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Fair Value Measurements

6 Months Ended

Jun. 30, 2023

Fair Value MeasurementsThe 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.

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, 2023 and December 31, 2022, are summarized as follows:


	June 30, 2023
	Level 1		Level 2		Level 3		Total

	(In thousands)
Assets
Cash equivalents:
Money market funds	$	143,441	$	—	$	—	$	143,441
Total assets	$	143,441	$	—	$	—	$	143,441

Liabilities
Earn-outs treated as contingent consideration	$	—	$	—	$	15,418	$	15,418
Earn-outs treated as liability awards	—		—		8,985		8,985
Total liabilities	$	—	$	—	$	24,403	$	24,403


	December 31, 2022
	Level 1		Level 2		Level 3		Total

	(In thousands)
Assets
Cash equivalents:
Money market funds	$	308,295	$	—	$	—	$	308,295
Total assets	$	308,295	$	—	$	—	$	308,295
Liabilities
Earn-outs treated as contingent consideration	$	—	$	—	$	20,722	$	20,722
Earn-outs treated as liability awards	—		—		51,499		51,499
Total liabilities	$	—	$	—	$	72,221	$	72,221

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 measured 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 contingent earn-out liability is

measured at fair value on a recurring basis and is classified as Level 3 within the fair value hierarchy. On a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment. Long-lived tangible 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.

The estimated fair value of outstanding balances of our 2024 Notes and 2026 Notes are as follows:


	Level of Hierarchy	Fair Value		Principal Balance		Unamortized Issuance Costs		Net Carrying Value

		(In thousands)
June 30, 2023
2024 and 2026 Notes	2	$	407,800	$	589,992	$	(7,350)	$	582,642
December 31, 2022
2024 and 2026 Notes	2	$	512,900	$	747,500	$	(10,077)	$	737,423

Management determines the fair value by using Level 2 inputs based on antithetic variable technique done by an independent valuation specialist. Refer to Note 8 – Convertible Senior Notes, Net and Capped Call Transactions for additional details.

The changes in fair value of the Level 3 liabilities are as follows:


	June 30, 2023		December 31, 2022

	(In thousands)
Balance, beginning of year	$	72,221	$	29,830
Additions in the period	—		61,920
Change in fair value of contingent consideration	(5,304)		(8,516)
Change in fair value of liability awards	(42,514)		(11,013)

Balance, end of period	$	24,403	$	72,221

Certain former stakeholders of the Company’s acquisitions are 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 are accounted for as either contingent considerations arrangements or compensation arrangements. Contingent considerations are fair valued using significant inputs that are not observable in the market.

The earn-outs determined to be compensatory are remeasured each reporting period based on whether the performance targets are probable of being achieved and recognized over the related service periods. For the three and six months ended June 30, 2023, we reduced the fair value of the earn-outs by approximately $41.1 million and $42.5 million, respectively, primarily due to settlements that occurred during the three months ended June 30, 2023. The settlements and any changes to the fair value of remaining earn-outs were recognized as a component of stock-based compensation expense and other income (expense) in the accompanying condensed consolidated statements of operations. Subsequent to June 30, 2023, the Company settled the final portion of the VoiceBase earn-out for approximately $15.0 million, which is due to be paid in the fourth quarter of 2023.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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