LIVEPERSON INC 10-Q

Item 1. Financial Statements LIVEPERSON, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) June 30, 2024 December 31, 2023 (In thousands) ASSETS Current assets: Cash and cash equivalents $ 145,957 $ 210,782 Restricted cash — 2,143 Accounts receivable, net of allowance for credit losses of $ 9,356 and $ 9,290 as of June 30, 2024 and December 31, 2023, respectively 56,351 81,802 Prepaid expenses and other current assets (Note 1) 18,132 26,981 Total current assets 220,440 321,708 Operating lease right-of-use assets (Note 9) 260 4,135 Property and equipment, net (Note 6) 106,948 119,325 Contract acquisition costs, net 36,864 37,354 Intangible assets, net (Note 5) 52,956 61,625 Goodwill (Note 5) 280,726 285,631 Deferred tax assets 4,441 4,527 Other assets 1,133 1,208 Total assets $ 703,768 $ 835,513 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 13,878 $ 13,555 Accrued expenses and other current liabilities (Note 7) 68,237 97,024 Deferred revenue (Note 2) 79,356 81,858 Convertible senior notes (Note 8) — 72,393 Operating lease liabilities (Note 9) 268 2,719 Total current liabilities 161,739 267,549 Convertible senior notes, net of current portion (Note 8) 468,666 511,565 Operating lease liabilities, net of current portion (Note 9) — 2,173 Deferred tax liabilities 3,075 2,930 Other liabilities 3,682 3,158 Total liabilities 637,162 787,375 Commitments and contingencies (Note 11) Stockholders’ equity: Preferred stock, $ 0.001 par value - 5,000,000 shares authorized, none issued — — Common stock, $ 0.001 par value - 200,000,000 shares authorized, 91,752,520 and 90,603,519 shares issued, 88,986,447 and 87,837,446 shares outstanding as of June 30, 2024 and December 31, 2023, respectively. 92 91 Treasury stock - 2,766,073 shares as of June 30, 2024 and December 31, 2023 ( 3 ) ( 3 ) Additional paid-in capital 927,529 913,522 Accumulated deficit ( 850,824 ) ( 856,988 ) Accumulated other comprehensive loss ( 10,188 ) ( 8,484 ) Total stockholders’ equity 66,606 48,138 Total liabilities and stockholders’ equity $ 703,768 $ 835,513 See accompanying notes to condensed consolidated financial statements. 4 LIVEPERSON, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, 2024 2023 2024 2023 (In thousands, except share and per share amounts) Revenue $ 79,875 $ 97,522 $ 165,024 $ 205,183 Costs, expenses and other: Cost of revenue 21,212 30,888 50,675 73,984 Sales and marketing 26,473 26,724 56,603 61,194 General and administrative 24,448 8,170 46,200 39,617 Product development 24,843 22,839 54,963 59,358 Impairment of goodwill — — 3,627 — Impairment of intangibles and other assets 8,347 — 10,568 — Restructuring costs 3,119 2,387 6,428 13,902 Loss (gain) on divestiture 558 — 558 ( 17,591 ) Amortization of purchased intangible assets 674 876 1,565 1,750 Total costs, expenses and other 109,674 91,884 231,187 232,214 (Loss) income from operations ( 29,799 ) 5,638 ( 66,163 ) ( 27,031 ) Other income, net: Interest (expense) income, net ( 837 ) 136 495 1,937 Gain on debt extinguishment 73,083 1,151 73,083 7,200 Other income, net 606 3,742 369 12,355 Total other income, net 72,852 5,029 73,947 21,492 Income (loss) before provision for (benefit from) income taxes 43,053 10,667 7,784 ( 5,539 ) Provision for (benefit from) income taxes 1,258 ( 155 ) 1,620 1,059 Net income (loss) $ 41,795 $ 10,822 $ 6,164 $ ( 6,598 ) Net income (loss) per share of common stock: Basic $ 0.47 $ 0.14 $ 0.07 $ ( 0.09 ) Diluted $ ( 0.33 ) $ 0.12 $ ( 0.70 ) $ ( 0.09 ) Weighted-average shares used to compute net income (loss) per share: Basic 88,708,514 76,902,416 88,396,816 76,341,729 Diluted 94,978,234 91,500,059 94,973,001 76,341,729 See accompanying notes to condensed consolidated financial statements. 5 LIVEPERSON, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (In thousands) Net income (loss) $ 41,795 $ 10,822 $ 6,164 $ ( 6,598 ) Foreign currency translation adjustment ( 6 ) 386 ( 1,704 ) 1,252 Comprehensive income (loss) $ 41,789 $ 11,208 $ 4,460 $ ( 5,346 ) See accompanying notes to condensed consolidated financial statements. 6 LIVEPERSON, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) Common Stock Treasury Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders’ Equity Shares Amount Shares Amount (In thousands, except share data) Balance as of December 31, 2023 90,603,519 $ 91 ( 2,766,073 ) $ ( 3 ) $ 913,522 $ ( 856,988 ) $ ( 8,484 ) $ 48,138 Common stock issued upon vesting of restricted stock units 432,701 — — — 1 — — 1 Stock-based compensation — — — — 8,251 — — 8,251 Common stock issued under Employee Stock Purchase Plan (ESPP) 95,603 — — — 122 — — 122 Net loss — — — — — ( 35,631 ) — ( 35,631 ) Other comprehensive loss — — — — — — ( 1,698 ) ( 1,698 ) Balance as of March 31, 2024 91,131,823 $ 91 ( 2,766,073 ) $ ( 3 ) $ 921,896 $ ( 892,619 ) $ ( 10,182 ) $ 19,183 Common stock issued upon vesting of restricted stock units 536,424 1 — — 1 — — 2 Stock-based compensation — — — — 5,762 — — 5,762 Common stock issued under ESPP 84,273 — — — 55 — — 55 Activity related to divestiture (Note 19) — — — — ( 185 ) — — ( 185 ) Net income — — — — — 41,795 — 41,795 Other comprehensive loss — — — — — — ( 6 ) ( 6 ) Balance as of June 30, 2024 91,752,520 $ 92 ( 2,766,073 ) $ ( 3 ) $ 927,529 $ ( 850,824 ) $ ( 10,188 ) $ 66,606 See accompanying notes to condensed consolidated financial statements. 7 LIVEPERSON, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - CONTINUED (UNAUDITED) Common Stock Treasury Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders’ Equity Shares Amount Shares Amount (In thousands, except share data) Balance as of December 31, 2022 78,350,984 $ 78 ( 2,766,073 ) $ ( 3 ) $ 771,052 $ ( 692,362 ) $ ( 10,677 ) $ 68,088 Common stock issued upon exercise of stock options 18,687 — — — 130 — — 130 Common stock issued upon vesting of restricted stock units 413,252 1 — — — — — 1 Stock-based compensation — — — — 9,560 — — 9,560 Common stock issued under ESPP 87,794 — — — 724 — — 724 Issuance of common stock in connection with acquisitions — — — — 380 — — 380 Activity related to divestiture (Note 19) — — — — 66,775 ( 64,100 ) 57 2,732 Net loss — — — — — ( 17,420 ) — ( 17,420 ) Other comprehensive income — — — — — — 809 809 Balance as of March 31, 2023 78,870,717 $ 79 ( 2,766,073 ) $ ( 3 ) $ 848,621 $ ( 773,882 ) $ ( 9,811 ) $ 65,004 Common stock issued upon exercise of stock options 11,154 — — — 8 — — 8 Common stock issued upon vesting of restricted stock units 295,564 — — — — — — — Stock-based compensation — — — — 8,380 — — 8,380 Common stock issued under ESPP 97,832 — — — 397 — — 397 Issuance of common stock in connection with acquisitions 1,036,823 1 — — 5,147 — — 5,148 Net income — — — — — 10,822 — 10,822 Other comprehensive income — — — — — — 386 386 Balance as of June 30, 2023 80,312,090 $ 80 ( 2,766,073 ) $ ( 3 ) $ 862,553 $ ( 763,060 ) $ ( 9,425 ) $ 90,145 See accompanying notes to condensed consolidated financial statements. 8 LIVEP ERSON, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30, 2024 2023 (In thousands) OPERATING ACTIVITIES: Net income (loss) $ 6,164 $ ( 6,598 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Stock-based compensation expense 13,458 ( 6,816 ) Depreciation 15,939 17,088 Reduction of operating lease right-of-use assets 3,886 1,211 Amortization of purchased intangible assets and finance leases 7,899 10,889 Amortization of debt issuance costs and debt discount 1,343 2,727 Impairment of goodwill 3,627 — Impairment of intangibles and other assets 10,568 — Change in fair value of contingent consideration — ( 5,304 ) Gain on debt extinguishment ( 73,083 ) ( 7,200 ) Allowance for credit losses 8,928 1,809 Loss (Gain) on divestiture 558 ( 17,591 ) Deferred income taxes 199 722 Equity loss in joint venture — 1,384 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable 16,247 ( 20,537 ) Prepaid expenses and other current assets 8,673 ( 9,126 ) Contract acquisition costs 7 3,534 Other assets 47 75 Accounts payable 629 ( 19,757 ) Accrued expenses and other current liabilities ( 35,894 ) 16,737 Deferred revenue ( 2,269 ) 15,652 Operating lease liabilities ( 4,542 ) ( 1,648 ) Other liabilities 784 ( 7,800 ) Net cash used in operating activities ( 16,832 ) ( 30,549 ) INVESTING ACTIVITIES: Purchases of property and equipment, including capitalized software ( 16,457 ) ( 16,997 ) Purchases of intangible assets ( 1,259 ) ( 2,457 ) Proceeds from divestiture — 13,819 Net cash used in investing activities ( 17,716 ) ( 5,635 ) FINANCING ACTIVITIES: Principal payments for financing leases ( 353 ) ( 1,926 ) Proceeds from issuance of common stock in connection with the exercise of options and ESPP 180 1,256 Proceeds from issuance of senior notes 50,000 — Payment of debt issuance costs ( 4,231 ) — Payments on repurchase of 2024 convertible senior notes ( 72,492 ) ( 149,702 ) Payments on repurchase of 2026 convertible senior notes ( 4,901 ) — Net cash used in financing activities ( 31,797 ) ( 150,372 ) 9 Six Months Ended June 30, 2024 2023 (In thousands) Effect of foreign exchange rate changes on cash and cash equivalents ( 623 ) 789 Net decrease in cash, cash equivalents, and restricted cash ( 66,968 ) ( 185,767 ) Cash, cash equivalents, and restricted cash - beginning of year 212,925 392,198 Plus: cash classified within current assets held for sale - beginning of year — 10,011 Cash, cash equivalents, and restricted cash - end of period $ 145,957 $ 216,442 Reconciliation of cash, cash equivalents, and restricted cash to condensed consolidated balance sheets Cash and cash equivalents $ 145,957 $ 213,763 Restricted cash — 2,679 Total cash, cash equivalents, and restricted cash - end of period $ 145,957 $ 216,442 Supplemental disclosure of other cash flow information: Cash paid for income taxes, net $ 1,203 $ 1,112 Cash paid for interest 292 904 Supplemental disclosure of non-cash investing and financing activities: Purchase of property and equipment and intangible assets recorded in accounts payable $ 154 $ 581 Right-of-use assets obtained in exchange for operating lease liabilities 107 132 See accompanying notes to condensed consolidated financial statements. 10 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1. Description of Business and Basis of Presentation LivePerson, Inc. (“LivePerson”, the “Company”, “we”, “our” or “us”) is the enterprise leader in digital customer conversations. Over the past two decades, consumers have made digital conversations their primary mode of communication with others. Since 1998, we have enabled meaningful connections between consumers and our customers through our platform and currently power more than one billion conversational interactions each month. These digital and artificial intelligence (“AI”)-powered conversations decrease costs and increase revenue for our brands, resulting in more convenient, personalized and content-rich journeys across the entire consumer lifecycle, and across consumer channels. Our customers’ existing investments in Generative AI and Large Language Models (“LLMs”) can be used by LivePerson to leverage prior conversations in a safe and secure environment. The Conversational Cloud, LivePerson’s enterprise-class digital customer conversation platform, is trusted by the world’s top brands to accelerate their contact center transformation, orchestrate conversations across all channels, departments and systems, increase agent productivity, and deliver more personalized, AI-empowered customer experiences. The Conversational Cloud powers conversations across each of a brand’s primary digital channels, including mobile apps, mobile and desktop web browsers, short messaging service (“SMS”), social media and third-party consumer messaging platforms. Brands can also use the Conversational Cloud to message consumers when they dial a 1-800 number instead of forcing them to navigate interactive voice response systems and wait on hold. Most recently, the Conversational Cloud has been enhanced to provide a secure platform with appropriate guardrails to deploy Generative AI and LLMs in ways that help consumers and drive results for brands without sacrificing trust. LivePerson’s digital customer conversation platform enables what the Company calls “the tango” of humans, LivePerson bots, third-party bots and LLMs, in which humans act as bot managers, overseeing AI-powered conversations and seamlessly stepping into the flow when a personal touch is needed. Agents become highly efficient, leveraging the AI engine (including generative AI capabilities) to surface relevant content, define next-best actions and take over repetitive transactional work so that the agent can focus on relationship building. By seamlessly integrating customer engagement channels, LivePerson’s proprietary AI, and third-party bots and AI, the Conversational Cloud offers brands a comprehensive approach to scaling automations across all customer conversations. Basis of Presentation The accompanying condensed consolidated financial statements, and the financial data and other information disclosed in the notes to the condensed consolidated financial statements as of June 30, 2024 and for the three and six months ended June 30, 2024 are unaudited. In the opinion of management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments necessary for a fair presentation of the Company’s condensed consolidated financial position, results of operations, comprehensive loss, and cash flows for the interim periods presented. The results of operations for any interim period are not necessarily indicative of the results of operations for any other future interim period or for a full fiscal year. The condensed consolidated balance sheet as of December 31, 2023 has been derived from audited consolidated financial statements at that date. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2023 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 4, 2024 (as amended on April 29, 2024) . Principles of Consolidation The unaudited condensed consolidated financial statements reflect the operations of LivePerson and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. 11 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Use of Estimates The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. These estimates are based on information available as of the date of the condensed consolidated financial statements. On a regular basis, management evaluates these estimates and assumptions. Items subject to such estimates and assumptions include, but are not limited to: • stock-based compensation expense; • allowance for credit losses; • the period of benefit for deferred contract acquisition costs; • valuation of goodwill; • valuation and useful lives of other long-lived assets; • fair value of assets acquired and liabilities assumed in business combinations; • income taxes; • recognition, measurement, and disclosure of contingent liabilities; and • estimated fair values of convertible notes and warrants. As of the date of issuance of the financial statements, the Company is not aware of any material specific events or circumstances that would require it to update its estimates, judgments, or to revise the carrying values of its assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s condensed consolidated financial statements. Significant Accounting Policies The Company’s significant accounting policies are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. There have been no significant changes to these policies that have had a material impact on the Company’s condensed consolidated financial statements and related notes for the three and six months ended June 30, 2024. Prepaid expenses and other current assets The following table presents the detail of prepaid expenses and other current assets as of the dates presented: June 30, 2024 December 31, 2023 (In thousands) Prepaid software maintenance $ 8,189 $ 8,592 VAT receivable 4,177 4,399 Prepaid server maintenance 1,606 2,634 Prepaid - other 1,158 2,599 Other assets 3,002 8,757 Total prepaid expenses and other current assets $ 18,132 $ 26,981 Recently Adopted Accounting Pronouncements In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-03, Fair Value Measurement (Topic 820), Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions to clarify that a contractual restriction on the sale of an equity security is not considered part of a unit of account of the equity security, and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, 12 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) as a separate unit of account, recognize and measure a contractual sale restriction. The amendments also require the following disclosures for equity securities subject to the contractual sale restrictions: 1.) The fair value of equity securities subject to the contractual sale restrictions reflected on the balance sheet. 2.) The nature and remaining duration of the restriction(s). 3.) The circumstances that could cause a lapse in the restriction(s). This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within those financial years. The Company adopted this guidance on January 1, 2024, which did not have a material effect on the Company’s condensed consolidated financial statements. Recently Issued Accounting Pronouncements In March 2024, the FASB issued ASU 2024-01, Compensation—Stock Compensation (Topic 718) : Scope Application of Profits Interest and Similar Awards , which provides illustrative guidance to help entities determine whether profits interest and similar awards should be accounted for as share-based payment arrangements within the scope of FASB Accounting Standards Codification (“ASC”) 718, Compensation—Stock Compensation . Specifically, the amendments in ASU 2024-01 add an illustrative example that includes four fact patterns to demonstrate how an entity should apply the scope guidance in paragraph 718-10-15-3 to determine whether a profits interest award should be accounted for in accordance with Topic 718. The guidance in ASU 2024-01 applies to all entities that issue profits interest awards as compensation to employees or non-employees in exchange for goods or services. The amendments in this update are effective for annual periods beginning after December 15, 2024, and interim periods within those annual periods. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. ASU 2024-01 should be applied either retrospectively or prospectively. The Company does not expect this standard to have a material impact on its condensed consolidated financial statements and related disclosures. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures , which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. The updated standard is effective for annual periods beginning after December 15, 2023. As of June 30, 2024, the Company has one operating and reportable segment and therefore does not expect this standard to have a material impact on its condensed consolidated financial statements and related disclosures. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures , which modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (3) income tax expense or benefit from continuing operations (separated by federal, state and foreign). ASU 2023-09 also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among other changes. The guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. ASU 2023-09 should be applied on a prospective basis, but retrospective application is permitted. The Company does not expect this standard to have a material impact on its condensed consolidated financial statements and related disclosures. In August 2023, the FASB issued ASU 2023-05, Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement , which addresses the accounting for contributions made to a joint venture, upon formation, in a joint venture’s separate financial statements. The amendments require certain joint ventures to apply a new basis of accounting upon formation by recognizing and initially measuring most of their assets and liabilities at fair value. The objectives of the amendments are to provide decision-useful information to investors and other allocators of capital in a joint venture’s financial statements and also to reduce diversity in practice. ASU 2023-05 is effective for both public and private joint venture entities with a formation date on or after January 1, 2025. Early adoption is permitted. Entities may elect to apply the guidance retrospectively to joint ventures with a formation date prior to January 1, 2025. The Company does not expect the adoption of this standard to have a material impact on its condensed consolidated financial statements and related disclosures. Note 2. Revenue Recognition The majority of the Company’s revenue is generated from hosted service revenues, which is inclusive of its platform pricing model, and related professional services. Revenues are recognized when control of these services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. No single customer accounted for 10% or more of total revenue for the three and six months ended June 30, 2024 and 2023. 13 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table presents the Company’s revenues disaggregated by revenue source: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (In thousands) (In thousands) Revenue: Hosted services (1) $ 67,316 $ 81,286 $ 138,811 $ 168,624 Professional services 12,559 16,236 26,213 36,559 Total revenue $ 79,875 $ 97,522 $ 165,024 $ 205,183 (1) On March 20, 2023, the Company completed the sale of Kasamba and therefore ceased recognizing revenue related to Kasamba effective on the transaction close date. Further, this sale eliminated the entire Consumer segment, as a result of which revenue is presented within a single condensed consolidated segment. Hosted services includes $ 7.2 million of revenue related to Kasamba for the six months ended June 30, 2023. Remaining Performance Obligation As of June 30, 2024, the aggregate amount of the total transaction price allocated in contracts with original duration of one year or greater to the remaining performance obligations was $ 283.0 million. Approximately 94 % of the Company’s remaining performance obligations is expected to be recognized during the next 24 months, with the balance recognized thereafter. The aggregate balance of unsatisfied performance obligations represents contracted revenue that has not yet been recognized, and does not include contract amounts that are cancellable by the customer, amounts associated with optional renewal periods, and any amounts related to performance obligations, which are billed and recognized as they are delivered. The Company has elected the optional exemption, which allows for the exclusion of the amounts for remaining performance obligations that are part of contracts with an original expected duration of less than one year. Such remaining performance obligations represent unsatisfied or partially unsatisfied performance obligations pursuant to ASC 606, “Revenue from Contracts with Customers.” Revenue by Geographic Location The Company is domiciled in the United States and has international operations around the globe. The following table presents the Company’s revenues attributable to operations by region for the periods presented: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (In thousands) (In thousands) Americas (1) $ 56,385 $ 70,907 $ 118,410 $ 143,221 EMEA (2) 14,559 14,933 28,780 31,115 APAC (3) 8,931 11,682 17,834 30,847 Total revenue $ 79,875 $ 97,522 $ 165,024 $ 205,183 —————————————— (1) United States, Canada, Latin America and South America (“Americas”) (2) Europe, the Middle East and Africa (“EMEA”) (3) Asia-Pacific (“APAC”) Information about Contract Balances The deferred revenue balance consists of services, which have been invoiced upfront, and are recognized as revenue only when the revenue recognition criteria are met. In some arrangements, the Company allows customers to pay for access to the Conversational Cloud over the term of the software license. The Company refers to these as subscription transactions. Amounts recognized as revenue in excess of amounts billed are recorded as unbilled receivables. Unbilled receivables, anticipated to be invoiced in the next twelve months, are included in accounts receivable, net of allowance for credit losses on the condensed consolidated balance sheets. 14 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The Company recognized revenue of $ 22.2 million and $ 64.7 million for the three and six months ended June 30, 2024, respectively, which was included in the corresponding deferred revenue balance at the beginning of the year. The Company recognized revenue of $ 28.9 million and $ 73.0 million for the three and six months ended June 30, 2023, respectively, which was included in the corresponding deferred revenue balance at the beginning of the year. Our long-term deferred revenues are included in Other liabilities on the condensed consolidated balance sheets. The opening and closing balances of the Company’s accounts receivable, unbilled receivables, contract acquisition costs, net, and deferred revenues are as follows: Accounts Receivable Unbilled Receivable Contract Acquisition Costs, Net (Non-current) Deferred Revenue (Current) Deferred Revenue (Non-current) (In thousands) Balance as of December 31, 2022 $ 53,468 $ 33,069 $ 43,804 $ 84,494 $ 174 Increase (decrease), net 6,914 ( 11,649 ) ( 6,450 ) ( 2,636 ) 9 Balance as of December 31, 2023 $ 60,382 $ 21,420 $ 37,354 $ 81,858 $ 183 Decrease, net ( 18,800 ) ( 6,651 ) ( 490 ) ( 2,502 ) ( 106 ) Balance as of June 30, 2024 $ 41,582 $ 14,769 $ 36,864 $ 79,356 $ 77 Amortization expense in connection with contract acquisition cost was approximately $ 4.8 million and $ 9.7 million for the three and six months ended June 30, 2024, respectively. Amortization expense in connection with contract acquisition cost was approximately $ 5.1 million and $ 13.4 million for the three and six months ended June 30, 2023, respectively. Accounts Receivable, Net Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for credit losses is the Company’s estimate of the amount of probable credit losses in the Company’s existing accounts receivable, based on both specific and general reserves. The Company maintains general reserves on a collective basis by considering factors such as historical experience, creditworthiness, the age of the trade receivable balances, and current econom ic conditions. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers. The activity in the allowance for credit losses is as follows: June 30, 2024 December 31, 2023 (In thousands) Balance, beginning of year $ 9,290 9,239 Additions charged to costs and expenses 8,928 3,319 Deductions/write-offs ( 8,862 ) ( 3,268 ) Balance, end of period $ 9,356 $ 9,290 15 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 3. Net Income (Loss) Per Share Basic income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by giving effect to all potentially dilutive common stock equivalents outstanding for the period. For purposes of this calculation, stock options, restricted stock units, warrants, 0.750 % Convertible Senior Notes due 2024 (“2024 Notes”), and 0% Convertible Senior Notes due 2026 (the “2026 Notes”) are considered to be common stock equivalents but are excluded from the calculation of diluted net income (loss) per share when including them has an anti-dilutive effect. See Note 8 – Convertible Senior Notes, Net of Current Portion, Capped Call Transactions, and Warrants for additional information about the 2024 Notes, 2026 Notes and First Lien Convertible Senior Notes due 2029 (the “2029 Notes” and together with the 2024 Notes and the 2026 Notes, the “Notes”). Reconc iliation of shares used in calculating basic and diluted net income (loss) per share for the three and six months ended June 30, 2024 and 2023, is as follows: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (In thousands, except per share amounts) Numerator: Net income (loss) available to stockholders for basic net income per share $ 41,795 $ 10,822 $ 6,164 $ ( 6,598 ) Gain on debt extinguishment ( 73,083 ) — ( 73,083 ) — Interest on assumed conversion of convertible notes, net of tax — 136 — — Net (loss) income available to stockholders for diluted net income per share $ ( 31,288 ) $ 10,958 $ ( 66,919 ) $ ( 6,598 ) Denominator: Weighted-average shares used to compute basic net income (loss) per share 88,708,514 76,902,416 88,396,816 76,341,729 Weighted-average effect of dilutive securities: Stock options and employee stock purchase plan — 98,143 — — Restricted stock units — 166,156 — — Earn-outs — 5,575,251 — — Conversion option of the 2024 Notes — 1,878,810 — — Conversion option of the 2026 Notes 6,269,720 6,879,283 6,576,185 — Weighted-average shares used to compute diluted net (loss) income per share 94,978,234 91,500,059 94,973,001 76,341,729 Net income (loss) per share: Basic $ 0.47 $ 0.14 $ 0.07 $ ( 0.09 ) Diluted $ ( 0.33 ) $ 0.12 $ ( 0.70 ) $ ( 0.09 ) The securities listed below were excluded from the computation of diluted net income (loss) per share for the three and six months ended June 30, 2024 and for the six months ended June 30, 2023, as their effect would have been anti-dilutive. Further, the computation of diluted net income (loss) per share for the three months ended June 30, 2023 excluded 16 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) approximately 3.8 million shares and 3.2 million shares related to stock options and RSUs, respectively, as their effect would have been anti-dilutive. As of June 30, 2024 2023 Shares subject to outstanding common stock options and employee stock purchase plan 2,880,837 3,541,432 Restricted stock units 8,907,079 3,738,894 Earn-outs — 5,575,251 Conversion option of the 2024 Notes 612,396 1,878,810 Conversion option of the 2026 Notes — 6,879,283 Warrants 9,746,723 — Total 22,147,035 21,613,670 Note 4. Segment Information The Company accounts for its segment information in accordance with the provisions of ASC 280-10, “Segment Reporting.” ASC 280-10 establishes annual and interim reporting standards for operating segments of a company. ASC 280-10 requires disclosures of selected segment-related financial information about products, major customers, and geographic areas based on the Company’s internal accounting methods. T he chief operating decision maker (“CODM”), who is the Company’s Chief Executive Officer, evaluates performance, makes operating decisions, and allocates resources based on the financial information presented on a consolidated basis. Accordingly, management has determined that the Company operates as one operating and reportable segment. The Company was previously organized into two operating segments for purposes of making operating decisions and assessing performance: the Business segment and the Consumer segment. During the first quarter of 2023, the Consumer segment (consisting solely of the Kasamba business) was divested. As a result, the divestiture of Kasamba eliminated the Company’s Consumer segment. See Note 19 – Divestitures for additional information. Geographic Information The Company is domiciled in the United States and has international operations around the globe. The following table presents the Company’s long-lived assets by geographic region as of June 30, 2024 and December 31, 2023: June 30, December 31, 2024 2023 (In thousands) United States $ 412,660 $ 438,420 Germany 41,497 45,424 Australia 11,655 11,660 Netherlands 5,760 5,863 Other (1) 11,756 12,438 Total long-lived assets $ 483,328 $ 513,805 —————————————— (1) United Kingdom, Japan, France, Italy, Spain, Canada, and Singapore 17 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 5. Goodwill and Intangible Assets, Net Goodwill Goodwill represents the excess of the aggregate purchase price over the fair value of net identifiable assets acquired in a business combination. Goodwill is not amortized, but is tested for impairment at the reporting unit level using either a qualitative or quantitative assessment on an annual basis, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In the valuation of goodwill, management must make assumptions regarding estimated future cash flows to be derived from the Company’s business. If these estimates or their related assumptions change in the future, the Company may be required to record impairment for these assets. The changes in the carrying amount of goodwill as of June 30, 2024 and December 31, 2023 are as follows: Consolidated (In thousands) Balance as of December 31, 2022 $ 296,214 Adjustments to goodwill: Goodwill impairment (1) ( 11,895 ) Foreign exchange adjustment 1,312 Balance as of December 31, 2023 $ 285,631 Adjustments to goodwill: Goodwill impairment (1) ( 3,627 ) Foreign exchange adjustment ( 1,278 ) Balance as of June 30, 2024 $ 280,726 —————————————— (1) The sum of these amounts represents the accumulated goodwill impairment balance in our operating segment as of June 30, 2024. As a result of the Company’s intention to sell or dispose of its WildHealth reporting unit, during the first quarter of 2024, the Company recorded a non-cash impairment charge of $ 3.6 million in the condensed consolidated statements of operations, to recognize a full impairment of goodwill associated with its WildHealth reporting unit. There were no impairments of goodwill in the Company’s Business reporting unit during the three and six months ended June 30, 2024. There were no impairments of goodwill during the three and six months ended June 30, 2023 . Intangible Assets, Net Intangible assets are summarized as follows: June 30, 2024 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Amortization Period (In thousands) (In years) Amortizing intangible assets: Technology $ 94,559 $ ( 67,998 ) $ 26,561 5.0 Customer relationships 32,060 ( 20,593 ) 11,467 10.0 Patents 16,497 ( 2,226 ) 14,271 13.6 Trademarks 1,404 ( 826 ) 578 5.0 Trade names 1,044 ( 1,044 ) — 2.8 Other 914 ( 835 ) 79 4.1 Total $ 146,478 $ ( 93,522 ) $ 52,956 18 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) December 31, 2023 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Amortization Period (In thousands) (In years) Amortizing intangible assets: Technology $ 94,549 $ ( 60,465 ) $ 34,084 5.0 Customer relationships 32,025 ( 19,542 ) 12,483 10.0 Patents 15,350 ( 1,916 ) 13,434 12.9 Trademarks 1,400 ( 707 ) 693 5.0 Trade names 1,044 ( 672 ) 372 2.8 Other 914 ( 355 ) 559 4.1 Total $ 145,282 $ ( 83,657 ) $ 61,625 Amortization expense is calculated over the estimated useful life of the asset. Aggregate amortization expense for intangible assets and finance leases, net was $ 3.7 million and $ 5.5 million for the three months ended June 30, 2024 and 2023, respectively, and $ 7.9 million and $ 10.9 million for the six months ended June 30, 2024 and 2023, respectively. Of these amounts, amortization expense included in cost of revenue in our condensed consolidated statements of operations was $ 3.0 million and $ 4.6 million for the three months ended June 30, 2024 and 2023, respectively, and $ 6.3 million and $ 9.1 million for the six months ended June 30, 2024 and 2023, respectively. As a result of our impairment test during the first quarter of 2024, the Company recognized an immaterial non-cash impairment charge of $ 2.2 million included in impairment of intangibles and other assets in the condensed consolidated statements of operations, related to intangible assets associated with its WildHealth reporting unit, due to a plan to sell or dispose of the WildHealth reporting unit, as discussed above. There were no impairments of intangible assets during the three and six months ended June 30, 2023. As of June 30, 2024, estimated annual amortization expense for the next five years and thereafter is as follows: Estimated Amortization Expense (In thousands) Remainder of 2024 $ 7,307 2025 14,205 2026 11,519 2027 1,411 2028 1,343 Thereafter 17,171 Total $ 52,956 Note 6. Property and Equipment, Net Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the 19 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) asset. The Company reviews the estimated useful lives of its property and equipment on an ongoing basis. The following table presents the detail of property and equipment, net for the periods presented: June 30, 2024 December 31, 2023 Useful life (In thousands) (In years) Internal-use software development costs $ 183,169 $ 181,079 5 Computer equipment and software 126,181 123,580 3 to 5 Furniture, equipment and building improvements 328 327 The lesser of 5 or estimated useful life Finance lease right-of-use assets 238 3,060 2 Property and equipment, at cost 309,916 308,046 Less: accumulated depreciation ( 202,968 ) ( 188,721 ) Property and equipment, net $ 106,948 $ 119,325 Depreciation and amortization expense of property and equipment was $ 7.7 million and $ 9.7 million during the three months ended June 30, 2024 and 2023, respectively, and $ 15.9 million and $ 17.1 million during the six months ended June 30, 2024 and 2023, respectively. Expenditures for routine maintenance and repairs are charged to operating expense as incurred. Major renewals and improvements are capitalized and depreciated over their estimated useful lives. During the three months ended June 30, 2024, the Company recorded non-cash impairment charges of $ 8.3 million related to capitalized software development costs. The impairment charges were included in the condensed consolidated statements of operations for the three and six months ended June 30, 2024. These impairment charges pertained to internal projects that were discontinued and had no future economic benefit. There were no impairments of property and equipment during the three and six months ended June 30, 2023. Total depreciation included in our condensed consolidated statements of operations for the three and six months ended June 30, 2024 and 2023 is as follows: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (In thousands) (In thousands) Cost of revenue $ 1,771 $ 2,186 $ 3,453 $ 4,433 Sales and marketing 740 741 1,640 1,467 General and administrative 33 139 191 300 Product development 5,170 6,660 10,655 10,888 Total $ 7,714 $ 9,726 $ 15,939 $ 17,088 20 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 7. Accrued Expenses and Other Current Liabilities The following table presents the detail of accrued expenses and other current liabilities for the periods presented: June 30, 2024 December 31, 2023 (In thousands) Professional services and consulting and other vendor fees $ 48,150 $ 67,585 Payroll and other employee-related costs 10,521 20,767 Warrants liability 5,266 — Finance lease liability 108 3,037 Restructuring 1,344 2,076 Sales commissions 475 734 Non-income tax 556 556 Other 1,817 2,269 Total $ 68,237 $ 97,024 Note 8. Convertible Senior Notes, Net of Current Portion, Capped Call Transactions, and Warrants Convertible Senior Notes due 2024 and Capped Calls In March 2019, the Company issued $ 230.0 million aggregate principal amount of its 0.750 % Convertible Senior Notes due 2024 in a private placement. Interest on the 2024 Notes was payable semi-annually in arrears on March 1 and September 1 of each year. The 2024 Notes matured on March 1, 2024, on which date the Company repaid in full the outstanding $ 72.5 million in aggregate principal amount of the 2024 Notes. On March 21, 2023, the Company entered into individual privately negotiated transactions (the “Note Repurchase Agreements”) with certain holders of its 2024 Notes, pursuant to which the Company agreed to pay an aggregate of approximately $ 149.7 million in cash for the repurchase of approximately $ 157.5 million in aggregate principal amount of the 2024 Notes (the “Note Repurchases”). D uring the first quarter of 2023, the Company recognized a $ 6.1 million gain, net of transaction costs of $ 0.5 million on debt extinguishment, which represented the difference between the carrying value and the fair value of the 2024 Notes just prior to the Note Repurchases, which was recorded in Other income, net in the condensed consolidated statements of operations. The gain on debt extinguishment was subsequently adjusted by an immaterial amount of $ 1.1 million with a total gain of $ 7.2 million reported as of December 31, 2023. Upon completion of the Note Repurchases, the aggregate principal amount of the 2024 Notes was reduced by $ 157.5 million to $ 72.5 million and the carrying amount of the 2024 Notes reduced by $ 228.3 million to $ 72.0 million. A corresponding portion of the 2024 capped calls were terminated in connection following the Note Repurchases as required by their terms for minimal consideration. As of June 30, 2024 , there was no outstanding principal amount of the 2024 Notes. Convertible Senior Notes due 2026 and Capped Calls In December 2020, the Company issued $ 517.5 million aggregate principal amount of its 2026 Notes in a private placement, of which $ 361.2 million aggregate principal amount was outstanding as of June 30, 2024 . The 2026 Notes are senior unsecured obligations of the Company. The 2026 Notes will mature on December 15, 2026, unless earlier repurchased or redeemed by the Company or converted pursuant to their terms. The total net proceeds from the offering of the 2026 Notes, after deducting debt issuance costs, was approximately $ 505.3 million. 21 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Each $1,000 in principal amount of the 2026 Notes is initially convertible into 13.2933 shares of the Company’s common stock par value $ 0.001 , which is equivalent to an initial conversion price of approximately $ 75.23 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid special interest. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its 2026 Notes in connection with such a corporate event. The 2026 Notes are not redeemable prior to the maturity date of the 2026 Notes and no sinking fund is provided for the 2026 Notes. The indenture governing the 2026 Notes contains events of default customary for convertible notes issued in connection with similar transactions. If the Company undergoes a “fundamental change” (as defined in the indenture governing the 2026 Notes), which includes a change of control or the failure of the Company’s common stock to be listed or quoted on any of the Nasdaq Global Select Market, The Nasdaq Global Market or the New York Stock Exchange, holders may require the Company to repurchase for cash all or any portion of their 2026 Notes in principal amounts of $1,000 or a multiple thereof at a fundamental change repurchase price equal to 100 % of the principal amount of the 2026 Notes to be repurchased, plus accrued and unpaid special interest to, but excluding, the fundamental change repurchase date. Holders of the 2026 Notes may convert their 2026 Notes at their option at any time prior to the close of business on the business day immediately preceding August 15, 2026, in multiples of $1,000 principal amount, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2021 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price for the 2026 Notes on each applicable trading day as determined by the Company; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the indenture governing the 2026 Notes) per $1,000 principal amount of 2026 Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the conversion rate for the 2026 Notes on each such trading day; (3) with respect to any 2026 Notes that the Company calls for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after August 15, 2026, holders may convert all or any portion of their 2026 Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election. During the three and six months ended June 30, 2024, the conditions allowing holders of the 2026 Notes to convert were not met. In connection with the offering of the 2026 Notes, the Company entered into privately-negotiated capped call option transactions with certain counterparties (the “2026 capped calls”). The 2026 capped calls each have an initial strike price of approximately $ 75.23 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes. The 2026 capped calls have initial cap prices of $ 105.58 per share, subject to certain adjustment events. The 2026 capped calls cover, subject to anti-dilution adjustments, approximately 6.88 million shares of common stock. The 2026 capped calls are generally intended to reduce or offset the potential dilution to the common stock upon any conversion of the 2026 Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. The 2026 capped calls expire on December 15, 2026, subject to earlier exercise. The 2026 capped calls are subject to either adjustment or termination upon the occurrence of specified extraordinary events affecting the Company, including a merger event, a tender offer, and a nationalization, insolvency or delisting involving the Company. In addition, the 2026 capped calls are subject to certain specified additional disruption events that may give rise to a termination of the 2026 capped calls, including changes in law, failure to deliver, and hedging disruptions. The 2026 capped calls are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost of $ 46.1 million incurred to purchase the 2026 capped calls was recorded as a reduction to additional paid-in capital in the accompanying condensed consolidated balance sheets. Pursuant to a privately negotiated exchange and purchase agreement (the “Exchange and Purchase Agreement”), on June 3, 2024, the Company exchanged $ 146.0 million principal amount of the 2026 Notes then held by an investor for $ 100.0 million principal amount of new 2029 Notes, and the same investor purchased an additional $ 50.0 million principal amount of the 2029 Notes for cash. In connection with the exchange and purchase, the Company also issued the Warrants (as defined below) to the investor, and the investor agreed to purchase up to $ 50.0 million of additional 2029 Notes upon the Company’s request at any time prior to December 3, 2024 (the “Delayed Draw Notes”). As a result of the exchange and purchase transactions, during the second quarter of 2024, the Company recognized a $ 68.1 million gain on debt extinguishment which represented the difference between the carrying value of the 2026 Notes so exchanged and the collective fair value of the 2029 22 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Notes and the Warrants, net of the cash payment received from the investor. The extinguishment gain was recorded in Other income, net in the condensed consolidated statements of operations. On June 13, 2024, the Company repurchased $ 10.3 million principal amount of the 2026 Notes for $ 4.9 million in cash. As a result of the transaction, during the second quarter of 2024, the Company recognized a $ 5.0 million gain on debt extinguishment, which was recorded in Other income, net in the condensed consolidated statements of operations. As a result of the adoption of ASU 2020-06 “Debt - Debt with Conversion and Other Options (Subtopic 815-40) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), the 2026 Notes are accounted for as a single liability. The 2026 Notes were classified as long-term liabilities in the accompanying condensed consolidated balance sheets as of June 30, 2024. After the completion of the exchange and repurchase, the aggregate principal amount of the 2026 Notes was reduced by $ 156.3 million to $ 361.2 million and the carrying amount of the 2026 Notes reduced by $ 154.7 million to $ 357.8 million. A corresponding portion of the 2026 capped calls were terminated in connection following the transactions as required by their terms for no consideration. The remaining term over which the 2026 Notes’ debt issuance costs will be amortized is 2.4 years at an effective interest rate of 0.40 % for the three months ended June 30, 2024 . First Lien Convertible Senior Notes due 2029 In June 2024, the Company issued $ 150.0 million aggregate principal amount of its 2029 Notes pursuant to the Exchange and Purchase Agreement including $ 100.0 million aggregate principal amount issued in exchange for $ 146.0 million aggregate principal amount of 2026 Notes and $ 50.0 million aggregate principal amount issued for cash. The Company paid third parties $ 7.6 million in connection with the transaction, which was capitalized as debt issuance costs. At the time of the exchange, the fair value of the 2029 Notes approximated $ 118.1 million, and the Company recognized a debt discount of $ 31.9 million. Unless earlier repurchased or redeemed by the Company or converted pursuant to their terms, the 2029 Notes will mature on the earlier of (a) June 15, 2029 and (b) 91 days before the maturity of the 2026 Notes, if greater than $ 60.0 million principal amount of 2026 Notes remains outstanding on such date. The amount payable by the Company if the 2029 Notes mature pursuant to clause (b) will be equal to 100 % of the aggregate principal amount of the 2029 Notes, plus accrued and unpaid interest, plus the remaining future interest payments that would have been payable through June 15, 2029, discounted at a rate equal to the comparable treasury rate plus 50 basis points (the “Make-Whole Amount”). From June 3, 2024, until the earlier of the date of issuance of the Delayed Draw Notes and December 15, 2026, interest on the 2029 Notes will accrue at a rate of 10.83 % (consisting of 4.17 % cash and 6.66 % paid in kind (“PIK”)) per annum. From the date of issuance of the Delayed Draw Notes and prior to December 15, 2026, interest on the 2029 Notes will increase and accrue at a rate of 11.375 % (consisting of 4.375 % cash and 7.00 % PIK) per annum. On and after December 15, 2026, interest on the 2029 Notes will further increase and accrue at a rate of 13 % (consisting of 5 % cash and 8 % PIK) per annum. The Company may, at its option, redeem the 2029 Notes, in whole or in part, prior to June 15, 2025 at a price equal to the Make-Whole Amount. On or after June 15, 2025, and prior to June 15, 2026, the Company may, at its option, redeem the 2029 Notes, in whole or in part for an amount of cash equal to the sum of (i) 106.50 % of the aggregate principal amount of the 2029 Notes (including all increases to the principal amount as the result of previous payments of PIK interest) plus (ii) 106.50 % of all accrued and unpaid PIK interest plus (iii) all accrued and unpaid cash interest. On or after June 15, 2026, and prior to December 15, 2026, the Company may, at its option, redeem the 2029 Notes, in whole or in part for an amount of cash equal to the sum of (i) 103.25 % of the aggregate principal amount of the 2029 Notes (including all increases to the principal amount as the result of previous payments of PIK interest) plus (ii) 103.25 % of all accrued and unpaid PIK interest plus (iii) all accrued and unpaid cash interest. From December 15, 2026 until maturity, the Company may, at its option, redeem the 2029 Notes, in whole or in part for an amount of cash equal to the sum of (i) 113 % of the aggregate principal amount of the 2029 Notes (including all increases to the principal amount as the result of previous payments of PIK interest) plus (ii) 113 % of all accrued and unpaid PIK interest plus (iii) all accrued and unpaid cash interest. In addition, the Make-Whole Amount will be payable in the event of an acceleration of the 2029 Notes or repurchase triggered by certain asset sales. No sinking fund is provided for the 2029 Notes. The 2029 Notes are guaranteed on a senior basis by certain of the Company’s direct and indirect domestic and foreign subsidiaries and secured by first priority security interests in substantially all of the assets of the Company and such subsidiary guarantors, subject to customary exceptions. The indenture governing the 2029 Notes contains affirmative and negative covenants and events of default customary for senior secured notes issued in connection with similar transactions. The negative 23 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) covenants include limitations on asset sales, the incurrence of debt, preferred stock and liens, fundamental changes, investments, dividends and other payment restrictions affecting subsidiaries, restricted payments and transactions with affiliates. Among other things, these covenants generally prohibit the payment of cash dividends on the Company’s common stock. The indenture governing the 2029 Notes permits the Company and its subsidiaries to incur, subject to certain requirements, up to $ 150.0 million of debt that is junior in lien priority and subordinated in right of payment to the 2029 Notes. The indenture governing the 2029 Notes also includes a financial covenant that requires the Company at all times to maintain a minimum cash balance of $ 60.0 million (excluding proceeds of the 2029 Notes). Upon request of the investor, the indenture governing the 2029 Notes requires the Company to enter into a registration rights agreement with respect to the 2029 Notes containing customary terms including demand, shelf and piggyback registration rights. If the Company undergoes a “fundamental change” (as defined in the indenture governing the 2029 Notes), which includes a change of control or the failure of the Company’s common stock to be listed or quoted on any of the Nasdaq Global Select Market, The Nasdaq Global Market or the New York Stock Exchange, holders may require the Company to repurchase all or any portion of their 2029 Notes at a repurchase price equal to 100 % of the aggregate principal amount of the 2029 Notes to be repurchased, plus accrued and unpaid interest, plus an amount equal to 66 % of the remaining future interest payments (including PIK interest) that would have been payable through June 15, 2029, discounted at a rate equal to the comparable treasury rate plus 50 basis points. Holders of the 2029 Notes may convert their 2029 Notes at their option at any time prior to the close of business on the business day immediately preceding February 15, 2029 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2024 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price for the 2029 Notes on each applicable trading day as determined by the Company; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the indenture governing the 2029 Notes) per $1,000 principal amount of 2029 Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the product of (x) the quotient of (i) the “conversion amount” (as defined in the Indenture) in respect of $1,000 principal amount of the 2029 Notes on such trading day divided by (ii) 1,000 times (y) the conversion rate for the 2029 Notes on each such trading day; (3) with respect to any 2029 Notes that the Company calls for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; (4) upon the occurrence of specified corporate events; or (5) during the period from August 17, 2026 through September 14, 2026, if the aggregate principal amount of 2026 Notes exceeds $ 60.0 million on August 16, 2026. On or after February 15, 2029, holders may convert all or any portion of their 2029 Notes at any time prior to the close of business on June 13, 2029, regardless of the foregoing circumstances. Our 2029 Notes include certain embedded features requiring bifurcation, which did not have material values as of June 30, 2024 due to management’s estimates of the likelihood of triggering events, but that may have value in the future should those estimates change, with any change in fair value recorded in the Company’s condensed consolidated statements of operations. The 2029 Notes (including all accrued and unpaid interest) are convertible at the option of the holders at certain times into cash based on a daily conversion value calculated on a proportionate basis for each trading day in a 50 trading day observation period, initially corresponding to 13.2933 shares of the Company’s common stock per $1,000 principal amount of 2029 Notes. The Company is not required to deliver its common stock upon conversion under any circumstances. The conversion rate for the 2029 Notes is subject to adjustment if certain events occur and contains customary anti-dilution protections. During the three months ended June 30, 2024 , the conditions allowing holders of the 2029 Notes to convert were not met. As a result of the adoption of ASU 2020-06, the 2029 Notes are accounted for as a single liability, and the carrying amount of the 2029 N otes is $ 110.9 million as of June 30, 2024, consisting of principal of $ 150.0 million, net of unamortized issuance costs of $ 7.5 million and debt discount of $ 31.6 million . The 2029 Notes were classified as long-term liabilities in the accompanying condensed consolidated balance sheets as of June 30, 2024. The remaining term over which the 2029 Notes’ debt issuance costs will be amortized is 5.0 years at an effective interest rate of 19.18 % for the six months ended June 30, 2024. Unamortized debt issuance costs incurred in connection with securing the Company’s financing arrangements are presented in the condensed consolidated balance sheets as a direct deduction from the carrying amount of the outstanding 24 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) borrowings, consistent with debt discounts. All deferred financing costs are amortized to interest expense. The net carrying amount of the Notes as of June 30, 2024 and December 31, 2023 is as follows: June 30, 2024 December 31, 2023 2026 Notes 2029 Notes Total 2024 Notes 2026 Notes Total (In thousands) (In thousands) Principal $ 361,204 $ 150,000 $ 511,204 $ 72,492 $ 517,500 $ 589,992 Unamortized debt discount — ( 31,578 ) ( 31,578 ) — — — Unamortized issuance costs ( 3,472 ) ( 7,488 ) ( 10,960 ) ( 99 ) ( 5,935 ) ( 6,034 ) Total net carrying value $ 357,732 $ 110,934 $ 468,666 $ 72,393 $ 511,565 $ 583,958 Less: short-term debt, net — — — 72,393 — 72,393 Long-term debt, net $ 357,732 $ 110,934 $ 468,666 $ — $ 511,565 $ 511,565 The following table sets forth the interest expense recognized related to the Notes: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (In thousands) (In thousands) Contractual interest expense $ 1,591 $ 128 $ 1,681 $ 569 Amortization of debt discount 301 — 301 — Amortization of debt issuance costs 531 1,807 1,042 2,727 Total interest expense $ 2,423 $ 1,935 $ 3,024 $ 3,296 Interest expense of $ 2.4 million and $ 3.0 million is reflected as a component of interest (expense) income, net in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2024, respectively. Interest expense was $ 1.9 million and $ 3.3 million for the three and six months ended June 30, 2023, respectively. Warrants On June 3, 2024, pursuant to the Exchange and Purchase Agreement, the Company issued to the investor 10-year warrants with a strike price of $ 0.75 per share, exercisable for 9,746,723 shares of the Company’s common stock (the “Share-Settled Warrants”) and 10-year warrants with a strike price of $ 0.75 per share, exercisable with respect to a notional amount of 2,344,775 shares of the Company’s common stock for cash payments equal to the excess of “fair market value” (as defined therein) per share over the strike price, fully diluted subject to certain adjustments (the “Cash-Settled Warrants,” and collectively with the Share-Settled Warrants, the “Warrants.”). The Cash-Settled Warrants will permit the Company, subject to certain conditions (including to the extent that the Company, following payment, would have “available cash” (as defined therein) of less than $ 100.0 million ), to defer payment of the settlement amount at an annualized interest rate of 6.0 % , compounded monthly. Warrants outstanding at the 10-year expiration will be exercised automatically (and in the case of the Share-Settled Warrants, will be exercised on a cashless basis) if, immediately prior to the expiration, the Fair Market Value per share is greater than the strike price. The Warrants contain customary anti-dilution protections and a beneficial ownership limitation on the investor’s ownership of the Company’s common stock, on a post-exercise basis (aggregating all securities convertible into or exercisable for the Company’s common stock), of 4.99 % , subject to increase upon 61 days’ notice by the investor, but not to exceed 9.99 % . The Warrants were classified as current liabilities in the Company’s condensed consolidated balance sheets as of June 30, 2024 and recorded at fair value of $ 5.3 million at the issuance date with any subsequent changes in fair value to be recorded in the Company’s condensed consolidated statements of operations. 25 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 9. Leases The Company has non-cancelable operating and finance leases for its corporate offices and other service agreements. Its leases have remaining lease terms of less than one to five years , some of which include options to extend. The Company uses the non-cancelable lease term when recognizing the right-of-use (“ROU”) assets and lease liabilities, unless it is reasonably certain that a renewal or termination option will be exercised. The Company continues to actively assess its global lease portfolio. However, any additional de-recognition of ROU assets and incurrence of various one-time expenses in connection with early termination of additional leases are not expected to be material to its financial condition or results of operations. Supplemental cash flow information related to leases for the three and six months ended June 30, 2024 and 2023 is as follows: Three Months Ended Six Months Ended June 30, June 30, 2024 2023 2024 2023 (In thousands) (In thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 579 $ 863 $ 1,421 $ 1,837 Operating cash flows for finance leases 3 13 21 37 Financing cash flows for finance leases 26 968 353 1,926 The components of lease costs for the three and six months ended June 30, 2024 and 2023 are as follows: Three Months Ended Six Months Ended June 30, June 30, 2024 2023 2024 2023 (In thousands) (In thousands) Finance lease cost Amortization of right-of-use assets $ 21 $ 919 $ 355 $ 1,830 Interest 3 13 21 37 Operating lease cost 2,565 2,887 5,467 5,627 Total lease cost $ 2,589 $ 3,819 $ 5,843 $ 7,494 June 30, 2024 June 30, 2023 Weighted Average Remaining Lease Term: Operating leases 0.6 years 2.1 years Finance leases 1.3 years 1.1 years Weighted Average Discount Rate: Operating leases 7 % 7 % Finance leases 7 % 4 % 26 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Supplemental balance sheet information related to leases is as follows: Financial Statement Classification June 30, 2024 December 31, 2023 (In thousands) Assets Operating right-of-use assets Operating lease right-of-use assets $ 260 $ 4,135 Finance right-of-use assets Property and equipment, net 128 3,060 Liabilities Current liabilities: Operating lease liabilities Operating lease liabilities $ 268 $ 2,719 Finance lease liabilities Accrued expenses and other current liabilities 108 3,037 Non-current liabilities: Operating lease liabilities Operating lease liabilities, net of current portion — 2,173 Finance lease liabilities Other liabilities 28 85 Future minimum lease payments under non-cancellable operating and finance leases are immaterial. Note 10. Fair Value Measurements The Company measures its cash equivalents at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value: • Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. • Level 2: Inputs reflect: quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. • Level 3: Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available. 27 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Financial Assets and Liabilities The carrying amount of cash, accounts receivable, and accounts payable approximate their fair value due to their short-term nature. The Company’s assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy as of June 30, 2024 and December 31, 2023, are summarized as follows: June 30, 2024 Level 1 Level 2 Level 3 Total (In thousands) Assets Cash equivalents: Money market funds $ 122,884 $ — $ — $ 122,884 Total assets $ 122,884 $ — $ — $ 122,884 Liabilities Warrants liability $ — $ — $ 5,266 $ 5,266 Total liabilities $ — $ — $ 5,266 $ 5,266 December 31, 2023 Level 1 Level 2 Level 3 Total (In thousands) Assets Cash equivalents: Money market funds $ 174,701 $ — $ — $ 174,701 Total assets $ 174,701 $ — $ — $ 174,701 In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions based on the best information available. The Company’s money market funds are measure d at fair value on a recurring basis based on quoted market prices in active markets and are classified as Level 1 within the fair value hierarchy. The Company’s warrants and contingent earn-out liability were measured at fair value on a recurring basis and was classified as Level 3 within the fair value hierarchy. For 2023, the fair value was based on the negotiated contracts with the selling shareholders. Significant changes in unobservable inputs could result in significantly lower or higher fair value measurements. On a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair value. The Company uses an income approach and inputs that constitute Level 3. 28 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The estimated fair value of outstanding balances of our Notes as of June 30, 2024 and December 31, 2023 are as follows: Level of Hierarchy Fair Value Principal Balance Unamortized Debt Discount Unamortized Debt Issuance Costs Net Carrying Value (In thousands) June 30, 2024 2026 Notes 2 $ 170,516 $ 361,204 $ — $ ( 3,472 ) $ 357,732 2029 Notes 2 118,122 150,000 ( 31,578 ) ( 7,488 ) 110,934 December 31, 2023 2024 Notes 2 $ 71,396 $ 72,492 $ — $ ( 99 ) $ 72,393 2026 Notes 2 364,487 517,500 — ( 5,935 ) 511,565 Management determines the fair value by using Level 2 inputs base d on observable market prices and antithetic variable technique don e by an independent valuation specia list. Warrants The Company recorded the fair value of the Warrants upon issuance using the Black-Scholes valuation model and is required to revalue these warrants at each reporting date with any changes in fair value recorded on the Company’s condensed statement of operations. The valuation of the Warrants was classified as Level 3 within the fair value hierarchy and influenced by the fair value of the underlying, or notional amount of, common stock of the Company. A summary of the Black-Scholes pricing model assumptions used to record the fair value of the Warrants as of June 30, 2024 is as follows: Stock price $ 0.62 Risk free rate 4.41 % Expected life (in years) 10 years Expected volatility 60 % Any significant changes in the inputs may result in significantly higher or lower fair value measurements. Refer to Note 8 – Convertible Senior Notes, Net of Current Portion, Capped Call Transactions, and Warrants for additional information. The changes in fair value of the Level 3 warrants and earn-out liabilities during the six months ended June 30, 2024 and the year ended December 31, 2023 are as follows: June 30, 2024 December 31, 2023 Balance, beginning of year $ — $ 72,221 Change in fair value of contingent consideration — 4,629 Change in fair value of liability awards — ( 27,857 ) Payments — ( 48,993 ) Issuance of warrants 5,266 — Balance, end of period $ 5,266 $ — Certain former stakeholders of the Company’s acquisitions were eligible to receive additional cash or share considerations based on the attainment of certain operating metrics in the periods subsequent to the acquisitions. These earn-out arrangements were accounted for as either contingent considerations arrangements or compensation arrangements. Contingent considerations were fair valued using significant inputs that are not observable in the market. 29 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The earn-outs determined to be compensatory were remeasured each reporting period based on whether the performance targets were probable of being achieved and recognized over the related service periods. During the year ended December 31, 2023, the Company settled the VoiceBase, Tenfold and e-Bot7 and WildHealth, Inc. earn-outs for approximately $ 19.9 million, $ 9.3 million, $ 7.7 million, and $ 12.0 million, respectively. Changes to the fair value of the earnouts were recognized as a component of stock-based compensation expense and Other income, net in the accompanying condensed consolidated statements of operations. Payments in cash were recognized as a component of compensation expense and payments in stock were recognized as a component of equity in the accompanying condensed consolidated statements of operations. There were no outstanding earnout liabilities as of June 30, 2024 based on settlements that were completed as of December 31, 2023. Note 11. Commitments and Contingencies Employee Benefit Plans The Company has a 401(k) defined contribution plan covering all eligible employees. The Company’s 401(k) policy is a Safe Harbor Plan, whereby the Company matches 100 % of the first 3 % of eligible compensation and 50 % of the next 2 % of eligible compensation. Furthermore, the match is immediately vested. Salaries and related expenses include $ 0.7 million and $ 0.9 million of employer matching contributions for the three months ended June 30, 2024 and 2023, respectively, and $ 1.8 million and $ 2.3 million for the six months ended June 30, 2024 and 2023, respectively. Letters of Credit As of June 30, 2024, the Company had letters of credit totaling $ 0.5 million outstanding as a security deposit for the due performance by the Company of the terms and conditions of a supply contract. Contractual obligations The Company’s purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. These purchase obligation agreements are primarily related to contracts with vendors in connection with Information Technology (“IT”) infrastructure and cloud computing-related services with remaining terms of two years or less. Our contractual obligations as of June 30, 2024, did not materially change from the amounts disclosed in our 2023 Annual Report on Form 10-K. Indemnifications The Company enters into service and license agreements in its ordinary course of business. Pursuant to some of these agreements, the Company agrees to indemnify certain customers from and against certain types of claims and losses suffered or incurred by them as a result of using the Company’s products. The Company also has agreements whereby its executive officers and directors are indemnified for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a directors and officers insurance policy that reduces its exposure and enables the Company to recover a portion of any future amounts paid subject to customary deductibles. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. The Company has no liabilities recorded for these agreements as of the three and six months ended June 30, 2024 and 2023. 30 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 12. Stockholders’ Equity Stock-Based Compensation The Company’s stock-based compensation generally includes stock options, restricted stock units (“RSUs”), performance-vesting restricted stock units (“PRSUs”), and purchases under the Company’s 2019 Employee Stock Purchase Plan. Stock-based compensation expense related to RSUs is based on the market value of the underlying stock on the date of grant and the related expense is recognized ratably over the requisite service period. The stock-based compensation expense related to PRSUs is estimated at the grant date based on the expectation that performance goals will be achieved at the stated target level. The amount of compensation cost recognized depends on the relative satisfaction of the performance condition based on performance to date. Stock Incentive Plan The Company’s 2019 Stock Incentive Plan became effective on April 11, 2019. The 2019 Stock Incentive Plan, as amended and restated, allows the Company’s employees and directors to participate in the Company’s future performance through grants of stock-based awards of stock options and RSUs at the discretion of the board of directors. The number of shares authorized for issuance under the 2019 Stock Incentive Plan as of June 30, 2024 was 42,367,744 shares in the aggregate. Stock options granted under the 2019 Stock Incentive Plan have ten-year terms. As of June 30, 2024, 2,260,544 shares of common stock remained available for issuance (taking into account all stock option exercises and other equity award settlements through June 30, 2024). Employee Stock Purchase Plan As of June 30, 2024, there were 2,000,000 shares authorized and reserved for issuance under the Company’s ESPP, and as of June 30, 2024, 864,180 shares of common stock remained available for issuance under the ESPP (taking into account all share purchases through June 30, 2024). Inducement Plan There are 13,079,009 shares of common stock authorized and reserved for issuance under the Company’s 2018 Inducement Plan, inclusive of 6,920,000 shares, in the aggregate, authorized for issuance during the first and second quarters of 2024. As of June 30, 2024, 648,450 shares of common stock remained available for issuance under the Inducement Plan (taking into account all option exercises and other equity award settlements through June 30, 2024). CEO Inducement Award As part of an equity compensation package negotiated to induce John Sabino, the Company’s Chief Executive Officer, to accept employment with the Company, pursuant to the terms of the employment agreement entered into between Mr. Sabino and the Company, the Company granted Mr. Sabino an option to purchase 1,000,000 shares of common stock (the “CEO Inducement Award”) that will vest upon the satisfaction of certain performance-based and time-based vesting conditions. On May 17, 2024, the Company’s board of directors authorized 1,000,000 shares for issuance under the CEO Inducement Award in compliance with and in reliance on Nasdaq Listing Rule 5635(c)(4). The CEO Inducement Award was a standalone award granted outside of the 2019 Stock Incentive Plan and 2018 Inducement Plan. As of June 30, 2024, no shares of common stock remained available for issuance under the CEO Inducement Award. 31 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Stock Option Activity The following table is a summary of the Company’s stock option activity for the six months ended June 30, 2024: Stock Option Activity Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Options Weighted Average Exercise Price (In thousands) (Per option) (In years) (In thousands) Balance outstanding as of December 31, 2023 3,137 $ 22.68 4.84 $ 40 Granted 1,000 (1) 1.02 Cancelled or expired ( 1,256 ) 22.22 Balance outstanding as of June 30, 2024 2,881 15.38 6.3 1 Options vested and expected to vest 624 6.89 9.29 — Options exercisable as of June 30, 2024 1,692 $ 22.51 4.12 $ 1 —————————————— (1) Represents the CEO Inducement Award, which does not count against the number of shares reserved for issuance under the Company’s 2019 Stock Incentive Plan or the Company’s 2018 Inducement Plan. As of June 30, 2024, there was approximately $ 2.2 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of approximately 1.7 years. Restricted Stock Unit and Performance-Vesting Restricted Stock Unit Activity The following table is a summary of the Company’s RSU and PRSU activity for the six months ended June 30, 2024: Number of Shares Weighted Average Grant Date Fair Value Aggregate Fair Value (In thousands) (Per share) (In thousands) Balance outstanding as of December 31, 2023 5,064 $ 12.53 $ 19,193 Awarded 5,699 0.99 Vested ( 969 ) 16.66 Forfeited ( 887 ) 15.82 Non-vested and outstanding as of June 30, 2024 8,907 4.37 5,171 Expected to vest 6,215 $ 4.66 $ 3,608 RSUs granted to employees generally vest over a three to four-year period or upon achievement of certain performance conditions. As of June 30, 2024, total unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested RSUs and PRSUs was approximately $ 27.3 million and the weighted-average remaining vesting period was 1.8 years. PRSUs granted are generally subject to both a service-based vesting condition and a performance-based vesting condition. PRSUs will vest upon the achievement of specifi ed performance targets and subject to continued service through the applicable vesting dates. The associated compensation cost is recognized over the requisite service period when it is probable that the performance condition will be satisfied. There were no PRSUs granted during the three and six months ended June 30, 2024 . PRSUs granted during the three and six months ended June 30, 2023, were immaterial. 32 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Total stock-based compensation costs included in our condensed consolidated statements of operations for the three and six months ended June 30, 2024 and 2023 are as follows: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (In thousands) (In thousands) Cost of revenue $ 288 $ ( 1,232 ) $ 631 $ 803 Sales and marketing 1,854 2,299 4,309 4,703 General and administrative 2,318 ( 13,882 ) 4,116 ( 11,250 ) Product development 1,440 ( 5,333 ) 4,402 ( 1,072 ) Total $ 5,900 $ ( 18,148 ) $ 13,458 $ ( 6,816 ) Note 13. Restructuring LivePerson maintains restructuring initiatives to realign the Company’s cost structure to better reflect significant product and business model innovation and then-recent changes due to acquisitions and factors outside the control of the Company. As part of the restructuring initiative that commenced in the second quarter of 2022, the Company reoriented its global product and engineering organization for greater efficiency and focus, and reallocated some spending to increase its investment in customer success and go-to-market initiatives. In 2023, due to the changing technology landscape related to the evolution of LLMs, we were able to identify opportunities for significant cost savings because the latest generation of LLMs is able to build a bot in minutes, enabling reduction of headcount previously devoted to bot-building. Additionally, we have moved to a product-led growth structure where we flattened the organization to align to more efficient sales and service support ratios. In connection with the restructuring initiatives, the Company recognized restructuring costs of $ 3.1 million and $ 2.4 million during the three months ended June 30, 2024 and 2023, respectively, and $ 6.4 million and $ 13.9 million during the six months ended June 30, 2024 and 2023, respectively, which is included in restructuring costs in the accompanying condensed consolidated statements of operations. Such costs primarily include severance and other compensation costs as well as IT infrastructure contract termination costs. The following table presents the detail of the liability for the Company’s restructuring charges, which is included within Accrued expenses and other current liabilities within the accompanying condensed consolidated balance sheets as of June 30, 2024 and December 31, 2023: June 30, 2024 December 31, 2023 (In thousands) Balance, beginning of the year $ 2,076 $ 803 IT contract termination (reversals) costs ( 568 ) 5,744 Severance and other compensation associated costs 6,996 16,920 Cash payments ( 7,160 ) ( 21,391 ) Balance, end of period $ 1,344 $ 2,076 The Company anticipates that payments associated with the employee severance and other compensation associated costs reflected in the table above will be substantially completed by December 31, 2024. 33 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table presents the detail of expenses for the Company’s restructuring charges for the three months and six months ended June 30, 2024 and 2023: Three Months Ended Six Months Ended June 30, June 30, 2024 2023 2024 2023 (In thousands) (In thousands) IT contract termination reversals $ ( 1,284 ) $ — $ ( 568 ) $ — Severance and other associated costs 4,403 2,387 6,996 13,902 Total restructuring costs $ 3,119 $ 2,387 $ 6,428 $ 13,902 Note 14. Legal Matters Stockholder Litigation In December 2023, a putative stockholder class action entitled Damri v. LivePerson, Inc., No. 1:23-cv-10517, was filed under the federal securities laws against the Company, its former Chief Executive Officer, and its Chief Financial Officer in the United States District Court for the Southern District of New York. The complaint alleges that the Company’s Form 10-Q filings and forecasts for the first, second, and third quarters of fiscal year 2022 were false and misleading in violation of Section 10(b) of the Securities Exchange Act of 1934, based on the Company’s later disclosures and report on Form 10-K on March 16, 2023. On May 31, 2024, the plaintiff filed an amended complaint. The Company moved to dismiss the amended complaint on August 1, 2024. A parallel litigation on behalf of stockholders who purchased their shares on the Tel Aviv Stock Exchange, entitled Weissbrod v. LivePerson, Inc., is pending in the Tel Aviv District Court in Israel, but has been stayed pending further developments in the Damri case. In January 2024, a purported derivative action entitled Marti v. LoCascio, No. 1:24-cv-00598, was filed in the United States District Court for the Southern District of New York by a purported stockholder of the Company against the Company’s former Chief Executive Officer, its Chief Financial Officer, most of the members of the current board of directors and several former directors. The Marti litigation claims that the Company itself was harmed by the same acts and omissions underlying the Damri federal securities lawsuit, and seeks to recover unspecified losses on behalf of the Company. The Marti case is stayed pending further developments in the Damri case. In June and July 2024, three other purported derivative actions were filed by purported stockholders of the Company against the Company’s former Chief Executive Officer, its Chief Financial Officer, most of the members of the current board of directors and several former directors. These three purported derivative actions, similar to the Marti litigation, claim that the Company itself was harmed by the same acts and omissions underlying the Damri federal securities lawsuit, and seek to recover unspecified losses on behalf of the Company. The three actions are entitled: (i) Steffens v. Block, No. 1:24-cv-04481, filed in the United States District Court for the Southern District of New York; (ii) Ravi v. LoCascio, Index No. 653498/2024, filed in the Supreme Court of the State of New York, New York County, and (iii) Morales v. LoCascio, No. 1:24-cv-05297, filed in the United States District Court for the Southern District of New York. I n January 2024, a purported stockholder of the Company filed a lawsuit against the Company and its Board of Directors entitled Browne v. Layfield, No. 2024-0079, in the Court of Chancery of the State of Delaware. The complaint asserted a claim for breach of fiduciary duty based upon a Tax Benefits Preservation Plan. In February 2024, the Board approved technical amendments to the Tax Benefits Preservation Plan which were filed by the Company on Form 8-K, and the case was dismissed as moot, subject to attorneys’ fees on behalf of the plaintiff. The plaintiff has sought $ 0.9 million in fees and expenses, which the Company has opposed. In February 2024, Starboard Value LP and several of its related entities and investment funds filed a lawsuit against the Company, its former Chief Executive Officer and its Chief Financial Officer entitled Starboard Value LP v. LivePerson, Inc., No. 2024-0103, in the Court of Chancery of the State of Delaware. The complaint alleges common law fraud, fraudulent inducement and negligent misrepresentation in connection with an alleged scheme to induce Starboard to settle its 2022 proxy contest against the Company and, as stated in the complaint, involves previous Starboard allegations of misrepresentations in the Company’s public disclosures that the Company previously informed Starboard were found to be unsubstantiated following an independent investigation. The complaint seeks unspecified damages. The defendants have filed an answer denying the substantive allegations of the complaint. 34 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COVID-Related Matters As has been widely reported, there is heightened scrutiny by the federal government across many programs related to global novel coronavirus disease (“COVID-19”) that were introduced during the COVID-19 pandemic. The Company previously provided products and services related to COVID-19 testing and accompanying software. Those products and services have been the subject of inquiry and review by Medicare, the Department of Justice and the U.S. Food and Drug Administration. The Company has discontinued all products and services related to COVID-19, and has responded to and intends to continue to cooperate with governmental inquiries related to its previous engagement in COVID-19 related product and service offerings. Other Legal, Administrative, Governmental and Regulatory Matters From time to time, the Company is or may be subject to or involved in legal, administrative, governmental and/or regulatory proceedings, inquiries and investigations as well as actual or threatened litigation, claims and/or demands (each an “Action” and collectively “Actions”). These have included and may include (without limitation) Actions brought by or against the Company, its affiliates, subsidiaries, directors and/or officers with respect to intellectual property, contracts, financial, commercial, employment, legal, compliance, privacy, data security, regulatory and/or other matters related to our business, as well as Actions brought against the Company’s customers for which the Company has a contractual indemnification obligation. Regardless of the outcome, Actions can have an adverse impact on the Company because of defense and/or settlement costs, diversion of management resources, reputational risks and other factors. Accruals The Company accrues for certain contingencies when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated and discloses certain contingencies for which no accrual has been made as appropriate and in compliance with ASC 450, “Contingencies”. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. The accruals or estimates, if any, resulting from the foregoing analysis, are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. Note 15. Income Taxes Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are expected to become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The Company records both the interest accrued on the underpayment of income taxes and penalties, if any, related to unrecognized tax benefits in the provision for (benefit from) income taxes in its condensed consolidated statements of operations. The Company maintains a valuation allowance against its U.S., e-bot7 Germany and Bulgaria deferred tax assets as it considered its cumulative losses in recent years as a significant piece of negative evidence. Since valuation allowances are evaluated by jurisdiction, the Company believes that the deferred tax assets related to LivePerson Australia Pty. Ltd., Engage Pty. Ltd., LivePerson (UK) Ltd., LivePerson Italy, LivePerson Japan, and LivePerson Ltd. (Israel) are more likely than not to be realized as these jurisdictions have positive cumulative pre-tax book income after adjusting for permanent and one-time items. During the year ended December 31, 2023, there was an increase in the valuation allowance recorded of $ 23.7 million. 35 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The Company recorded a tax provision o f $ 1.3 million and $ 1.6 million for the three and six months ended June 30, 2024 , respectively, which consists of a tax provision on operating earnings of non-US subsidiaries and interest accrual on unrecognized tax benefits in Israel. The Company recorded a benefit from income taxes of $ 0.2 million and a tax provision of $ 1.1 million for the three and six months ended June 30, 2023 , respectively, which was made up of tax provision on operating earnings, a stock compensation tax deficiency related to the stock compensation arrangements of LivePerson, Inc., LivePerson (UK) Ltd., and LivePerson Ltd. (Israel), and an increase in valuation allowance activity on deferred tax assets resulting from a release of deferred tax liabilities as a result of the Kasamba sale during the first quarter of 2023. The increase in the tax provision for the three and six months ended June 30, 2024 as compared to the three and six months ended June 30, 2023 is due to changes in the forecasted earnings by jurisdiction year over year, the effects of U.S. state taxes as a result of net operating loss utilization limitations, and offsetting activities related to the prior period tax benefit including the change in Israeli tax rate, the return-to-provision adjustments from foreign tax return filings, and the changes in valuation allowance connected to the sale of Kasamba during the prior period. The Company had a valuation allowance on certain deferred tax assets for the year ended December 31, 2023 of $ 211.2 million. In 2024, the Company expects an estimated increase in the valuation allowance of $ 15.4 million, al l of which would be recorded as an expense. During 2023, an increase in the valuation allowance in the amount of $ 23.7 million was recorded as an expense. Note 16. Equity Method Investment On February 13, 2022, the Company and Pasaca Capital Inc. (“Pasaca”) entered into a joint venture agreement (the “JV Agreement”) to form Claire Holdings, Inc. (“Claire”), a joint venture to build, create, and administer a marketplace for health and well-being diagnostic testing. Pursuant to the terms of the JV Agreement, the Company agreed to contribute a total of $ 19.0 million over a five-year period in exchange for a 19.2 % ownership interest in Claire. Pasaca agreed to contribute $ 80.0 million to Claire over a five-year period in exchange for an 80.8 % ownership interest in Claire. The Company accounts for its 19.2 % interest in Claire using the equity method of accounting. The Company recorded its ownership percentage of losses of Claire in other income, net in the amount of $ 0.8 million and $ 1.8 million for the three and six months ended June 30, 2023, respectively. The Company’s equity method investment in joint venture was reduced to zero during the prior year, based on the prior year losses, and remained at zero on the accompanying condensed consolidated balance sheet as of June 30, 2024. Refer to Note 18 – Related Parties for additional information. Note 17. Variable Interest Entities The Company prepares its condensed consolidated financial statements in accordance with ASC 810, “Consolidation”, which provides for the consolidation of variable interest entities (“VIEs”) of which the Company is the primary beneficiary. In February 2022, the Company acquired WildHealth as well as certain variable interests that WildHealth has in four Professional Corporations (“PCs”). The PCs are owned by a medical practitioner in accordance with certain state laws which restrict the corporate practice of medicine and require medical practitioners to own such entities. WildHealth provides management and other services to the PCs in exchange for a management fee and provides financial support to the PCs through a revolving credit arrangement. WildHealth also has separate agreements with the equity holder of the PCs where it may acquire and assign such equity interests for certain PCs. The agreement entitles WildHealth to control rights sufficient to require the Company to consolidate the balance sheet and results of operations of the PCs as VIEs. The Company determined that the PCs were VIEs as WildHealth was the primary beneficiary of the PCs. The assets, liabilities, revenues, and operating results of the VIEs after elimination of intercompany transactions were not material as of and for the three and six months ended June 30, 2024. In the second quarter of 2024, the Company entered into an agreement for and completed the sale of 100 % equity in WildHealth. As a result, as of June 30, 2024, the PCs related to WildHealth are no longer considered VIEs of the Company. Refer to Note 19 - Divestitures for additional information. 36 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 18. Related Parties Related parties are defined as entities related to the Company’s directors or main sha reholders as well as equity method affiliates. During the year ended December 31, 2023, the Company provided services to Claire, an equity method affiliate (refer to Note 16 – Equity Method Investment for additional information on the equity method affiliate) in exchange for fees through certain commercial arrangements. These arrangements facilitated Claire’s build out and operations. In connection with the JV Agreement, the Company entered into commercial agreements with Claire, under which the Company agreed to provide custom software development and managed services in exchange for fees governed by the terms and conditions set forth therein. In accordance with guidance under ASC 606, Claire was considered a customer of the Company. No revenues were recognized for the services provided to Claire included in the Company’s condensed consolidated statements of operations for the three and six months ended June 30, 2024, compared to revenues of zero and $ 3.8 million for the three and six months ended June 30, 2023. Note 19. Divestitures Fiscal 2024 Divestitures In the first quarter of 2024, the Company announced its intent to sell or dispose of WildHealth. As of March 31, 2024, the goodwill and intangible assets associated with the WildHealth reporting unit were fully impaired. See Note 5 – Goodwill and Intangible Assets, Net for additional details. In the second quarter of 2024, the Company entered into an agreement for and completed the sale of 100 % equity in WildHealth with a third party. Pursuant to ASC Subtopic 205-20, Presentation of Financial Statements - Discontinued Operations , the divestiture did not meet the criteria for presentation as a discontinued operation. WildHealth was part of the Business segment and was a separate reporting unit. The transaction resulted in a loss of $ 0.6 million which was recognized and presented separately in Loss (gain) on divestiture on the Company’s condensed consolidated statements of operations for the three months ended June 30, 2024. Subsequent to the closing, the Company does not have ongoing involvement or arrangements with WildHealth. Fiscal 2023 Divestitures In the fourth quarter of 2022, the Company entered into a non-binding Letter of Intent to divest Kasamba, Inc. and Kasamba LTD (together “Kasamba”), which represented the Company’s Consumer segment. Pursuant to ASC Subtopic 360-10, Impairment or Disposal of Long-Lived Assets , t he Company applied held for sale accounting treatment to the assets and liabilities of Kasamba. Accordingly, the related net assets were separately presented in current assets and current liabilities as held for sale on the consolidated balance sheets as of December 31, 2022, up until the close of the transaction . The held for sale classification also resulted in ceasing depreciation and amortization on the designated assets. The Share Purchase Agreement between Ingenio, LLC (“Ingenio”) and the Company closed on March 20, 2023. In accordance with the Share Purchase Agreement, the Company sold all of the issued and outstanding shares of Kasamba for $ 16.9 million which was received in cash upon closing; and $ 2.6 million deferred payment to be received within a year of the close transaction date, which was included in Prepaid expenses and other current assets on the Company’s condensed consolidated balance sheets as of March 31, 2023. $ 11.8 million was required to be held in various escrow accounts for up to 15 months, and was included in restricted cash on the Company’s consolidated balance sheets; however, $ 9.8 million of this escrow amount was released as of December 31, 2023 . In June 2024, restricted cash of $ 2.0 million was released and is accounted for as Cash and cash equivalents on the condensed consolidated balance sheet as of June 30, 2024. The transaction resulted in a gain of $ 17.6 million, which was recognized and presented separately as a gain on divestiture on the Company’s consolidated statements of operations during the year ended December 31, 2023. During the six months ended June 30, 2024 , the Company recognize d $ 1.8 million of post-closing adjustments pertaining to the final agreement amount which is recorded in General and administrative expenses in the condensed consolidated statement of operations. 37 Item 2. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in “Risk Factors.” Key Metrics Average Annual Revenue Per Enterprise and Mid-market Customer (“ARPC”) and revenue retention are currently the key performance metrics our management uses to assess the health and trajectory of the Company. These metrics should be viewed independently of revenue, deferred revenue and remaining performance obligations. ARPC increased to approximately $630,000 for the trailing twelve months ended June 30, 2024, as compared to approximately $575,000 for the trailing twelve months ended June 30, 2023. Revenue retention for our enterprise and mid-market customers on the Conversational Cloud, which represents the trailing twelve month change in total revenue from existing customers after upsells, downsells and attrition, was approximately 83% in the second quarter of 2024, below our target range of 105% to 115% and below the comparable period in 2023. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). As such, we are required to make certain estimates, judgments and assumptions that management believes are reasonable based upon the information available. We base these estimates on our historical experience, future expectations and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments that may not be readily apparent from other sources. There have been no significant changes in our critical accounting policies and estimates during the three and six months ended June 30, 2024, as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 4, 2024 (as amended on April 29, 2024) . Recently Issued Accounting Standards See Note 1 – Description of Business and Basis of Presentation under Item 1 of this Quarterly Report on Form 10-Q for additional information about recent accounting guidance not yet adopted and recently adopted accounting pronouncements. 38 Results of Operations We enable brands to leverage the Conversational Cloud’s sophisticated intelligence engine to connect with consumers through an integrated suite of mobile and online business messaging technologies. The Conversational Cloud enables businesses to have conversations with millions of consumers as personally as they would with one consumer. Comparison of the Three and Six Months Ended June 30, 2024 and June 30, 2023 The following tables set forth our results of operations for the periods presented and as a percentage of our revenues for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results. Revenue Three Months Ended June 30, Six Months Ended June 30, 2024 2023 % Change 2024 2023 % Change (Dollars in thousands) (Dollars in thousands) Revenue $ 79,875 $ 97,522 (18) % $ 165,024 $ 205,183 (20) % Revenue decrease d by 18% to $79.9 million and by 20% to $165.0 million for the three and six months ended June 30, 2024, respectively, from $97.5 million and $205.2 million for the comparable period in 2023 . This decrease in revenue is driven primarily by decreases in hosted services of $14.0 million and $29.8 million, primarily driven by customer cancellations and downsells, and decreases in professional services of $3.7 million and $10.3 million, for the three and six months ended June 30, 2024, respectively. Included in hosted services is a decrease in revenue that is variable based on interactions and usage of approximately $3.7 million and $8.2 million for the three and six months ended June 30, 2024, respectively . Further, on March 20, 2023, the Company completed the sale of Kasamba and therefore ceased recognizing revenue related to Kasamba effective on the transaction close date. This sale eliminated the entire Consumer segment, as a result of which revenue is presented within a single consolidated segment. Hosted services for Consumer included $7.2 million for the six months ended June 30, 2023, relating to Kasamba. Cost of Revenue Cost of revenue consists of compensation costs relating to employees who provide customer service to our customers, compensation costs relating to our network support staff, outside labor provider costs, the cost of supporting our server and network infrastructure, and allocated occupancy costs and related overhead. Three Months Ended June 30, Six Months Ended June 30, 2024 2023 % Change 2024 2023 % Change (Dollars in thousands) (Dollars in thousands) Cost of revenue $ 21,212 $ 30,888 (31) % $ 50,675 $ 73,984 (32) % Percentage of total revenue 27 % 32 % 31 % 36 % Headcount (at period end) 202 215 (6) % 202 215 (6) % Cost of revenue decreased by 31% to $21.2 million for the three months ended June 30, 2024, from $30.9 million for the comparable period in 2023. This decrease in expense is primarily attributable to a decrease in outsourced labor and related costs of approximately $5.6 million, a decrease in salary and employee-related expenses of $2.1 million, a decrease in software, hosting and other expenses of approximately $1.5 million, and a decrease in amortization expenses of $1.6 million related to purchased intangible assets associated with prior period acquisitions and finance leases settled during the three months ended June 30, 2024. These decreases were partially offset by an increase in stock compensation expense of $1.5 million. Cost of revenue decreased by 32% to $50.7 million for the six months ended June 30, 2024, from $74.0 million for the comparable period in 2023. This decrease in expense is primarily attributable to a decrease in outsourced labor and related costs of approximately $12.2 million, a decrease in salary and employee-related expenses due to attrition from the prior period of approximately $6.1 million, a decrease in software, hosting and other expenses of $1.0 million, and a decrease in amortization 39 expenses of approximately $2.8 million related to purchased intangible assets associated with prior period acquisitions and finance leases settled during the six months ended June 30, 2024. Sales and Marketing Sales and marketing expenses consist of compensation and related expenses for sales and marketing personnel, as well as advertising, marketing events, public relations, trade show exhibit expenses and allocated occupancy costs and related overhead. Three Months Ended June 30, Six Months Ended June 30, 2024 2023 % Change 2024 2023 % Change (Dollars in thousands) (Dollars in thousands) Sales and marketing $ 26,473 $ 26,724 (1) % $ 56,603 $ 61,194 (8) % Percentage of total revenue 33 % 27 % 34 % 30 % Headcount (at period end) 250 375 (33) % 250 375 (33) % Sales and marketing expenses decreased by 1% to $26.5 million for the three months ended June 30, 2024 from $26.7 million for the comparable period in 2023. This decrease was primarily attribu table to a decrease in salary and employee-related expenses of approximately $1.8 million and a decrease in software and hosting expenses of approximately $0.6 million, partially offset by an increase in business services and outsourced subcontracted labor of approximately $1.4 million and marketing expense of approximately $0.7 million. Sales and marketing expenses decreased by 8% to $56.6 million for the six months ended June 30, 2024 from $61.2 million for the comparable period in 2023. This decrease was primarily attribu table to a decrease in marketing expense of approximately $3.5 million, a decrease in salary and employee-related expenses of approximately $2.5 million, and a decrease in software and hosting expenses of approximately $1.2 million, partially offset by an increase in business services and outsourced subcontracted labor of approximately $2.5 million. General and Administrative Our general and administrative expenses consist of compensation and related expenses for executive, accounting, legal, human resources and administrative personnel, professional fees and other general corporate expenses. Three Months Ended June 30, Six Months Ended June 30, 2024 2023 % Change 2024 2023 % Change (Dollars in thousands) (Dollars in thousands) General and administrative $ 24,448 $ 8,170 199 % $ 46,200 $ 39,617 17 % Percentage of total revenue 31 % 8 % 28 % 19 % Headcount (at period end) 138 144 (4) % 138 144 (4) % General and administrative expenses increased by 199% to $24.4 million for the three months ended June 30, 2024 from $8.2 million for the comparable p eriod in 2023. This movement is primarily attributable to an increase of approximately $16.2 million in compensation expense due to the favorable settlements of acquisition-related earnouts in the three months ended June 30, 2023, which did not reoccur in the three months ended June 30, 2024, and an increase in other expenses of $3.6 million, primarily related to bad debt expense. The increases are partially offset by a decrease in salary and employee-related expenses of approximately $1.3 million from restructuring activities, a decrease in business services and outsourced subcontracted labor of approximately $1.5 million, and a decrease in facilities and software expense of $0.5 million. General and administrative expenses increased by 17% to $46.2 million for the six months ended June 30, 2024 from $39.6 million for the comparable p eriod in 2023. This movement is primarily attributable to an increase of approximately $15.4 million in compensation expense due to the favorable settlements of acquisition-related earnouts in the six months ended June 30, 2023, which did not reoccur in the six months ended June 30, 2024. The increase was partially offset by a decrease in business services and outsourced subcontracted labor of approximately $4.8 million and a decrease in salary and employee-related expenses of approximately $3.0 million from restructuring activities. 40 Product Development Our product development expenses consist of compensation and related expenses for product development personnel as well as allocated occupancy costs and related overhead and outsourced labor and expenses for testing new versions of our software. Three Months Ended June 30, Six Months Ended June 30, 2024 2023 % Change 2024 2023 % Change (Dollars in thousands) (Dollars in thousands) Product development $ 24,843 $ 22,839 9 % $ 54,963 $ 59,358 (7) % Percentage of total revenue 31 % 23 % 33 % 29 % Headcount (at period end) 424 453 (6) % 424 453 (6) % Product development costs increased by 9% to $24.8 million for the three months ended June 30, 2024 from $22.8 million for the comparable period in 2023 . This increase is primarily related to an increase of approximately $6.8 million in compensation expense due to the favorable settlements of acquisition-related earnouts in the three months ended June 30, 2023, which did not reoccur in the three months ended June 30, 2024, and an increase in other expense of $1.0 million. These increases were partially offset by a decrease in salaries and employee-related expenses of approximately $2.1 million, a decrease in business services and outsourcing subcontracted labor of approximately $2.0 million, and a decrease in depreciation of approximately $1.5 million. Product development costs decreased by 7% to $55.0 million for the six months ended June 30, 2024 from $59.4 million for the comparable period in 2023 . This decrease is primarily related to a decrease in salaries and employee-related expenses of approximately $5.7 million, a decrease in business services and outsourcing subcontracted labor of approximately $4.6 million, and a decrease in software expense of approximately $1.0 million. These decreases were partially offset by an increase of approximately $5.5 million in compensation expense due to the favorable settlements of acquisition-related earnouts in the six months ended June 30, 2023, which did not reoccur in the six months ended June 30, 2024, and an increase in other expense of $1.7 million. We continue to invest in new product development efforts to expand the capability of the Conversational Cloud. Upon completion, the project costs will be depreciated over five years. For the three and six months ended June 30, 2024, $4.8 million and $10.5 million was capitalized for software development costs, respectively, compared to $6.5 million and $14.6 million, respectively, for the comparable periods in 2023. Restructuring Costs Restructuring costs consist of reprioritizing and reallocating resources to focus on areas believed to show high growth potential. Three Months Ended June 30, Six Months Ended June 30, 2024 2023 % Change 2024 2023 % Change (Dollars in thousands) (Dollars in thousands) Restructuring costs $ 3,119 $ 2,387 31 % $ 6,428 $ 13,902 (54) % Percentage of total revenue 4 % 2 % 4 % 7 % We began a restructuring initiative to realign our cost structure to better reflect significant product and business model innovation and have had changes since then due to acquisitions and various other factors outside our control. In the first quarter of 2023, due to the changing technology landscape related to the evolution of LLMs, we identified opportunities for significant cost savings because the latest generation of LLMs is able to build a bot in minutes, enabling reduction of headcount previously devoted to bot-building. Additionally, we have moved to a product-led growth structure where we flattened the organization to align to more efficient sales and service support ratios. Refer to Note 13 – Restructuring for additional information about the restructuring initiative. Restructuring costs increased by 31% to $3.1 million during the three months ended June 30, 2024 from $2.4 million for the comparable period in 2023. Severance and other related compensation costs increased by $2.0 million, partially offset by 41 a favorable adjustment of $1.3 million in IT infrastructure contract termination costs for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Restructuring costs decreased by 54% to $6.4 million during the six months ended June 30, 2024 from $13.9 million for the comparable period in 2023. Severance and other related compensation costs decreased by $6.9 million and IT infrastructure contract termination costs decreased by $0.6 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. Impairment of Goodwill Three Months Ended June 30, Six Months Ended June 30, 2024 2023 % Change 2024 2023 % Change (Dollars in thousands) (Dollars in thousands) Impairment of goodwill $ — $ — —% $ 3,627 $ — 100% Percentage of total revenue — % — % 2 % — % Goodwill impairment was approximately $3.6 million during the six months ended June 30, 2024. This non-cash charge was a result of our impairment test in the first quarter of 2024, attributable to the goodwill associated with our WildHealth reporting unit. There were no impairment charges during the three months ended June 30, 2024 and during the three and six months ended June 30, 2023. Impairment of Intangibles and Other Assets Three Months Ended June 30, Six Months Ended June 30, 2024 2023 % Change 2024 2023 % Change (Dollars in thousands) (Dollars in thousands) Impairment of intangibles and other assets $ 8,347 $ — 100 % $ 10,568 $ — 100 % Percentage of total revenue 10 % — % 6 % — % Impairment of intangibles and other assets was approximately $8.3 million and $10.6 million during the three and six months ended June 30, 2024, respectively. Impairment of intangibles and other assets represents a non-cash charge related to the impairment of internal use software projects for the three months ended June 30, 2024. Impairment of intangibles and other assets for the six months ended June 30, 2024 also includes a non-cash charge of approximately $2.2 million as a result of our impairment test in the first quarter of 2024, attributable to the intangible assets associated with our WildHealth reporting unit. There were no impairments of intangible assets during the three and six months ended June 30, 2023. 42 Total other income, net Total other income, net consists primarily of gain on debt extinguishment, fair value adjustments for earn-outs, foreign currency gains and losses and income (loss) from our equity method investment. Interest (expense) income, net includes interest income from cash deposits, amortization of debt issuance costs and debt discount, and interest expense from our convertible senior notes. Three Months Ended June 30, Six Months Ended June 30, 2024 2023 % Change 2024 2023 % Change (Dollars in thousands) (Dollars in thousands) Interest (expense) income, net $ (837) $ 136 (715) % $ 495 $ 1,937 (74) % Gain on debt extinguishment 73,083 1,151 6,250 % 73,083 7,200 915 % Other income, net 606 3,742 (84) % 369 12,355 (97) % Total other income, net $ 72,852 $ 5,029 1,349 % $ 73,947 $ 21,492 244 % Total other income, net increased by 1,349% to $72.9 million for the three months ended June 30, 2024 from $5.0 million for the comparable period in 2023. The increase is primarily attributable to a gain of $73.1 million on the extinguishment of the 2026 Notes. See Note 8 – Convertible Senior Notes, Net of Current Portion, Capped Call Transactions, and Warrants for additional information. Total other income, net increased by 244% to $73.9 million for the six months ended June 30, 2024 from $21.5 million for the comparable period in 2023. The increase is primarily attributable to a gain of $73.1 million on the extinguishment of the 2026 Notes. During the six months ended June 30, 2023, other income, net, included a gain of $10.0 million related to a legal settlement, a gain of $7.2 million resulting from the repurchase of 2024 Notes and a gain of $2.7 million related to the fair value adjustment for earn-outs. Provision for (benefit from) income taxes Three Months Ended June 30, Six Months Ended June 30, 2024 2023 % Change 2024 2023 % Change (Dollars in thousands) (Dollars in thousands) Provision for (benefit from) income taxes $ 1,258 $ (155) 912 % $ 1,620 $ 1,059 53 % Provision for income taxes w as $1.3 million and $1.6 million for the three and six months ended June 30, 2024, respectively. Our consolidated effective tax rate during the three months ended June 30, 2024 was impacted by the statutory income tax rates applicable to each of the jurisdictions in which we operate, valuation allowance recorded against losses generated in the U.S., e-bot7 Germany, and Bulgaria, and changes to unrecognized tax benefits in Israel. The increase in the tax provision in the current period as compared to the prior period is due to changes in the forecasted earnings by jurisdiction year over year, the effects of U.S. state taxes as a result of net operation loss utilization limitations, and offsetting activities related to the prior period tax benefit including the change in Israeli tax rate, the return-to-provision adjustments from foreign tax return filings, and the changes in valuation allowance connected to the sale of Kasamba during the prior period. 43 Liquidity and Capital Resources Six Months Ended June 30, 2024 2023 (In thousands) Condensed Consolidated Statements of Cash Flows Data: Net cash used in operating activities $ (16,832) $ (30,549) Net cash used in investing activities (17,716) (5,635) Net cash used in financing activities $ (31,797) $ (150,372) As of June 30, 2024, we had approximatel y $146.0 million in cash and cash equivalents, a decrease of approximately $67.0 million from the cash and cash equivalents and restricted cash balance as of December 31, 2023. The decrease is primarily attributable to the Company’s repayment in full at maturity of the outstanding $72.5 million in aggregate principal amount of the 2024 Notes coupled with various other uses of cash for operating purposes. Net cash used by operating activities was $16.8 million for the six months ended June 30, 2024. Our net income of $6.2 million includes the effect of non-cash expenses related to depreciation of $15.9 million, a net expense in stock-based compensation of $13.5 million, amortization of purchased intangible assets and finance leases of $7.9 million, allowance for credit losses of $8.9 million, a goodwill impairment of $3.6 million and intangible and other assets impairment of $10.6 million, offset by gain on debt extinguishment of $73.1 million, in connection with the exchange of our 2026 Notes. This was further driven by a decrease in accrued expenses and other current liabilities of $35.9 million, partially offset by decreases in accounts receivable of $16.2 million and prepaid expenses and other current assets of $8.7 million. Our net loss of $6.6 million for the six months ended June 30, 2023 includes the effect of non-cash expenses related to depreciation of $17.1 million, amortization of purchased intangibles and finance leases of $10.9 million, partially offset by a gain on divestiture of $17.6 million and a net reversal in stock-based compensation of $6.8 million, largely attributable to the settlement of earn-outs related to prior acquisitions . This was further driven by an increase in accounts receivable of $20.5 million, an increase in prepaid expenses and other current assets of $9.1 million, a decrease in other liabilities of $7.8 million, and a decrease in accounts payable of $19.8 million, partially offset by an increase in accrued expenses and other current liabilities of $16.7 million, a decrease in contract acquisition costs of $3.5 million, and an increase in deferred revenue of $15.7 million. Net cash used in investing activities was $17.7 million for the six months ended June 30, 2024 , and was primarily driven by purchases of property and equipment and capitalization of internally developed software. Net cash used in investing activities was $5.6 million for the six months ended June 30, 2023 and was primarily driven by purchases of fixed assets and capitalization of internally developed software, partially offset by the proceeds from the sale of Kasamba. Net cash used in financing activities was $31.8 million for the six months ended June 30, 2024, which was driven primarily by the full repayment of our 2024 Notes, repurchase of 2026 Notes for $4.9 million and payments of debt issuance costs of $4.2 million in connection with the debt exchange transaction, partially offset by proceeds from the issuance of 2029 Notes. Net cash used in financing activities was $150.4 million for the six months ended June 30, 2023 , which was driven primarily by the repurchase of our 2024 convertible notes. We have incurred significant expenses to develop our technology and services, to hire employees in our customer service and sales and marketing departments, and for the amortization of purchased intangible assets, as well as non-cash compensation costs. Historically, we have incurred net losses and negative cash flows for various quarterly and annual periods since our inception, including during numerous quarters and annual periods in the past several years. As of June 30, 2024 , we had an accumulated deficit of approximately $850.8 million. Our principal sources of liquidity are the net proceeds from the issuance of our convertible senior notes, after deducting purchaser discounts as applicable and debt issuance costs paid by us, and payments received from customers using our products. We anticipate that our current cash and cash equivalents will be sufficient to satisfy our working capital and capital requirements for at least the next 12 months. However, we cannot assure you that we will not require additional funds prior to such time, and we would then seek to sell additional equity or debt securities through public financings, or seek alternative 44 sources of financi ng. Further, we continue to plan to refinance the remaining balance of our 2026 Notes on or prior to their maturity. W e cannot assure you that additional funding will be available on favorable terms, when needed, if at all. If we are unable to obtain any necessary financing, we may be required to further reduce the scope of our planned sales and marketing and product development efforts, which could materially adversely affect our financial condition and operating results. In addition, we may require additional funds in order to fund more rapid expansion, to develop new or enhanced services or products or to invest in or acquire complementary businesses, technologies, services or products. The indenture governing the 2029 Notes includes a financial covenant that requires the Company to maintain a minimum cash balance of $60 million at all times. Proceeds of the 2029 Notes may be used only to (i) pay interest, or cash settle, the 2029 Notes, (ii) cash settle the Warrants, (iii) exchange, repurchase, redeem, replace or otherwise refinance 2026 Notes (or refund or replenish cash of the company or any of its subsidiaries used to do so after May 13, 2024) or (iv) pay or reimburse certain fees, costs and expenses related to the foregoing and the other transactions contemplated by the Exchange and Purchase Agreement as amended or otherwise modified from time to time. Upon conversion or exercise, the 2029 Notes and Cash-Settled Warrants would be settled for cash. In addition, the 2026 Notes and the 2029 Notes are subject to repurchase at the option of holders if the Company undergoes a “fundamental change”, and the 2026 Notes and the 2029 Notes are subject to events of default customary for notes issued in connection with similar transactions, which could result in the acceleration of amounts owed. See Note 8 – Convertible Senior Notes, Net of Current Portion, Capped Call Transactions, and Warrants for additional information. The Company may from time to time, subject to board authorization and any applicable restrictions under contracts to which it may be or become a party, depending upon market conditions and the Company’s financing needs, use available funds to refinance or repurchase its outstanding debt or equity securities in privately negotiated or open market transactions, by tender offer or otherwise, in compliance with applicable laws, rules and regulations, at prices and on terms the Company deems appropriate (which, in the case of debt securities, may be below par) and subject to the Company’s cash requirements for other purposes and other factors management deems relevant. We do not engage in off-balance sheet financing arrangements.