading prices require significant unobservable inputs to the pricing model, such instruments are classified as Level 2. The fair value amounts were approximately $ 540.3 million and $ 531.6 million as of December 31, 2023 and 2022, respectively. Effective October 31, 2022, the Company entered into an interest rate swap agreement (the “Initial Swap”) in connection with the Company’s Credit Facilities for a notional amount of $ 200.0 million to convert a portion of the floating component of the Term Loans from a floating rate to a fixed rate. The Initial Swap agreement has a term of five years with a fixed rate in the agreement of 4.212 %, as amended in June 2023. Additionally, effective March 31, 2023, the Company entered into a second interest rate swap agreement (the “Second Swap” and together with the Initial Swap, the “Swap Agreements”) in connection with the Company’s Credit Facilities for a notional amount of $ 100.00 million to convert a portion of the floating rate component of the Term Loans from a floating rate to a fixed rate. The Second Swap agreement has a term of approximately 4.5 years with a fixed rate in the agreement of 3.951 %, as amended in June 2023. The Swap Agreements are accounted for as derivatives whereby the fair value of the contract is reported within the consolidated balance sheets, and related gains and losses resulting from changes in the fair value are reported in interest and other expense, net, in the statements of operations and comprehensive loss. As of December 31, 2023 the fair value of the Swap Agreements was a liability II-41 EverCommerce Inc. Notes to Consolidated Financial Statements of $ 4.9 million which are reported in other non-current liabilities on the consolidated balance sheets, and the associated net losses of $ 2.0 million and $ 2.9 million were recognized for the years ended December 31, 2023 and 2022, respectively. The Company’s Credit Facilities are subject to certain financial and nonfinancial covenants and are secured by substantially all assets of the Company. As of December 31, 2023, the Company was in compliance with all of its covenants. Aggregate maturities of the Company’s debt are as follows (in thousands): Year Ended December 31, 2024 $ 5,500 2025 5,500 2026 5,500 2027 5,500 2028 515,625 Thereafter — Total aggregate maturities of the Company’s debt $ 537,625 Note 11. Equity Shares of convertible preferred stock were as follows (in thousands): Year Ended December 31, 2021 Series B Series C Series A (in thousands) Convertible Preferred Stock: Shares outstanding, beginning of period 72,226 — 44,958 Issuance of convertible preferred stock, net — 7,857 — Conversion to common stock upon closing of IPO ( 72,226 ) ( 7,857 ) ( 44,958 ) Shares outstanding, end of period — — — On May 5, 2021, the Company amended its Certificate of Incorporation (“Third Amended and Restated Certificate of Incorporation”) to increase the number of authorized shares of Preferred Stock from 125,000,000 shares to 140,000,000 shares of Preferred Stock, $ 0.00001 par value per share, of which 50,000,000 were designated as Series A, 75,000,000 were designated as Series B and 15,000,000 were designated as Series C as of such date. Each share of Series A, Series B and Series C could have been converted into common stock at any time, at the option of the holder, based on a prescribed formula set forth in the Company’s Third Amended and Restated Certificate of Incorporation. In the event of a liquidation, dissolution, winding up of the Company or other similar event, liquidation payments would have first been made to the holders of Series B, then to Series C, then to Series A. In May 2021, the Company issued 7.9 million shares of Series C for proceeds of $ 109.8 million net of issuance costs. In accordance with ASC 480, Distinguishing Liabilities from Equity, if the carrying value of redeemable preferred stock is less than its redemption value, redeemable preferred stock shall be accreted to its redemption value if it is probable it will become redeemable. Prior to March 15, 2021, the Company concluded it was probable that the Series B would become redeemable due to the passage of time. However, after that date the Company concluded that it was no longer probable that the Series B would become redeemable due to the increased likelihood of a successful IPO prior to February 23, 2025. The Company’s Series B accruing dividends comprised a component of the redemption value of such stock. The Company recorded the accretion of Series B through March 15, 2021, by increasing its carrying value and recording a corresponding reduction of additional paid-in capital in the amount of $ 15.1 million for the year ended December 31, 2021. On July 6, 2021, the Company completed its IPO, in which the Company issued and sold 19.1 million shares of its common stock at a public offering price of $ 17.00 per share. After underwriter discounts and commissions, net proceeds from the IPO were $ 303.9 million. Additionally, the Company incurred other IPO related fees of $ 6.9 million. On July 29, 2021, the IPO underwriters fully exercised their over-allotment option, resulting in the sale of an additional 2.8 million shares at the IPO price of $ 17.00 per share and after underwriter discounts, net proceeds were $ 43.9 million. In connection with the IPO, the Company’s outstanding convertible preferred stock converted into shares of common stock on a one-for-one basis. Upon conversion of the convertible preferred stock, the Company reclassified the carrying value of the convertible II-42 EverCommerce Inc. Notes to Consolidated Financial Statements preferred stock to common stock and additional paid-in capital. Immediately prior to the closing of the IPO, the Company filed an amended and restated certificate of incorporation on July 6, 2021 with the Secretary of State of the State of Delaware to authorize the issuance of up to 2,050,000,000 shares, par value $ 0.00001 per share, consisting of 2,000,000,000 shares of common stock and 50,000,000 shares of preferred stock. On June 14, 2022, our Board approved a stock repurchase program (as subsequently amended, the “Repurchase Program”) with authorization to purchase up to $ 50.0 million in shares of the Company’s common stock through the expiration of the program on December 21, 2022. On November 7, 2022, our Board approved an expansion of the Repurchase Program with authorization to purchase up to an additional $ 50.0 million in shares of the Company’s common stock ($ 100.0 million total) and an extension to the expiration of the Repurchase Program through December 31, 2023. On November 5, 2023, our Board approved an additional expansion of the Repurchase Program with authorization to purchase up to an additional $ 50.0 million in shares of the Company’s common stock (from $ 100.0 million to $ 150.0 million in total) and extended the expiration of the Repurchase Program through December 31, 2024. On December 14, 2023, our Board approved a stock purchase agreement entered into between the Company and Eric Remer, Matt Feierstein, Marc Thompson, Sarah Jordan, Shane Driggers and Evan Berlin, who currently serve as officers of the Company (collectively, the “Selling Stockholders”). On December 19, 2023, as part of our Repurchase Program, the Company repurchased an aggregate of 1,401,472 shares of common stock from the Selling Stockholders at a price of $ 9.82 per share, for an aggregate price of $ 13.8 million. Repurchases under the program may be made in the open market, in privately negotiated transactions or otherwise, with the amount and timing of repurchases to be determined at the Company’s discretion, depending on market conditions and corporate needs. The Repurchase Program does not obligate the Company to acquire any particular amount of common stock and may be modified, suspended or terminated at any time at the discretion of the Board. The Company expects to fund repurchases with existing cash on hand. The Company repurchased and retired 6.9 million shares of common stock pursuant to the Repurchase Program for $ 67.6 million, including transaction fees and taxes, during the year ended December 31, 2023. As of December 31, 2023, $ 40.0 million remained available under the Repurchase Program. Note 12. Stock-Based Compensation In 2016, the Company adopted the 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan provided for the granting of stock-based awards, including stock options, stock appreciation rights, restricted or unrestricted stock awards, phantom stock, performance awards and other stock-based awards. The 2016 Plan allowed for the granting of stock-based awards through January 17, 2027. In connection with the IPO, the Company’s Board adopted, and the Company’s stockholders approved, the 2021 Incentive Award Plan (the “2021 Plan”), which became effective immediately prior to the effectiveness of the registration statement for the Company’s IPO and, as a result of which, the Company can no longer make awards under the 2016 Plan. The 2021 Plan provides for the issuance of incentive stock options, non-qualified stock options, stock awards, stock units, stock appreciation rights and other stock-based awards. The number of shares initially reserved for issuance under the 2021 Plan was 22,000,000 shares, inclusive of available shares previously reserved for issuance under the 2016 Plan. In addition, the number of shares reserved for issuance under the 2021 Plan is subject to an annual increase on the first day of each calendar year beginning on January 1, 2022 and ending on and including January 1, 2031, equal to the lesser of (i) 3 % of the shares outstanding (on an as-converted basis) on the last day of the immediately preceding fiscal year and (ii) such smaller number of shares as determined by the Company’s Board, provided that no more than 22,000,000 shares may be issued upon the exercise of incentive stock options. Based on the number of outstanding shares of the Company’s common stock as of December 31, 2022, on January 1, 2023 the number of shares reserved for issuance under the 2021 Plan increased by 5.7 million. Stock options During the years ended December 31, 2022 and 2021, the Company granted time-based and performance-based stock options to employees and directors. Time-based options granted under the 2016 Plan vest 25 % after one year , and then monthly over the next three years whereas time-based options granted under the 2021 Plan vest 25 % after one year and then quarterly over the next three years . Time-based options granted under both the 2016 Plan and the 2021 Plan expire 10 years from date of grant and carry an exercise price equal to the fair market value at the date of grant as determined by the Company’s Board for options granted under the 2016 Plan and an exercise price equal to the closing price of the Company’s stock at the date of grant for options granted under the 2021 Plan. The Company did not grant stock options in 2023. The overwhelming majority of performance-based options were granted prior to the IPO and had vesting conditions as follows: 50 % of a holder’s award would have vested upon a change in control or an initial public offering if the per share cash price received in connection with such change in control or the per share offering price in such initial public offering was at least $ 27.41 , and the other 50 % of the holder’s award would have vested upon a change in control or an initial public offering if the per share cash price received in connection with such change in control or the per share offering price in such initial public offering was at least $ 36.54 . The II-43 EverCommerce Inc. Notes to Consolidated Financial Statements performance-based options generally carried an exercise price equal to the fair market value at the date of grant as determined by the Board and expired 10 years from date of grant. For options outstanding following the IPO, there was a market condition based on the Company achieving a volume weighted average stock price ranging from $ 27.41 to $ 36.54 through June 2023, none of which vested. To date, $ 17.4 million of stock-based compensation expense has been recognized related to the market condition-based options. The relevant data used to determine the value of the stock options is as follows: December 31, 2022 2021 Weighted-average risk-free interest rate 1.82 % 0.97 % Expected term in years 6.1 6.1 Weighted-average expected volatility 50 % 48 % Expected dividends 0 % 0 % A summary of stock option activity for the year ended December 31, 2023 is as follows: Number of Options Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term in Years Aggregate Intrinsic Value (in thousands except for exercise price and term in years) Outstanding balance at January 1, 2023 16,937 $ 9.86 7.25 $ 3,870 Granted — — Exercised ( 482 ) 5.38 Cancelled ( 3,118 ) 10.00 Outstanding balance at December 31, 2023 13,337 $ 10.03 6.27 $ 22,578 Exercisable at December 31, 2023 11,612 $ 9.59 6.06 $ 21,910 The weighted-average grant date fair value of time-based stock options granted was nil , $ 5.76 and $ 8.30 for the years ended December 31, 2023, 2022 and 2021, respectively. The weighted-average modification date fair value of the market condition-based options modified in 2021 was $ 6.85 . The total intrinsic value of options exercised during the years ended December 31, 2023, 2022 and 2021 was $ 2.2 million, $ 2.3 million and $ 2.1 million, respectively. Compensation expense of $ 11.5 million , $ 19.3 million and $ 11.1 million was recognized in stock-based compensation for the years ended December 31, 2023, 2022 and 2021, respectively. The unrecognized compensation expense associated with outstanding time-based stock options at December 31, 2023 was $ 9.7 million, which is expected to be recognized over a weighted average period of 1.71 years. There was no remaining unrecognized compensation expense associated with outstanding market condition-based stock options at December 31, 2023. Restricted Stock Awards Prior to 2021, the Company granted 1.6 million shares of funding restricted stock awards (“RSAs”). The unvested awards were subject to modification upon an investment by the equity sponsors, which occurred when the Company issued Series C convertible preferred stock in May 2021 to fund an acquisition (see Note 11. Equity). In connection with these contributions, the RSAs were modified, and approximately 0.6 million of funding RSAs vested at $ 17.00 per share. Compensation expense of $ 9.7 million was recognized in general and administrative in the statements of operations and comprehensive loss for the year ended December 31, 2021. In connection with the IPO, all remaining unvested funding awards were cancelled. Restricted Stock Units During the years ended December 31, 2023, 2022 and 2021, the Company issued time vesting restricted stock units (“RSUs”). The vesting schedule for awards granted to newly hired employees provides that the awards vest over a four-year period starting on the grant date, with 25 % of the awards vesting on the one-year anniversary, and then in equal quarterly installments for the subsequent three years . The vesting schedule for awards granted to existing employees provides that the awards vest ratably in quarterly installments over a period of four years . The Company records compensation expense for these awards on a straight-line basis, which approximates the service period. Compensation expense of $ 12.8 million, $ 6.0 million and $ 1.2 million related to these awards was recognized in the statements of operations and comprehensive loss for the years ended December 31, 2023, 2022 and 2021, II-44 EverCommerce Inc. Notes to Consolidated Financial Statements respectively. The unrecognized compensation expense associated with the RSUs at December 31, 2023 was $ 30.5 million , which is expected to be recognized over a weighted average perio d of 2.84 years. The summary of time vesting restricted stock units activity for the year ended December 31, 2023 is as follows: Number of Units Weighted-Average Grant Date Fair Value (in thousands except for fair value) Unvested, restricted stock units at January 1, 2023 2,022 $ 12.27 Granted 3,129 9.72 Vested ( 1,335 ) 11.29 Forfeited ( 479 ) 10.79 Unvested, restricted stock units at December 31, 2023 3,337 $ 10.48 2021 Employee Stock Purchase Plan In connection with the IPO, the Company’s Board adopted the 2021 Employee Stock Purchase Plan. The ESPP is designed to allow eligible employees to purchase shares of our common stock, at periodic intervals, with their accumulated payroll deductions. The aggregate number of shares of common stock that were initially reserved for issuance under the ESPP is equal to the sum of (i) 4,500,000 shares and (ii) an annual increase on the first day of each calendar year beginning in 2022 and ending in and including 2031 equal to the lesser of (A) one percent ( 1 %) of the outstanding shares of our common stock on the last day of the immediately preceding fiscal year and (B) such smaller number of shares as determined by the Board; provided that in no event will more than 60,000,000 shares of our common stock be available for issuance under the ESPP. Compensation expense of $ 1.3 million, $ 1.5 million and $ 0.1 million related to the ESPP was recognized in the statements of operations and comprehensive loss for the years ended December 31, 2023, 2022 and 2021, respectively. Stock-based Compensation Expense Stock-based compensation expense was classified in the accompanying consolidated statements of operations and comprehensive loss as follows: Year Ended December 31, 2023 2022 2021 (in thousands) Cost of revenues $ 464 $ 373 $ 39 Sales and marketing 1,672 1,503 506 Product development 2,273 1,854 551 General and administrative 21,150 23,088 20,999 Total stock-based compensation expense $ 25,559 $ 26,818 $ 22,095 II-45 EverCommerce Inc. Notes to Consolidated Financial Statements Note 13. Net Loss Per Share Attributable to Common Stockholders The following table presents the calculation of basic and diluted net loss per share for the Company’s common stock as of: Year Ended December 31, 2023 2022 2021 (in thousands except share and per share amounts) Numerator: Net loss $ ( 45,620 ) $ ( 59,816 ) $ ( 81,966 ) Accretion of Series B to redemption value — — ( 15,105 ) Numerator for basic and diluted EPS – net loss attributable to common stockholders $ ( 45,620 ) $ ( 59,816 ) $ ( 97,071 ) Denominator: Denominator for basic and diluted EPS – Weighted-average shares of common stock outstanding used in computing net loss per share 188,938,892 194,624,968 117,795,280 Basic and diluted net loss per share attributable to common stockholders $ ( 0.24 ) $ ( 0.31 ) $ ( 0.82 ) The following outstanding potentially dilutive common stock equivalents have been excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented due to their anti-dilutive effect: December 31, 2023 2022 2021 Outstanding stock options and unvested RSUs 16,673,982 18,959,163 16,984,483 Shares of common stock pursuant to ESPP 277,656 341,389 14,755 Total anti-dilutive outstanding potential common stock 16,951,638 19,300,552 16,999,238 Note 14. Fair Value of Financial Instruments Fair value estimates of financial instruments are made at a specific point in time, based on relevant information about financial markets and specific financial instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair value. The Company measures fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The Company utilizes a three-tier hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value: • Level 1: Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access. • Level 2: Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. • Level 3: Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The carrying value of cash and cash equivalents, accounts receivable, contract assets and accounts payable approximate their fair value because of the short-term nature of these instruments. Our interest rate swaps are valued based upon interest yield curves, interest rate volatility and credit spreads. Our interest rate swaps are classified within Level 2 of the fair value hierarchy as all significant inputs are corroborated by observable data. There were no transfers between fair value measurement levels during the years ended December 31, 2023 and 2022. II-46 EverCommerce Inc. Notes to Consolidated Financial Statements The following table presents information about the Company's financial assets and liabilities measured at fair value on a recurring basis: December 31, 2023 Balance Sheet Classification Level 1 Level 2 Level 3 Total (in thousands) Asset: Money market $ 764 $ — $ — $ 764 Cash equivalents Liability: Interest rate swaps $ — $ 4,889 $ — $ 4,889 Other non-current liabilities December 31, 2022 Balance Sheet Classification Level 1 Level 2 Level 3 Total (in thousands) Asset: Money market $ 6,568 $ — $ — $ 6,568 Cash equivalents Liability: Interest rate swap $ — $ 2,893 $ — $ 2,893 Other non-current liabilities The following is a reconciliation of the opening and closing balance for contingent consideration measured at fair value on a recurring basis within Level 3 of the fair value hierarchy during the year ended December 31, 2022 (in thousands): Opening balance $ 675 Fair value adjustments ( 18 ) Amounts settled through payment ( 657 ) Ending balance $ — Note 15. Retirement Plan Effective January 1, 2009, EverCommerce Inc. adopted a defined contribution savings plan under section 401(k) of the Internal Revenue Code (the “401(k)”). The 401(k) covers substantially all employees who meet minimum age and service requirements and allows participants to contribute a portion of their pre-tax and post-tax annual compensation in accordance with prescribed limits. The Company may make discretionary and/or matching contributions to the 401(k). We began making discretionary employer contributions effective January 1, 2020 equal to 25 % of employee contributions up to 8 % and increased this contribution to 100 % of employee contributions up to 4 % effective January 1, 2022. Employer matching contributions were $ 5.3 million, $ 4.8 million and $ 1.5 million for the years ended December 31, 2023, 2022 and 2021, respectively. Note 16. Income Taxes The components of our net loss before income tax (expense) benefit are as follows: Year Ended December 31, 2023 2022 2021 (in thousands) United States $ ( 43,177 ) $ ( 59,134 ) $ ( 81,801 ) International ( 804 ) ( 5,362 ) ( 10,216 ) Net loss before income tax (expense) benefit $ ( 43,981 ) $ ( 64,496 ) $ ( 92,017 ) As of December 31, 2023, a portion of our undistributed earnings from non-U.S. subsidiaries are intended to be indefinitely reinvested in non-U.S. operations, and therefore no U.S. deferred taxes have been recorded. As of December 31, 2023, there was no material unrecognized deferred tax liability related to countries where we are indefinitely reinvested. The remaining undistributed earnings from non-U.S. subsidiaries are not permanently reinvested, however, due to a combination of anticipated tax treatment and losses, no material deferred tax liability exists. II-47 EverCommerce Inc. Notes to Consolidated Financial Statements The components of the provision for income taxes consists of the following: Year Ended December 31, 2023 2022 2021 (in thousands) Current: State $ 1,649 $ 1,539 $ 801 Foreign 1,647 1,258 1,174 Total current 3,296 2,797 1,975 Deferred: Federal ( 4,376 ) ( 9,034 ) ( 12,747 ) State ( 2,368 ) ( 2,743 ) ( 2,263 ) Foreign ( 256 ) ( 11,235 ) ( 3,436 ) Change in valuation allowance - United States 8,831 12,257 6,342 Change in valuation allowance - Foreign ( 3,488 ) 3,278 78 Total deferred ( 1,657 ) ( 7,477 ) ( 12,026 ) Income tax expense (benefit) $ 1,639 $ ( 4,680 ) $ ( 10,051 ) The Company’s deferred tax assets and liabilities, included in other non-current assets and other non-current liabilities on the consolidated balance sheets, related to temporary differences and operating loss carryforwards were as follows: December 31, 2023 2022 (in thousands) Deferred tax assets: Net operating losses $ 35,484 $ 44,545 163(j) interest limitation 27,143 23,363 Reserves and accrued expenses 8,175 7,258 Property and equipment depreciation 1,462 2,526 Stock-based compensation 3,193 3,753 Lease liability 5,837 7,053 Other 2,589 2,555 Total deferred tax assets 83,883 91,053 Less: valuation allowance ( 51,904 ) ( 47,756 ) Net deferred tax assets 31,979 43,297 Deferred tax liabilities: Intangible assets ( 29,263 ) ( 38,080 ) Property and equipment depreciation ( 1,288 ) ( 5,056 ) Capitalized expenses ( 4,678 ) ( 3,804 ) Operating lease right-of-use assets ( 3,963 ) ( 5,434 ) Other ( 364 ) ( 614 ) Total deferred tax liabilities ( 39,556 ) ( 52,988 ) Net deferred tax liabilities $ ( 7,577 ) $ ( 9,691 ) II-48 EverCommerce Inc. Notes to Consolidated Financial Statements The Company had net operating loss and tax credit carryforwards as of the financial statement date as follows: Amount Expiration Years (in thousands) Net operating losses, federal (Post December 31, 2017) $ 23,028 Indefinite Net operating losses, federal (Pre January 1, 2018) $ 2,030 2033 - 2037 Net operating losses, state $ 7,481 Various Net operating losses, foreign $ 2,945 2035 - Indefinite Tax credits, federal $ 258 2037 Tax credits, foreign $ 254 Various Management has not considered future projections of income in this analysis due to the Company’s history of losses. The Company has determined that it is more likely than not that a portion of the deferred tax assets will not be realized and has recorded a valuation allowance of $ 51.9 million and $ 47.8 million as of December 31, 2023 and 2022, respectively, against the deferred tax assets. If the Company’s assumptions change and we determine that we will be able to realize these deferred tax assets, the tax benefits related to any reversal of the valuation allowance on deferred tax assets as of December 31, 2023, will be accounted for as follows: $ 51.5 million will be recognized as a reduction of income tax expense and $ 0.8 million will be recorded as an increase in equity. A reconciliation of our valuation allowance on deferred tax assets is as follows: Year Ended December 31, 2023 2022 (in thousands) Balance at beginning of period $ 47,756 $ 31,070 Additions to valuation allowance 5,342 15,648 Additions recorded in acquisition accounting 216 — Additions recorded as a decrease in equity 8 1,430 Reductions recorded as an increase in equity ( 1,418 ) ( 392 ) Balance at end of period $ 51,904 $ 47,756 The Company files income tax returns in the U.S. federal jurisdiction, Colorado, various other state jurisdictions, Canada, Jordan, the United Kingdom, Australia and New Zealand. The years open for audit vary depending on the tax jurisdiction. In the U.S., the Company's federal tax returns for the years before 2020 (year ended December 31, 2020) are no longer subject to audit. The net operating losses utilized during the open periods from select years prior to 2020 are subject to examination. The foreign jurisdictions statutes vary but are generally four years from assessment of the return. While management believes we have adequately provided for all tax positions, amounts asserted by taxing authorities could materially differ from our accrued positions as a result of uncertain and complex application of tax regulations. Additionally, the recognition and measurement of certain tax benefits includes estimates and judgment by management and inherently includes subjectivity. Accordingly, additional provision on federal, state and foreign tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows: Year Ended December 31, 2023 2022 (in thousands) Balance at beginning of period $ 364 $ 134 Gross additions based on tax positions related to the current year 167 230 Balance at end of period $ 531 $ 364 As of December 31, 2023 and 2022, unrecognized tax benefits o f $ 0.5 million and $ 0.4 million, respectively, were recorded in other long-term liabilities, which would impact the annual effective tax rate if recognized. The Company recognizes interest and penalties, if II-49 EverCommerce Inc. Notes to Consolidated Financial Statements any, related to unrecognized tax positions in the provision for income taxes in the accompanying consolidated statements of operations and comprehensive loss. The Company does not expect a significant increase or decrease in unrecognized tax benefits over the next twelve months. The Company, through its foreign subsidiary Alnashmi Digital Marketing, LLC, provides exported technology services, the profits of which are exempt from income tax through December 31, 2025 according to the provisions of the article (9/A/4) of Regulation Number 106 of the 2016 Regulations. So long as the services are exported outside of Jordan, they originate in Jordan and there are no other services within the exported services, the qualifications are met. The approximate dollar value of tax expense related to the tax holiday was $ 0.2 million and $ 0.3 million as of December 31, 2023 and 2022, respectively. During the year ended December 31, 2023, we restructured the ownership of certain intellectual property, which resulted in an income tax benefit. The income tax benefit differs from the expected tax benefit computed by applying the U.S. federal statutory rate to income before taxes as a result of the following: Year Ended December 31, 2023 2022 2021 (in thousands, except percentages) Benefit at U.S. statutory rate $ ( 9,236 ) 21.00 % $ ( 13,544 ) 21.00 % $ ( 19,324 ) 21.00 % Change in income tax resulting from: State income benefit, net of federal benefit ( 810 ) 1.84 ( 852 ) 1.32 ( 1,916 ) 2.08 Stock-based compensation 2,513 ( 5.71 ) 2,961 ( 4.59 ) 529 ( 0.57 ) Nondeductible compensation 876 ( 1.99 ) 163 ( 0.25 ) 2,788 ( 3.03 ) Nondeductible transaction costs 61 ( 0.14 ) — — 509 ( 0.55 ) Foreign rate differential 85 ( 0.19 ) ( 129 ) 0.20 ( 613 ) 0.67 Change in valuation allowance 5,342 ( 12.15 ) 15,648 ( 24.26 ) 6,420 ( 6.98 ) Intellectual property migration — — ( 8,805 ) 13.65 — — US taxation of foreign income 1,512 ( 3.44 ) — — — — Other 1,296 ( 2.95 ) ( 122 ) 0.19 1,556 ( 1.69 ) Income tax expense (benefit) $ 1,639 ( 3.73 ) % $ ( 4,680 ) 7.26 % $ ( 10,051 ) 10.93 % Note 17. Commitments and Contingencies The Company has non-cancelable contractual purchase obligations incurred in the normal course of business to help deliver our services and products and provide support to our customers. These contracts with vendors primarily relate to software service, targeted mail costs, third party fulfillment costs and software hosting. Unrecognized future minimum payments due under these agreements are as follows (in thousands): Year Ended December 31, 2024 $ 15,710 2025 12,544 2026 3,745 2027 2,625 2028 687 Thereafter — Total future minimum payments due $ 35,311 From time to time, the Company is involved in various lawsuits and legal proceedings which arise in or outside the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Accruals for loss contingencies are recorded when a loss is probable, and the amount of such loss can be reasonably estimated. An adverse determination in one or more of these pending matters could have an adverse effect on the Company’s consolidated financial position, results of operations or cash flows. II-50 EverCommerce Inc. Notes to Consolidated Financial Statements On January 31, 2024, plaintiff Vladimir Gusinsky Revocable Trust filed a putative class action lawsuit in the Court of Chancery of the State of Delaware against the Company, members of its Board of Directors (the “Board”) and the other parties to its sponsor stockholders agreement, dated June 30, 2021, Providence Strategic Growth II L.P., Providence Strategic Growth II-A L.P., SLA Eclipse Co-Invest, L.P., and SLA CM Eclipse Holdings, L.P. (collectively, the “Sponsor Stockholders”), captioned Vladimir Gusinsky Revocable Trust v. Eric Remer, Penny Balwdin, et. al., Case No. 2024-0077 (Del Ch.). The complaint generally alleges violations of Section 141(a) of the Delaware General Corporation Law (“DGCL”) by providing the Sponsor Stockholders with a veto right over the Board’s ability to hire or fire the Company’s Chief Executive Officer (the “CEO Approval Right”) on the basis that it unlawfully limits the Board’s authority to manage the business and affairs of the Company. The plaintiff seeks declaratory judgment that the CEO Approval Right is invalid and void, other declaratory and equitable relief for the class and/or the Company, attorneys’ and experts’ witness fees and other costs and expenses, and other equitable relief. The Company believes it has meritorious defenses to the claims of the plaintiff and members of the class and any liability for the alleged claims is not currently probable and the potential loss or range of loss is not reasonably estimable. The Company is party to additional legal proceedings incidental to its business. While the outcome of these additional matters could differ from management’s expectations, the Company does not believe that the resolution of such matters is reasonably likely to have a material effect on its results of operations or financial condition. The Company assesses the applicability of nexus in jurisdictions in which the Company sells products and services. As of December 31, 2023 and 2022, the Company recorded a liability in the amount of $ 10.9 million and $ 11.2 million, respectively, within current liabilities and other long-term liabilities as a provision for sales and use and gross receipts tax. In connection with the Company's accounting for acquisitions, the Company has recorded liabilities and corresponding provisional escrow or indemnity receivables within the purchase price allocations for instances in which the Company is indemnified for tax matters. Note 18. Geographic Areas The following table sets forth long-lived assets by geographic area: December 31, 2023 2022 (in thousands) United States $ 41,134 $ 36,226 International $ 11,111 $ 8,258 Note 19. Subsequent Event On March 13, 2024, the Company entered into definitive sale and purchase agreements to sell our fitness solutions to Jonas Software (see Note 2. Summary of Significant Accounting Policies). The Company expects the transaction to close in two parts. The North American businesses, Club OS and ASF, have closed simultaneous with signing. The international businesses, ClubWise and MyPTHub, are expected to close during the third quarter of 2024 following customary closing conditions and regulatory approvals. As a result of the definitive sale and purchase agreement, the Company concluded that the transaction will meet the held for sale criteria in the first quarter of 2024. As such, the assets and liabilities of the asset disposal group will be classified as held for sale and presented within other current assets and other current liabilities on our consolidated balance sheets as of March 31, 2024. The Company does not consider the sale of the asset disposal group to be a strategic shift that will have a material effect on its operations and financial results, and therefore it does not qualify for reporting as a discontinued operation. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures None.