What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-08 compared with 2023-03-06 · 145 added, 257 removed, 321 unchanged (56% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in Part II, Item 8 of this Annual Report.

In addition to historical data, the following discussion contains forward-looking statements that involve risks and uncertainties.

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The following discussion provides a narrative of our financial condition and results of operations for the fiscal year ended December 31, 2023 compared to the fiscal year ended December 31, 2022 .

A discussion regarding our financial condition and results of operations for the fiscal year ended December 31, 2021 compared to the fiscal year ended December 31, 2020, other than the comparison of service revenue by delivery geography, can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 9, 2022, which is incorporated herein by reference.

India, which was previously included in Rest of World, is now reported separately within revenue disaggregation by geographical location.

As a result, t he comparison of service revenue by delivery geography for the years ended December 31, 2021 and 2020 has been recast, and included in this Annual Report, for comparability.

We are a provider of outsourced digital services and next-generation customer experience to the world’s most innovative companies, helping our clients represent, protect and grow their respective brands.

A discussion regarding our financial condition and results of operations for the fiscal year ended December 31, 2022 compared to the fiscal year ended December 31, 2021 can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 6, 2023, which is incorporated herein by reference.

We are a provider of outsourced digital services and next-generation customer experience to the world’s most innovative companies, helping our clients represent, protect and grow their brands.

We serve our clients to support their end customers’ urgent needs, navigate an increasingly-complex compliance landscape, handle sensitive tasks, including online content moderation and enable artificial intelligence technology and automation.

As of December 31, 2022, we served over 150 clients spanning established and emerging industry segments, including e-commerce, FinTech, food delivery and ride sharing, gaming, Technology, HealthTech, social media and streaming media.

Our global, omni-channel delivery model is focused on providing our clients three key services – Digital Customer Experience (“Digital CX”), Trust and Safety (formerly known as Content Security) and Artificial Intelligence (“AI”) Services (formerly known as AI Operations).

As of December 31, 2023, we served nearly 200 clients spanning established and emerging industry segments, including e-commerce, FinTech, food delivery and ride sharing, gaming, Technology, HealthTech, social media and streaming media.

Our global, omni-channel delivery model is focused on providing our clients three key services – Digital Customer Experience (“Digital CX”), Trust and Safety and Artificial Intelligence (“AI”) Ser vices.

88% of our revenue for the year ended December 31, 2023 was delivered from non-voice, digital channels or omni-channel services which allow us to utilize resources efficiently, thereby driving higher profitability.

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We believe our ability to deliver “ridiculously good” outsourcing will enable us to continue to grow our client base.

We use our strong reputation and expertise serving the digital economy to attract new innovators and enterprise-class brands looking to transform.

At TaskUs, culture is at the heart of everything we do.

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Business Highlights

We continued to grow revenue, despite challenging macroeconomic developments during 2022.

As certain of our clients elected to shift work from the United States to the Philippines, India and Rest of World in 2022, we focused on working with clients to deliver service out of their optimal geography, which allows us to serve them better in the long-term, and cost management.

We won 40 new clients in 2022, achieving a 43% new client win rate, and 63 current clients signed new statements of work with us.

During 2023, we continued to support our current clients, and win new clients, as they navigated prolonged macroeconomic challenges.

We expanded our client portfolio, winning 47 new clients in 2023, achieving a 35% new client win rate, and expanded work with our current clients, with 58 current clients signing new statements of work.

We continued our focus on cost optimization allowing us to maintain margins and cash generation.

We also launched and began implementing TaskGPT, a next generation customer support technology, into our workflows internally and to support our clients.

Recent Financial Highlights

For the year ended December 31, 2022, we recorded service revenue of $960.5 million, a 26.3% increase from $760.7 million for the year ended December 31, 2021.

For the year ended December 31, 2022, we recorded net income of $40.4 million compared to a net loss of $58.7 million for the year ended December 31, 2021.

This increase included expenses related to the one-time phantom shares bonuses and non-recurring teammate bonuses associated with the initial public offering ("IPO") of $133.7 million and the impact of our continued revenue growth, partially offset by higher non-cash stock-based compensation expense which we began recognizing upon the IPO, the impact of foreign currency exchange rate forward contracts, depreciation and rising interest rates.

Adjusted Net Income for the year ended December 31, 2022 increased 10.4% to $142.8 million from $129.4 million for the year ended

December 31, 2021.

Adjusted EBITDA for the year ended December 31, 2022 increased 18.8% to $223.2 million from $187.9 million for the year ended December 31, 2021.

The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

For the year ended December 31, 2023, we recorded service revenue of $924.4 million, a 3.8% decrease from $960.5 million for the year ended December 31, 2022.

For the year ended December 31, 2023, we recorded net income of $45.7 million an increase from $40.4 million for the year ended December 31, 2022, due primarily to lower stock-based compensation expense, cost optimization and the benefit from foreign currency exchange rate changes and forward contracts, partially offset by rising interest rates and higher income taxes.

Adjusted Net Income for the year ended December 31, 2023 decreased 11.4% to $126.5 million from $142.8 million for the year ended December 31, 2022.

Adjusted EBITDA for the year ended December 31, 2023 decreased 1.1% to $220.8 million from $223.2 million for the year ended December 31, 2022.

For definitions and reconciliations to net income, the most directly comparable measure in accordance with GAAP, see " — Non-GAAP Financial Measures below."

Our operating results in any period are not necessarily indicative of the results that may be expected for any future period.

2023 Developments

Acquisition of heloo

On April 15, 2022, we acquired all of the equity interests of Parsec d.o.o.

and Q Experience d.o.o.

(collectively, "heloo"), a Croatia-based Digital Customer Experience solutions provider to European technology companies supporting 20 languages across seven additional Eastern European countries, including Bosnia, Serbia, and Slovenia.

The results of operations of heloo subsequent to the April 15, 2022 acquisition date are included in the accompanying consolidated financial statements.

See Note 3, "Business Combination" in the Notes to Consolidated Financial Statements included in this Annual Report.

Macroeconomic Trends

Macroeconomic factors, including global economic and geopolitical developments, increased inflation rates, interest rate increases, and foreign currency exchange rate changes, have direct and indirect impacts on our results of operations that are difficult to isolate and quantify.

Due to market uncertainty and potential recession or other economic challenges, many of our customers are shifting their focus from growth to cost reduction resulting in certain customers electing to shift work from our onshore locations to our offshore delivery centers or reduce vendor spend across the board.

This trend has been accelerated by our clients in the cryptocurrency and equity trading spaces.

Macroeconomic factors, including global economic and geopolitical developments, increased inflation rates, interest rate changes, and foreign currency exchange rate changes, have direct and indirect impacts on our results of operations that are difficult to isolate and quantify.

Due to market uncertainty and potential recession or other economic challenges, many of our customers have increased their focus on cost reduction resulting in certain customers electing to shift work from our onshore locations to our offshore delivery locations, partnering with service providers to find cost-efficient arrangements, or reducing vendor spend across the board.

These factors contributed to a deceleration in our revenue growth rate and an increase in our operating costs.

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however, we believe that the increased cost focus also creates meaningful opportunities with both new and existing clients.

War in Ukraine

The Russian invasion of Ukraine and resulting sanctions and other measures imposed in response thereto have increased the level of economic and political uncertainty in Eastern Europe and worldwide.

We do not have employees, facilities or operations in either Russia or Ukraine;

however, the continuation of the conflict or its potential expansion into surrounding geographic areas, could directly impact us, our clients, vendors or subcontractors, which could impact our operations and financial performance.

We continue to monitor the situation closely to ensure business continuity plans are in place for neighboring countries where we have a presence.

Generative AI

Generative AI, including Large Language Models (“LLMs”), has developed significantly in recent years and has demonstrated further advancement in 2023.

We believe this technology has the potential to impact most industries, including business process outsourcing, further automating simple, repeatable tasks, and even streamlining some more sophisticated workflows.

Certain of our clients have begun experimenting with this technology.

As this technology develops, demand for certain service offerings could decrease, further reducing our clients' spend, which could have a negative impact on our revenue.

We also believe that this technology will provide us with new opportunities and workflows.

We have historically differentiated our value proposition with a frontline first culture, which aligns with and allows us to be an extension of our clients’ brands, as well as our focus on driving efficiency, seeking opportunities to eliminate simple, routine work so our teammates can deliver higher value services.

We have been using generative AI for nearly two years and believe the future of this technology is one of augmentation rather than automation, enabling our talented teammates to leverage these tools and continue to meaningfully improve client outcomes and operational efficiencies.

During the year ended December 31, 2023 , we launched TaskGPT, a next generation customer support technology, enabling rapid expansion and enhancements to our customer service capabilities by leveraging AI technology.

New technology also produces demand for novel services.

We have demonstrated an ability to quickly discover and launch services in new markets and believe we are well positioned to discover these needs and deliver them for our innovative clients.

We believe that there is an opportunity to integrate generative AI throughout our offerings, including:

• AI Services:

TaskUs provides annotation and evaluation support services to help train algorithms, improving the models’ performance and aligning them with human values.

We built a Prompt Engineering team that creates and refines prompts for AI systems.

• Trust and Safety:

We expect to see increased demand for Trust and Safety services in a world of infinite content creation and deepfake technology.

We also work with generative AI companies to ensure the safety and soundness of their AI (e.g., ensuring responses of LLMs do not violate company policies).

• Digital Customer Experience:

We believe that there may be a decrease in volumes of certain workflows;

however, there may also be revenue opportunities for systems integrators and service providers to build, integrate and deploy this technology.

We have launched a consultative model that helps leading enterprises innovate by building new capabilities powered by generative AI across a spectrum of tasks, from automating the routine to assisting in creative work.

TaskUs consults with companies to drive customer engagement, improve customer service and enhance operations through the use of technology.

Trends and Factors Affecting our Performance

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We won 47 new clients in 2023, and we achieved a 35% new client win rate for every dollar of new client opportunities we pursued.

As of December 31, 2022 , we served over 150 of the world’s leading technology companies.

In addition, over 99% of our revenues in 2022 were from recurring revenue contracts.

As of December 31, 2023 , we served nearly 200 of the world’s leading technology companies.

As our clients grow in size and the complexity of their outsourcing needs increases, we believe we have an opportunity to increase the addressable spend available to TaskUs through enhanced penetration of current services as well as cross-selling new services.

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Expanded service offerings

We closely watch trends in the start-up and private equity space, working with founders and investors to develop custom service offerings.

We also work closely with current and potential clients to develop offerings that we believe align with our core competencies and present an attractive market opportunity.

This approach has earned us the opportunity to support some of the most innovative companies in history (often before anyone else) and has enabled significant expansion opportunities with large global enterprises.

For example, we leveraged our knowledge of talent management and onboarding to launch our Learning Experience solution to support the onboarding and training of our clients’ employees and we significantly expanded our AI Services capabilities to respond to the needs of our largest clients.

We closely watch trends and work closely with current and potential clients to develop offerings that we believe align with our core competencies and present an attractive market opportunity.

This approach has earned us the opportunity to support some of the most innovative companies and has enabled significant expansion opportunities with large global enterprises.

We leveraged our knowledge working with Generative AI to quickly implement TaskGPT throughout our offerings, augmenting the support our talented teammates provide to meaningfully improve client outcomes and operational efficiencies.

We combine our expertise and service offerings to support the Generative AI ecosystem through three pillars (1) Build - supporting clients across industries with the creation and tuning of AI algorithms through our AI Services expertise 2) Protect - training AI models to align them with human values and protect marketplaces against adverse effects of generative AI outputs with our Trust and Safety services 3) Grow - deploying generative AI solutions in our DCX services to improve customer experiences and help our clients operate more efficiently to grow their business.

Expanding geographically

We expanded our presence from 23 sites in ten countries as of December 31, 2021 to 27 sites in 13 countries as of December 31, 2022 .

During 2022, we nearly doubled our Headcount in the Rest of World from approximately 2,200 employees as of December 31, 2021 to approximately 4,100 as of December 31, 2022.

We have seen strong growth in Colombia, Greece and Malaysia, as well as Croatia and Serbia associated with our acquisition of heloo.

We expanded our presence from 27 sites in 13 countries as of December 31, 2022 to 28 sites in 12 countries as of December 31, 2023.

During 2023, we significantly increased our Headcount outside of the U.S., the Philippines and India (the “Rest of World”) from approximately 4,100 employees as of December 31, 2022 to approximately 6,000 as of December 31, 2023, with particularly strong growth in Colombia and Mexico.

We plan to continue expanding our geographic footprint to drive growth with both existing and new clients, which may result in one-time costs that may impact profitability.

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Cost management and financial flexibility

During 2022, we enhanced our focus on cost management and financial flexibility.

We conducted a comprehensive review of our cost structure in order to drive efficiencies across functions.

We generated net cash flow from operating activities of $147.1 million and Free Cash Flow of $103.3 million, respectively, and refinanced our credit facility which increased our borrowing capacity on our revolving credit facility to $190.0 million.

While we incurred certain one-time costs during the year, including severance in some cases, we believe these actions will have long-term benefits to the goal of enabling our future growth and profitability.

During the year ended December 31, 2023 , we continued to focus on cost management and financial flexibility.

We reviewed our cost structure in order to drive efficiencies across functions.

While we incurred certain costs associated with these changes, including severance in some cases, we believe these actions will have long-term benefits to the goal of enabling our future growth and profitability.

We generated net cash flow from operating activities of $143.7 million and Free Cash Flow of $112.7 million, respectively, both of which include the $18.3 million payment for earn-out consideration.

Hiring and retention of employees

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Principally consists of omni-channel customer care services primarily delivered through digital (non-voice) channels.

Other solutions include customer care services for new product or market launches, trust & safety solutions and customer acquisition solutions.

Other solutions include learning experience and customer care services for new product or market launches and customer acquisition solutions.

• Trust and Safety:

Principally consists of review and disposition of user and advertiser generated visual, text and audio content for purposes which include removal or labeling of policy violating, offensive or misleading content.

We are developing and enforcing client designated Trust and Safety policies in several areas including intellectual property, job and commerce postings, objectionable material, political advertising, dating apps and digital marketplaces and gaming platforms.

Also included in this area are our offerings for risk management, compliance, identity management and fraud.

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Additionally, it includes costs of marketing and promotional events, corporate communications, and other brand-building activities.

General and administrative expenses consist of personnel costs and related expenses for technology, human resources, legal, finance, global shared services, and executives including, professional fees, insurance premiums, cloud-based capabilities and other corporate expenses.

Depreciation is computed on the straight-line basis over the estimated useful life of our property and equipment assets, generally three to five years or, for leasehold improvements, over the term of the lease, whichever is shorter.

General and administrative expenses consist of personnel costs and related expenses for technology, human resources, legal, finance, global shared services, and executives as well as professional fees, insurance premiums, cloud-based capabilities and other corporate expenses.

Depreciation is computed on a straight-line basis over the estimated useful life of our property and equipment assets, generally three to five years or, for leasehold improvements, over the term of the lease, whichever is shorter.

Amortization of Intangible Assets

Amortization of intangible assets relates primarily to our client relationship and trade name intangibles, which are amortized over their useful lives using the straight-line method, which reflects the pattern of benefit, and assumes no residual value.

Other Expense (Income)

Other expense (income) primarily consists of gains and losses resulting from changes in the fair value of the foreign currency exchange rate forward contracts that we are party to.

Our forward contracts are not designated as hedging instruments.

Other Expense (Income), Net

Other expense (income), net primarily consists of gains and losses resulting from changes in the fair value of our foreign currency exchange rate forward contracts which are not designated as hedging instruments.

Other income also includes gains and losses resulting from the remeasurement of U.S.-denominated accounts to foreign currency and interest income.

Financing Expenses

Financing expenses primarily consist of interest expenses related to our term loan and revolving credit facility in addition to commitment fees related to the undrawn delayed draw loan and revolver borrowings.

Financing expenses primarily consist of interest expenses related to our term loan as well as commitment fees related to the undrawn revolving credit facility.

Provision for (Benefit From) Income Taxes

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Comparison of the Years Ended December 31, 2023 and 2022

The following table sets forth our consolidated statement of income information for the years ended December 31, 2022 and 2021:

The following table sets forth certain historical consolidated financial information for the years ended December 31, 2023 and 2022:

Year ended December 31, Period over Period Change

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Amortization of intangible assets 20,346 19,882 464 2.3 %

Loss on disposal of assets 31 52 (21) (40.4) %

Loss on disposal of assets 1,322 31 1,291 NM

Total operating expenses 829,327 876,592 (47,265) (5.4) %

Operating income (loss) 83,897 (54,282) 138,179 NM

Other expense 7,443 177 7,266 NM

Operating income 95,038 83,897 11,141 13.3 %

Other expense (income), net (1,711) 7,443 (9,154) NM

Financing expenses 21,717 11,921 9,796 82.2 %

Income (loss) before income taxes 64,533 (60,963) 125,496 NM

Provision for (benefit from) income taxes 24,111 (2,265) 26,376 NM

Net income (loss) $ 40,422 $ (58,698) $ 99,120 NM

Income before income taxes 75,032 64,533 10,499 16.3 %

Provision for income taxes 29,342 24,111 5,231 21.7 %

Net income $ 45,690 $ 40,422 $ 5,268 13.0 %

not meaningful

Service revenue

Service revenue for the years ended December 31, 2022 and 2021 was $960.5 million and $760.7 million, respectively.

Service revenue for the year ended December 31, 2022 increased by $199.8 million or 26.3% when compared to the year ended December 31, 2021.

Service revenue by service offering

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$ 924,365 $ 960,489 $ (36,124) (3.8) %

The year over year growth in Digital Customer Experience, AI Services and Trust and Safety contributed 19.9%, 5.2% and 1.2%, respectively, of the total increase of 26.3% for the year ended December 31, 2022.

The 31.0% growth in Digital Customer Experience was primarily driven by an increase from existing clients in On Demand Travel + Transportation, FinTech, Entertainment + Gaming and Technology and new clients in On Demand Travel + Transportation, as well as new clients as a result of the acquisition of heloo.

The 37.7% growth in AI Services was driven by an increase from existing clients in Social Media and On Demand Travel + Transportation, partially offset by a decrease from Retail + E-Commerce.

The 5.5% growth in Trust and Safety was primarily driven by an increase from existing clients in Entertainment + Gaming, Retail + E-Commerce and FinTech, partially offset by a decrease from Social Media and On Demand Travel + Transportation.

Digital Customer Experience was primarily driven by a decrease from existing clients in FinTech, Social Media, On Demand Travel + Transportation and HealthTech.

These decreases were partially offset by an increase from existing clients in Technology, as well as new clients in Retail + E-Commerce, HealthTech and On Demand Travel + Transportation.

Trust and Safety was primarily driven by an increase from existing clients in On Demand Travel + Transportation, Technology and Entertainment + Gaming, as well as new clients in FinTech.

These increases were partially offset by a decrease from existing clients in Social Media and FinTech.

AI Services was primarily driven by a decrease from existing clients in Social Media and On Demand Travel + Transportation, partially offset by an increase from existing clients in Entertainment + Gaming.

Service revenue by delivery geography

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$ 924,365 $ 960,489 $ (36,124) (3.8) %

Revenue generated from services provided from our delivery sites in the Philippines grew primarily from expansion in all three of our service offerings, including the impact of certain clients electing to shift work from the United States.

Digital Customer Experience contributed 15.4% of the total increase primarily driven by clients in On Demand Travel + Transportation, FinTech and Entertainment + Gaming.

Trust and Safety contributed 7.4% of the total increase primarily driven by clients in Social Media and Retail + E-Commerce.

AI Services contributed 2.6% of the total increase primarily driven by clients in Social Media as well as HealthTech, partially offset by clients in On Demand Travel + Transportation.

Revenue generated from services provided from our delivery sites in the United States grew primarily from expansion in two of our service offerings.

Digital Customer Experience contributed 9.9% of the total increase primarily driven by clients in Technology, On Demand Travel + Transportation, Entertainment + Gaming and HealthTech, partially offset by clients in FinTech and Social Media.

AI Services contributed 4.3% of the total increase primarily driven by clients in On Demand Travel + Transportation, partially offset by clients in Retail + E-Commerce.

These increases were partially offset by an 11.8% decrease contributed by Trust and Safety primarily driven by clients in Social Media, partially offset by clients in FinTech.

Certain of our clients elected to shift work from the United States to the Philippines and India in 2022.

While we expect to see these shifts slow, we expect to grow faster outside of the United States in 2023 as we work to deliver service out of our clients' optimal geography, which allows us to serve them better in the long-term.

Revenue generated from services provided from our delivery sites in India grew primarily from expansion in all three of our service offering s, including the impact of certain clients electing to shift work from the United States.

Digital Customer Experience contributed 40.2% of the total increase primarily driven by clients in On Demand Travel + Transportation and FinTech.

AI Services contributed 33.1% of the total increase primarily driven by clients in Social Media, as well as HealthTech, On Demand Travel + Transportation and Retail + E-Commerce, partially offset by clients in FinTech.

Trust and Safety contributed 9.1% of the total increase primarily driven by clients in Social Media, partially offset by clients in FinTech.

Revenue generated from services provided from our delivery sites in the Rest of World grew primarily from expansion in two of our service offerings.

Digital Customer Experience contributed 77.0% of the total increase primarily driven by new clients as a result of the acquisition of heloo, clients in Entertainment + Gaming, FinTech and On Demand Travel + Tran sportation.

Trust and Safety contributed 5.2% of the total increase primarily driven by clients in Entertainment + Gaming, partially offset by clients in On Demand Travel + Transportation.

Growth in the Rest of World was led by Europe and Latin America.

Trust and Safety contributed 5.0% of the total increase primarily driven by clients in Social Media, On Demand Travel + Transportation, FinTech and Technology.

Digital Customer Experience reduced 3.2% of the total increase primarily driven by clients in On Demand Travel + Transportation, FinTech, HealthTech and Retail + E-Commerce, partially offset by clients in Technology.

AI Services reduced 0.4% of the total increase primarily driven by clients in Social Media and On Demand Travel + Transportation, partially offset by clients in HealthTech, Retail + E-Commerce, Entertainment + Gaming and Technology.

United States:

The United States was impacted by certain of our clients electing to shift work from the United States to the Philippines and India as well as decreased spending from clients in FinTech, particularly crypto and equity trading clients.

Digital Customer Experience contributed 23.4% of the total decrease primarily driven by clients in FinTech, Social Media and Entertainment + Gaming, partially offset by clients in On Demand Travel + Transportation and Technology.

Trust and Safety contributed 13.1% of the total decrease primarily driven by clients in Social Media and FinTech.

AI Services contributed 4.6% of the total decrease primarily driven by clients in Social Media, On Demand Travel + Transportation and Retail + E-Commerce, partially offset by clients in HealthTech.

Trust and Safety contributed 15.2% of the total increase primarily driven by clients in On Demand Travel + Transportation and Social Media.

AI Services contributed 0.2% of the total increase primarily driven by clients in On Demand Travel + Transportation and Social Media, mostly offset by clients in HealthTech and Retail + E-Commerce.

Digital Customer Experience reduced 2.5% of the total increase primarily driven by clients in On Demand Travel + Transportation, partially offset by clients in Technology and Retail + E-Commerce.

Rest of World:

Digital Customer Experience contributed 45.6% of the total increase primarily driven by clients in FinTech, On Demand Travel + Transportation, Entertainment + Gaming, Retail + E-Commerce and HealthTech, partially offset by clients in Social Media.

Trust and Safety and AI Services contributed 0.9% and 0.5%, respectively, of the total increase.

Growth in the Rest of World was driven by Latin America, as well as consistent growth across Asia and Europe.

Operating Expenses

Cost of Services

Cost of services for the years ended December 31, 2022 and 2021 was $558.8 million and $431.7 million, respectively.

Cost of services for the year ended December 31, 2022 increased by $127.0 million, or 29.4%, when compared to the year ended December 31, 2021.

The increase was primarily driven by higher personnel costs of $108.2 million related to an increase in Headcount to meet the demand in services from our customers.

The remaining increase included costs associated with site expansions, returning a portion of employees back to office, and investments in software to support revenue growth.

The decrease was primarily driven by lower personnel costs of $19.7 million, including the impact of certain clients electing to shift work from the United States to the Philippines and India, partially offset by the impact of wage inflation and higher employee welfare costs.

The remaining decrease was associated with a reduction of costs previously incurred while transitioning to a hybrid model and lower recruiting and professional development costs, mostly offset by site expansions and costs associated with certain teammates operating on-site.

Selling, general, and administrative expense

Selling, general, and administrative expense for the years ended December 31, 2022 and 2021 was $260.0 million and $335.3 million, respectively.

Selling, general, and administrative expense for the year ended December 31, 2022 decreased by

$75.3 million, or 22.5%, when compared to the year ended December 31, 2021.

The decrease was primarily driven by lower personnel costs of $87.2 million due primarily to expenses related to the one-time phantom shares bonuses and non-recurring teammate bonuses associated with the IPO of $133.7 million , partially offset by higher stock-based compensation expense for equity-classified awards and increased headcount across functions in support of our growth, as well as earn-out consideration recognized as compensation expense.

The decrease was partially offset by investments in software, as well as costs associated with resuming travel during 2022.

Depreciation for the years ended December 31, 2022 and 2021 was $37.9 million and $29.0 million, respectively.

The increase in depreciation is a result of capital expenditures for additional technology and computers, as well as leasehold improvements associated with site expansions to support revenue growth .

The decrease was primarily driven by lower personnel costs of $26.0 million, due primarily to a reduction in stock-based compensation expense and the impact of optimization efforts as we drive efficiencies across functions, as well as earn-out consideration recognized as compensation expense.

The remaining decrease was associated with our optimization efforts, including lower insurance expense based on renegotiated rates, reductions in recruiting and professional development costs and professional fees and services, as well as bad debt expense.

These decreases were partially offset by higher software and travel costs.

The increase in depreciation is a result of capital expenditures for leasehold improvements associated with site expansions.

Amortization of intangible assets

Amortization of intangible assets for the years ended December 31, 2022 and 2021 was $19.9 million, and $18.8 million, respectively.

The increase in amortization is due to the acquisition of heloo on April 15, 2022.

The increase in amortization is due to our acquisition of heloo on April 15, 2022.

See Note 3, "Business Combination" in the Notes to Consolidated Financial Statements included in this Annual Report.

Other expense

Other expense for the years ended December 31, 2022 and 2021 was $7.4 million and $0.2 million, respectively.

Changes in other expense are primarily driven by our exposure to foreign currency exchange risk resulting from our operations in foreign geographies, primarily the Philippines, offset by economic hedges using foreign currency exchange rate forward contracts.

Loss on disposal of assets

The increase in loss on disposal of asset s is associated with optimizing our footprint, resulting in exiting certain sites in the United States and the Philippines.

Other expense (income), net

Changes are primarily driven by our exposure to foreign currency exchange risk resulting from our operations in foreign geographies, primarily the Philippines and India, offset by economic hedges using foreign currency exchange rate forward contracts .

The remaining increase is associated with higher interest income.

See Part II, Item 7A., "Quantitative and Qualitative Disclosures About Market Risk" in this Annual Report for additional information on how foreign currency impacts our financial results.

Financing expense

Financing expense for the years ended December 31, 2022 and 2021 was $11.9 million and $6.5 million, respectively.

Changes in financing expense are primarily driven by the rate of SOFR and LIBOR used to calculate the interest rate of our debt, the additional $32.5 million draw on our Revolving Credit Facility on April 12, 2022 to fund cash payments relating to our acquisition of heloo and the Refinancing.

See “—Liquidity and Capital Resources—Indebtedness—2019 Credit Agreement” and “—2022 Credit Agreement” for additional discussion on term loan.

Provision for (benefit from) income taxes

Provision for (benefit from) income taxes for the years ended December 31, 2022 and 2021 was $24.1 million and $(2.3) million, respectively.

Our effective tax rate for the years ended December 31, 2022 and 2021 was 37.4% and 3.7%, respectively.

There are certain items included within the provision for (benefit from) income taxes calculation which were directly related to the IPO in 2021 and not expected to recur in future periods, including certain phantom shares bonuses and equity awards made to officers which are not deductible under Section 162(m) of the Internal Revenue Code.

Additionally, costs related to the issuance of stock-based compensation and costs related to the acquisition of heloo within the provision for (benefit from) income taxes calculation are adjusted for Non-GAAP purposes.

If those costs are removed, the provision for income taxes would have been $30.6 million and $23.0 million and the effective tax rate would have been 21.4% and 20.0% for the years ended December 31, 2022 and December 31, 2021, respectively.

Comparison of the Years Ended December 31, 2021 and 2020

Service revenue

India, which was previously included in Rest of World, is now reported separately within revenue disaggregation by geographical location.

As a result, t he comparison of service revenue by delivery geography for the years ended December 31, 2021 and 2020 has been recast, and included in this Annual Report, for comparability.

Service revenue by delivery geography

The majority of our service revenues are derived from contracts with clients who are either located in the United States, or with clients who are located outside of the United States but whereby the contract specifies payment in United States Dollars.

However, we deliver our services from multiple locations around the world.

The following table presents the breakdown of our service revenue by geographical location, based on where the services are provided:

Year ended December 31, Period over Period Change

(in thousands) 2021 2020 ($) (%)

$ 402,340 $ 267,687 $ 134,653 50.3 %

United States

246,642 171,476 75,166 43.8 %

India 56,216 16,069 40,147 249.8 %

Rest of World

55,505 22,814 32,691 143.3 %

Service revenue

$ 760,703 $ 478,046 $ 282,657 59.1 %

Revenue generated from services provided from our delivery sites in the Philippines grew from expansion in all three of our service offerings, Digital Customer Experience, Trust and Safety and AI Services, which contributed 29.7%, 12.8% and 7.8% of the total increase of 50.3% in the Philippines, respectively.

Revenue generated from services provided from our delivery sites in the United States grew from expansion in two of our service offerings, Digital Customer Experience and AI Services, which contributed 36.7% and 12.7% of the total increase of 43.8% in the United States, respectively, partially offset by a 5.6% decrease contributed by Trust and Safety due to the shift in revenues to the Philippines and Rest of World.

Revenues generated from services provided from our delivery sites in India grew primarily from expansion in all three of our service offerings, Digital Customer Experience, Trust and Safety and AI Services, which contributed 112.9%, 68.6% and 68.3% of the total increase of 249.8% in India, respectively.

Revenues generated from services provided from our delivery sites in the Rest of World grew primarily from expansion in all three of our service offerings, Digital Customer Experience, Trust and Safety and AI Services, which contributed 111.9%, 25.6% and 5.8% of the total increase of 143.3% in the Rest of World, respectively.

Growth in the Rest of World was led by Latin America and Europe.

Changes in financing expense are primarily driven by increases in the rate of SOFR and LIBOR used to calculate the interest rate of our deb t, as well as additional borrowings in 2022.

See “—Liquidity and Capital Resources—Indebtedness—2019 Credit Agreement” and “—2022 Credit Agreement” for additional information.

Provision for income taxes

Our effective tax rate for the years ended December 31, 2023 and 2022 was 39.1% and 37.4%, respectiv ely.

Costs related to the issuance of stock-based compensation, the acquisition of heloo and severance within the provision for income taxes calculation are adjusted for Non-GAAP purposes.

If those costs are removed, the provision for income taxes would have bee n $33.7 million and $30.6 million and the effective tax rate would have been 24.5% and 21.4% for the years ended December 31, 2023 and December 31, 2022, respectively.

Revenue by Top Clients

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For our existing clients, we benefit from our ability to grow as they grow and to cross sell new solutions, further deepening our entrenchment.

For the years ended December 31, 2022 and 2021, we generated 22% and 27%, respectively, of our service revenue from our largest client, and we generated less than 10% and 11%, respectively, of our service revenue from our second largest client.

For the years ended December 31, 2023 and 2022, we generated 19% and 22%, respectively, of our service revenue from our largest client.

We continue to identify and target high growth industry verticals and clients.

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(1) “Headcount” refers to the total number of TaskUs teammates globally as of the end of a given measurement period.

As of December 31, 2022, our Headcount included approximately 500 contractor and agency teammates who support our heloo operations.

As of December 31, 2023 and 2022, our Headcount included approximately 350 and 500, respectively, of contractor and agency teammates who support our heloo operations.

(2) “Net revenue retention rate” is an important metric we calculate annually to measure the retention and growth in the use of our services by our existing clients.

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Adjusted Net Income is a non-GAAP profitability measure that represents net income or loss for the period before the impact of amortization of intangible assets and certain items that are considered to hinder comparison of the performance of our business on a period-over-period basis or with other businesses.

During the periods presented, we excluded from Adjusted Net Income amortization of intangible assets, transaction costs, earn-out consideration, the effect of foreign currency gains and losses, gains and losses on disposals of assets, COVID-19 related expenses, severance costs, natural disaster costs, one-time payments associated with the IPO, stock-based compensation expense and employer payroll tax associated with equity-classified awards and the related effect on income taxes of certain pre-tax adjustments, which include costs that are required to be expensed in accordance with GAAP.

Our management believes that the inclusion of supplementary adjustments to net income (loss) applied in presenting Adjusted Net Income are appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future.

During the periods presented, we excluded from Adjusted Net Income amortization of intangible assets, transaction costs, earn-out consideration, the effect of foreign currency gains and losses, gains and losses on disposals of assets, non-recurring severance costs, stock-based compensation expense and associated employer payroll tax and the related effect on income taxes of certain pre-tax adjustments, which include costs that are required to be expensed in accordance with GAAP.

Our management believes that the inclusion of supplementary adjustments to net income applied in presenting Adjusted Net Income are appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future.

The following table reconciles net income, the most directly comparable GAAP measure, to Adjusted Net Income for the years ended December 31, 2023 and 2022:

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(in thousands, except %) 2023 2022 ($) (%)

Net Income (loss)

$ 40,422 $ (58,698) $ 99,120 NM

Net income $ 45,690 $ 40,422 $ 5,268 13.0 %

Amortization of intangible assets

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Foreign currency losses (3)

7,967 809 7,158 NM

Loss on disposal of assets

431 7,967 (7,536) (94.6) %

COVID-19 related expenses (4)

— 6,105 (6,105) (100.0) %

Loss on disposal of assets 1,322 31 1,291 NM

Severance costs (4)

1,852 821 1,031 125.6 %

Natural disaster costs (6)

— 442 (442) (100.0) %

Phantom shares bonus (7)

— 129,362 (129,362) (100.0) %

Teammate IPO bonus (8)

— 4,361 (4,361) (100.0) %

Stock-based compensation expense (5)

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Adjusted Net Income $ 126,542 $ 142,815 $ (16,273) (11.4) %

Net Income (loss) Margin (11)

4.2 % (7.7) %

Net Income Margin (7)

Adjusted Net Income Margin (7)

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NM = not meaningful

(1) Represents non-recurring professional service fees primarily related to the acquisition of heloo in 2022 and the preparation for public offerings that have been expensed during the period in 2021.

(1) Represents professional service fees primarily related to the acquisition of heloo in 2022 and other non-recurring transactions.

(2) Represents earn-out consideration recognized as compensation expense related to the acquisition of heloo.

(3) Realized and unrealized foreign currency losses (gains) include the effect of fair market value changes of forward contracts and remeasurement of U.S.

(3) Realized and unrealized foreign currency losses include the effect of fair market value changes of forward contracts and remeasurement of U.S.

dollar-denominated accounts to foreign currency.

(4) Represents incremental expenses incurred that are directly attributable to the COVID-19 pandemic.

(4) Represents severance payments as a result of certain cost optimization measures we undertook during the period to restructure support roles.

(6) Represents one-time costs associated with emergency housing, transportation costs and bonuses for our employees in connection with the natural disaster related to the severe winter storm in Texas in February 2021.

(7) Represents expense for one-time, non-recurring payments of $127.5 million to vested phantom shareholders in connection with the completion of the IPO, as well as associated payroll tax and 401(k) contributions.

(8) Represents expense for non-recurring bonus payments to certain employees in connection with the completion of the IPO.

(9) Represents stock-based compensation expense associated with equity-classified awards, as well as associated payroll tax.

(10) Represents tax impacts of adjustments to net income (loss) which resulted in a tax benefit during the period, including phantom shares bonus related to the IPO, and stock-based compensation expense and earn-out consideration after the IPO.

(11) Net Income (Loss) Margin represents net income (loss) divided by service revenue and Adjusted Net Income Margin represents Adjusted Net Income divided by service revenue.

(5) Represents stock-based compensation expense, as well as associated payroll tax.

(6) Represents tax impacts of adjustments to net income which resulted in a tax benefit during the period, including stock-based compensation expense and earn-out consideration.

(7) Net Income Margin represents net income divided by service revenue and Adjusted Net Income Margin represents Adjusted Net Income divided by service revenue.

Adjusted EPS is a non-GAAP profitability measure that represents earnings available to shareholders excluding the impact of certain items that are considered to hinder comparison of the performance of our business on a period-over-period basis or with other businesses.

Adjusted EPS is calculated as Adjusted Net Income divided by our diluted weighted-average number of shares outstanding, including the impact of any potentially dilutive common stock equivalents that are anti-dilutive to GAAP net income (loss) per share – diluted (“GAAP diluted EPS”) but dilutive to Adjusted EPS.

Adjusted EPS is calculated as Adjusted Net Income divided by our diluted weighted-average number of shares outstanding.

Our management believes that the inclusion of supplementary adjustments to earnings per share applied in presenting Adjusted EPS are appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future.

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GAAP diluted EPS $ 0.48 $ 0.39

Per share adjustments to net income (loss) (1)

Per share adjustments for GAAP anti-dilutive shares (2)

Per share adjustments to net income (1)

Adjusted EPS $ 1.32 $ 1.39

Weighted-average common stock outstanding – diluted 96,173,071 102,603,179

GAAP anti-dilutive shares (2)

Adjusted weighted-average shares outstanding 102,603,179 102,308,521

(1) Reflects the aggregate adjustments made to reconcile net income (loss) to Adjusted Net Income, as noted in the above table, divided by the GAAP diluted weighted-average number of shares outstanding for the relevant period.

(2) Reflects the impact of awards that were anti-dilutive to GAAP diluted EPS since we were in a net loss position, and therefore not included in the calculation, but would be dilutive to Adjusted EPS and are therefore included in the calculation.

(1) Reflects the aggregate adjustments made to reconcile net income to Adjusted Net Income, as noted in the above table, divided by the GAAP diluted weighted-average number of shares outstanding for the relevant period.

EBITDA and Adjusted EBITDA

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Adjusted EBITDA is a non-GAAP profitability measure that represents EBITDA before certain items that are considered to hinder comparison of the performance of our business on a period-over-period basis or with other businesses.

During the periods presented, we excluded from Adjusted EBITDA transaction costs, earn-out consideration, the effect of foreign currency gains and losses, gains and losses on disposals of assets, COVID-19 related expenses, severance costs, natural disaster costs, one-time payments associated with the IPO and stock-based compensation expense and employer payroll tax associated with equity-classified awards, which include costs that are required to be expensed in accordance with GAAP.

During the periods presented, we excluded from Adjusted EBITDA transaction costs, earn-out consideration, the effect of foreign currency gains and losses, gains and losses on disposals of assets, non-recurring severance costs, stock-based compensation expense and associated employer payroll tax and interest income, which include costs that are required to be expensed in accordance with GAAP.

Our management believes that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future.

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(in thousands, except %) 2023 2022 ($) (%)

Net Income (loss)

$ 40,422 $ (58,698) 99,120 NM

Provision for (benefit from) income taxes 24,111 (2,265) 26,376 NM

Net income $ 45,690 $ 40,422 5,268 13.0 %

Provision for income taxes 29,342 24,111 5,231 21.7 %

Financing expenses 21,717 11,921 9,796 82.2 %

1 unchanged sentence

Amortization of intangible assets 20,346 19,882 464 2.3 %

EBITDA 134,251 (6,574) 140,825 NM

EBITDA 157,486 134,251 23,235 17.3 %

Transaction costs (1)

3 unchanged sentences

Foreign currency losses (3)

7,967 809 7,158 NM

Loss on disposals of assets 31 52 (21) (40.4) %

COVID-19 related expenses (4)

431 7,967 (7,536) (94.6) %

Loss on disposals of assets 1,322 31 1,291 NM

Severance costs (4)

1,852 821 1,031 125.6 %

Natural disaster costs (6)

— 442 (442) (100.0) %

Phantom shares bonus (7)

— 129,362 (129,362) (100.0) %

Teammate IPO bonus (8)

— 4,361 (4,361) (100.0) %

Stock-based compensation expense (5)

53,179 69,452 (16,273) (23.4) %

Interest income (6)

(1,581) — (1,581) (100.0) %

Adjusted EBITDA $ 220,797 $ 223,204 $ (2,407) (1.1) %

Net Income Margin (7)

4.2 % (7.7) %

Adjusted EBITDA Margin (7)

1 unchanged sentence

NM = not meaningful

(1) Represents professional service fees related to the acquisition of heloo in 2022 and other non-recurring transactions.

(2) Represents earn-out consideration recognized as compensation expense related to the acquisition of heloo.

(3) Realized and unrealized foreign currency losses (gains) include the effect of fair market value changes of forward contracts and remeasurement of U.S.

(3) Realized and unrealized foreign currency losses include the effect of fair market value changes of forward contracts and remeasurement of U.S.

dollar-denominated accounts to foreign currency.

(4) Represents incremental expenses incurred that are directly attributable to the COVID-19 pandemic.

(4) Represents severance payments as a result of certain cost optimization measures we undertook during the period to restructure support roles.

(8) Represents expense for non-recurring bonus payments to certain employees in connection with the completion of the IPO.

(9) Represents stock-based compensation expense associated with equity-classified awards, as well as associated payroll tax.

(10) Net Income (Loss) Margin represents net income (loss) divided by service revenue and Adjusted EBITDA Margin represents Adjusted EBITDA divided by service revenue.

(5) Represents stock-based compensation expense, as well as associated payroll tax.

(6) Represents interest income earned on short-term savings and time-deposit funds beginning in 2023.

(7) Net Income Margin represents net income divided by service revenue and Adjusted EBITDA Margin represents Adjusted EBITDA divided by service revenue.

Free Cash Flow

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Our management believes that the inclusion of this non-GAAP measure, when considered with our GAAP results, provides management and investors with an additional understanding of our ability to generate additional cash for ongoing business operations and other capital deployment.

The following table reconciles net cash provided by (used in) operating activities, the most directly comparable GAAP measure, to Free Cash Flow for the years ended December 31, 2022 and 2021:

The following table reconciles net cash provided by operating activities, the most directly comparable GAAP measure, to Free Cash Flow for the years ended December 31, 2023 and 2022:

Year ended December 31,

Net cash provided by (used in) operating activities $ 147,095 $ (32,674)

Net cash provided by operating activities $ 143,670 $ 147,095

Purchase of property and equipment (30,995) (43,758)

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In September 2022, our Board of Directors approved a share repurchase program of up to $100.0 million of shares of our Class A common stock.

In May 2023, the Company announced that our Board of Directors authorized a $100.0 million increase to the share repurchase program, increasing the total authorization to $200.0 million, with the total amount remaining available after the increase being exclusive of any commissions, fees or excise taxes.

During the year ended December 31, 2023, we repurchased 10,146,692 shares of our Class A common stock under the share repurchase program for $111.8 million, which we funded principally with available cash.

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The 2022 Revolving Credit Facility terminates on September 7, 2027.

As of December 31, 2022, we had $190.0 million of borrowing available under the 2022 Revolving Credit Facility.

As of December 31, 2023, we had no balance outstanding and $190.0 million of borrowing availability under the 2022 Revolving Credit Facility.

Borrowings under the 2022 Credit Agreement, with the exception of swing line borrowings, bear interest, at our option, either at (i) an adjusted Term Secured Overnight Financing Rate (“SOFR rate”) plus a margin of 2.25% per annum, subject to a SOFR rate floor of 0.00% or (ii) an alternative base rate plus a margin of 1.25% per annum, subject to an alternative base rate floor of 1.00%, Any borrowings under the swing line will be subject to the base rate.

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(in thousands) 2023 2022

Net cash provided by (used in) operating activities $ 147,095 $ (32,674)

Net cash provided by operating activities $ 143,670 $ 147,095

Net cash used in investing activities (31,995) (67,993)

Net cash provided by (used in) financing activities (4,035) 54,390

Net cash used in financing activities (119,085) (4,035)

Operating Activities

Net cash provided by operating activities for the year ended December 31, 2022 was $147.1 million compared to net cash used in operating activities of $32.7 million for the year ended December 31, 2021.

Net cash provided by operating activities for the year ended December 31, 2023 was $143.7 million compared to net cash provided by operating activities of $147.1 million for the year ended December 31, 2022.

Net cash provided by operating activities for the year ended December 31, 2023 reflects net income of $45.7 million, as well as the add back for non-cash charges totaling $110.0 million, primarily driven by $52.8 million in stock-based compensation expense, $40.4 million of depreciation and $20.3 million of amortization of intangible assets, partially offset by deferred taxes of $8.0 million.

These changes were partially offset by changes in operating assets and liabilities of $12.1 million.

Net cash used in operating activities for the year ended December 31, 2021 reflects the net loss of $58.7 million, which includes the one-time phantom shares bonuses, as well as changes in operating assets and liabilities of $62.8 million, primarily driven by an increase in accounts receivable of $76.2 million.

These changes were partially offset by the add back for non-cash charges totaling $88.8 million, primarily driven by $46.2 million in stock-based compensation expense, $29.0 million of depreciation and $18.8 million of amortization of intangible assets, partially offset by deferred taxes of $11.5 million.

Net cash provided by oper ating activities for the year ended December 31, 2022 reflects the net income of $40.4 million, as well as the add back for non-cash charges totaling $112.8 million, primarily driven by $69.0 million in stock-based compensation expense, $37.9 million of depreciation and $19.9 million of amortization of intangible assets, partially offset by deferred taxes of $11.8 million.

These changes were partially offset by changes in operating assets and liabilities of $6.1 million.

Investing Activities

Net cash used in investing activities for the year ended December 31, 2023 was $32.0 million compared to net cash used in investing activities of $68.0 million for the year ended December 31, 2022.

The increase in net cash used from investing activities was primarily driven by the acquisition of heloo, net of cash received .

Purchase of property and equipm ent decreased primarily due to certain employees returning to the office driving higher utilization of equipment.

Net cash used in investing activities for the year ended December 31, 2022 included the acquisition of heloo, net of cash received.

Financing Activities

Net cash used in financing activities for the year ended December 31, 2022 was $4.0 million compared to net cash provided by financing activities of $54.4 million for the year ended December 31, 2021.

Net cash used in financing activities for the year ended December 31, 2023 was $119.1 million compared to net cash used in financing activities of $4.0 million for the year ended December 31, 2022.

Net cash used in financing activities for the year ended December 31, 2023 consisted primarily of payments to acquire shares under our share repurchase program.

Net cash used in financing activities for the year ended December 31, 2022 consisted of payments on long-term debt, including the repayment of all outstanding borrowings under the 2019 Credit Facilities, payments to acquire shares under our share repurchase program, payments for taxes related to net share settlement of equity awards and payments for debt financing fees, mostly offset by proceeds from the 2022 Credit Facilities, borrowings from our 2019 Revolving Credit Facility and proceeds from employee stock plans.

Net cash provided by financing activities for the year ended December 31, 2021 consisted of proceeds from the IPO, net of underwriters’ fees, partially offset by distribution of dividends, payments on long-term debt, payments for offering costs and payments for taxes related to net share settlement of equity awards.

Contractual Obligations

Our principal commitments consist of obligations for outstanding debt and leases for our office space.

The following table summarizes our contractual obligations as of December 31, 2023 :

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Our consolidated financial statements and the related notes included elsewhere in this Annual Report are prepared in accordance with accounting principles generally accepted in the United States.

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, provision for income taxes, and related disclosures.

The preparation of these consolidated financial statements requires us to make estimates and assumptio ns that affect the reported amounts of assets, liabilities, revenue, costs and expenses, provision for income taxes, and related disclosures.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.

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Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Revenue Recognition

We recognize revenue as services are performed and amounts are earned.

Determining the method and amount of revenue to recognize requires us, at times, to make judgments and estimates.

Specifically, we apply judgments in determining whether performance obligations are satisfied over-time and the method to measure progress towards completion.

Additionally, the nature of our contracts gives rise to several types of variable consideration, including estimates on collectability, discounts, and client credits.

Some contracts may include incentives or penalties related to costs incurred, benefits produced or adherence to schedules that may increase the variability in service revenues and margins earned on such contracts.

Our estimates are monitored over the lives of our contracts and are based on an assessment of our anticipated performance, historical experience and other information available at the time.

Goodwill Impairment

Goodwill is the amount by which the cost of the acquired net assets in a business combination exceeds the fair value of the identifiable net assets on the date of purchase.

Goodwill is not amortized.

We review goodwill for impairment annually on October 1, or more frequently when events or circumstances indicate goodwill may be impaired.

We may initially assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the estimated fair value of a reporting unit is less than its carrying amount (“Step 0”).

If determined that it is more-likely-than-not the estimated fair value of a reporting unit is less than its carrying amount, a quantitative assessment is performe d (“Step 1”).

Under FASB Topic ASC 350 Intangibles—Goodwill and Other, entities have an unconditional option to bypass the qualitative assessment described in the preceding sentences for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test.

An entity may resume performing the qualitative assessment in any subsequent period.

We hav e determined that we have a single reporting unit.

Historically, the fair value of our reporting unit was estimated using a combination of the income approach, using a discounted cash flow methodology, and a market approach;

the determination of discounted cash flows was based on our strategic plans and market conditions.

Upon completion of the IPO, a public trading market for our common stock was established and, as a result, we consider our market capitalization (calculated as total common shares outstanding multiplied by the common equity price per share, as adjusted for a control premium factor, as necessary) to represent fair value.

If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to be impaired.

If the carrying amount of the reporting unit exceeds its fair value, an impairment charge is recorded in an amount equal to that excess, but not more than the carrying value of goodwill.

As of October 1, 2022 and 2021, we opted to bypass the qualitative assessment under Step 0 and proceeded directly to performing a quantitative goodwill impairment test under Step 1.

A s a result of the quantitative assessment, we determined that the carrying value of the reporting unit did not exceed its fair value.

Stock-based Compensation

We account for our stock-based awards in accordance with provisions of ASC 718, Compensation—Stock Compensation (“ASC 718”).

For equity awards, total compensation cost is based on the grant date fair value.

For liability awards, total compensation cost is based on the fair value of the award on the date the award is granted and its remeasured value at each reporting date until its settlement.

Awards granted to employees contain service, performance and market conditions that affect vesting.

We use the Black-Scholes model to determine the fair value of stock options with either solely service conditions or with a combination of service and performance conditions.

The assumptions used in the Black-Scholes model, other than the fair value of our common stock, are estimated as follows:

• Expected term:

Estimated based on the simplified method as we do not have adequate historical data.

• Risk-free interest rate:

Based on the U.S.

Treasury yield curve in effect at the time of grant.

• Expected volatility:

Based on the historical stock price volatility of comparable publicly-traded companies in our peer group and the implied volatility of our assets and current leverage.

• Expected dividend yield:

Zero percent, as we do not anticipate paying dividends on our common stock.

Prior to the IPO, we valued our options using a combination of Monte Carlo simulation and Black-Scholes model.

A Monte Carlo simulation was first used to determine the number of options eligible for vesting, then a Black-Scholes model was used to estimate the value for the vested options given the simulated scenario, with the assumption that vested options will be exercised at the mid-point from the vesting date to its maturity date.

Key assumptions in performing the option valuation include the expected time to liquidity event, total equity value, value per common share, the discount for lack of marketability to be applied to the common shares, and volatility of the common shares.

For unvested awards with performance conditions, we assess the probability of attaining the performance conditions at each reporting period which requires judgment.

Awards that are deemed probable of attainment are recognized in expense over the requisite service period of the grant using a graded vesting model.

Prior to the IPO, independent valuations were performed to assist management in determining the fair value of the common stock.

Given the absence of an active market for our common stock prior to the IPO, the board of directors was required to estimate the fair value of our common stock at the time of each option grant based on several factors, including consideration of input from management and third-party valuations.

Management considered numerous factors to determine the best estimate of the fair value of our common stock, including:

• our operating and financial performance – both historical and projected;

• current business conditions and projections;

• the likelihood of achieving a liquidity event such as an initial public offering or sale of our company;

• the lack of marketability of our shares;

• the market performance of comparable publicly traded companies and guideline transactions;

• the overall macroeconomic environment.

The value of the common shares was then used as an input to the option valuation.

Upon completion of the IPO, a public trading market for our common stock was established, and as a result, it is no longer necessary for our board of directors or management to estimate the fair value of our common stock in connection with our accounting for stock-based awards, as the fair value of our common stock will be determined based on its trading price on Nasdaq.

See Note 11, “Stock-Based Compensation” in the Notes to Consolidated Financial Statements, for additional information.

Income taxes are accounted for under the asset and liability method.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis