EX-99.2

EX-99.2 4 inst-ex99_2.htm EX-99.2 EX-99.2

Exhibit 99.2

Condensed Consolidated Financial Statements

PCS Holdings, LLC

Nine Months Ended September 30, 2023

PCS Holdings, LLC

Unaudited Condensed Consolidated Balance Sheet

(in thousands)


	As of September 30, 2023
Assets
Current assets:
Cash and cash equivalents	$	13,250
Accounts receivable, net		10,780
Deferred commissions, current portion		1,241
Prepaid expenses		3,621
Other current assets		4,137
Total current assets		33,029
Inventory		877
Fixed assets, net		559
Right-of-use assets, net		1,419
Intangible assets, net		133,049
Goodwill		182,287
Deferred commissions, net of current portion		3,299
Other assets		73
Total assets	$	354,592
Liabilities and members’ equity
Current liabilities:
Accounts payable	$	1,697
Accrued expenses and other current liabilities		21,191
Lease liability, current portion		414
Acquisition earnout		1,100
Debt, current portion		1,270
Deferred revenue, current portion		22,049
Total current liabilities		47,721
Debt, net of current portion		120,219
Lease liability, net of current portion		1,005
Deferred revenue, net of current portion		827
Deferred tax liabilities		62,710
Other long-term liabilities		148
Total liabilities		232,630
Commitments and contingencies (Note 13) Members’ equity:
Class A Units, no par value, 30,319,958 units issued and outstanding as of September 30, 2023. Liquidation preference of $405,341 as of September 30, 2023.		-
Paid-in capital		209,836
Accumulated deficit		(87,874	)
Total members’ equity		121,962
Total liabilities and members’ equity	$	354,592

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

PCS Holdings, LLC

Unaudited Condensed Consolidated Statement of Operations and Comprehensive Loss

(in thousands)



	Nine Months Ended September 30, 2023
Revenues	$	80,905
Operating expenses
Cost of revenues (1)		20,016
Sales and marketing		14,393
Research and development		14,080
General and administrative		9,639
Depreciation and amortization		15,425
Operating income		7,352
Interest expense, net		11,287
Other expense, net		183
Loss before income taxes		(4,118	)
Income tax expense		4,614
Net loss	$	(8,732	)
Total comprehensive loss	$	(8,732	)

(1)

Cost of revenues excludes amortization related to intangibles for acquired technology which are included in depreciation and amortization.

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

PCS Holdings, LLC

Unaudited Condensed Consolidated Statement of Members’ Equity

(in thousands, except unit amounts)


	Class A Units		Paid-in capital		Accumulated deficit			Total members’ equity
Balance as of December 31, 2022		30,319,958	$	209,367	$	(79,142	)	$	130,225
Net loss						(8,732	)		(8,732	)
Member unit-based compensation				469					469
Balance as of September 30, 2023		30,319,958	$	209,836	$	(87,874	)	$	121,962

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

PCS Holdings, LLC

Unaudited Condensed Consolidated Statement of Cash Flows

(in thousands)


	Nine Months Ended September 30, 2023
Operating activities
Net loss	$	(8,732	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation of fixed assets		263
Amortization of intangible assets		15,100
Amortization of right of use asset		297
Loss on disposal of fixed assets		268
Amortization of deferred financing costs		413
Member unit-based compensation		469
Change in fair value of acquisition earnout		200
Deferred income tax		3,705
Changes in operating assets and liabilities:
Accounts receivable		(2,393	)
Prepaid expenses and other current assets		(2,167	)
Inventory		(50	)
Other assets		836
Deferred commissions		(1,331	)
Accounts payable		136
Accrued expenses and other liabilities		1,028
Deferred revenue		4,971
Net cash provided by operating activities		13,013

Investing activities
Purchases of fixed assets		(505	)
Business acquisitions, net of cash acquired		(13,844	)
Net cash used in investing activities		(14,349	)

Financing activities
Payments on debt		(953	)
Deferred payments for acquisitions		(445	)
Net cash used in financing activities		(1,398	)
Net decrease in cash		(2,734	)
Cash, beginning of year		15,984
Cash, end of year	$	13,250

Supplemental disclosure of cash flow information
Cash paid during the year for:
Income taxes	$	(655	)
Interest paid	$	(9,128	)

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

PCS Holdings, LLC

Notes to Condensed Consolidated Financial Statements

September 30, 2023

Background and Description of Business

PCS Holdings, LLC (the “Company”) is a digital credentials management company, working with institutions and corporations around the world helping people collect, promote, and share their academic and professional credentials in simple and secure ways. The Company’s offering is a credential exchange and intelligence platform, enabling the secure, rapid exchange of digital credentials among schools, universities, state education agencies, companies, and individuals. Through Parchment.com, students can research colleges and discover their chances of admission, see how they compare with peers, get college recommendations, and send official transcripts when they are ready to apply.

The Company was incorporated in 1999 as Credentials Inc., reorganized into Credentials Solutions, LLC in 2017, and subsequently acquired by Credentials Holdings, LLC in 2018. Credentials Holdings, LLC formed PCS Holdings, LLC in 2020 in connection with the acquisition of Parchment Inc. Parchment Inc. was incorporated as Docufide, Inc. in 2003 and changed its name to Parchment Inc. in 2011. In connection with the 2020 acquisition, Parchment Inc. was reorganized into a limited liability company, Parchment LLC (“Parchment”). In 2021, Parchment acquired an international company, Framework Computer Consultants Limited along with its subsidiaries, Digitary Australia Pty Ltd and Digitary Canada, Inc. These companies were organized under a new Irish subsidiary, Plaid Bidco Limited (“Digitary”). In 2022, Parchment acquired Scrip-Safe Security Products Inc., via Scrip-Safe Holdings, LLC (collectively, “Scrip-Safe”) and Need My Transcript LLC (“NMT”). In the current year, Parchment acquired Quottly, Inc., a Delaware corporation (“Quottly”). The acquisition was treated as a business combination for accounting purposes. Scrip-Safe was organized as a subsidiary under Parchment and NMT’s assets were absorbed into Parchment. Quottly was organized as a subsidiary under Parchment. This acquisition is discussed further in Note 5.

Liquidity

The Company had an operating income of $7.4 million and generated operating cash flows of $13.0 million in the nine months ended September 30, 2023, and had an accumulated deficit of $87.9 million as of September 30, 2023. As of September 30, 2023, the Company had cash and cash equivalents of $13.3 million. Additionally, the Company has a $10.0 million line of credit, with no outstanding balance as of September 30, 2023, as discussed in Note 12. The Company believes its current cash position, projected revenues and new sales bookings will generate sufficient working capital to meet its obligations for the next twelve months.

Summary of Business and Significant Accounting

Basis of Presentation and Principles of Consolidation

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Foreign Currency

The functional and reporting currency for PCS Holdings, LLC and all of its wholly owned subsidiaries is the U.S. dollar. Any gains or losses resulting from the remeasurement of foreign currency transactions is recorded in other expense, net on the condensed consolidated statement of operations and comprehensive loss. All foreign transactions in monetary accounts are valued using the current exchange rate, whereas non-monetary accounts are valued using the historical exchange rates.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions reflected in the financial statements, include, but are not limited to the useful life of long- lived assets, fair values of assets acquired and liabilities assumed, and the valuation and related inputs of member unit-based compensation awards. Actual results could differ from such estimates.

Concentration of Credit Risk and Significant Customers

The Company maintains its cash and cash equivalents in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.

The Company may experience some concentration of credit risk related to certain agreements with universities, government education agencies, companies, and other customers. As of September 30, 2023, no customer represented more than 10% of the outstanding accounts receivable or revenue.

In accordance with our accounting policy, the Company actively monitors the credit risk of our customers, age of outstanding receivables, and general economic conditions to evaluate the risk of credit loss.

Cash and Cash Equivalents

Investments purchased with an original maturity of three months or less at the date of acquisition are considered cash equivalents. As of September 30, 2023, the Company did not hold any cash equivalents.

Payments due from financial institutions for third-party payment card transactions are classified as cash and cash equivalents in the condensed consolidated balance sheet as these amounts are normally processed within 48 hours. The amount due from financial institutions related to these transactions totaled $0.6 million as of September 30, 2023.

In addition, cash received in the lockbox related to subscription revenue follows a similar processing time. The Company did not have any amounts related to these transactions as of September 30, 2023.

Accounts Receivable, Net

Accounts receivable, net represents amounts due from secondary and postsecondary institutions, statewide education-related agencies, and corporations primarily located in the U.S. related to its services, which include credential ordering, premium services, award issuing, and education marketing services.

Accounts receivables are recorded at the invoiced amount and do not bear interest. The Company performs on-going credit evaluations of its clients on a regular basis and does not require collateral.

The allowance for doubtful accounts is immaterial because the Company has determined that there is not a material risk for uncollectible accounts. The Company writes off accounts when it is determined the amounts cannot be collected. The Company did not record any bad debt expense during the nine months ended September 30, 2023.

Depreciation and Amortization

Fixed assets include computer equipment, software, office furniture and equipment, and leasehold improvements and are recorded at cost. Depreciation and amortization are computed using the straight-line method based on the following estimated useful lives:


Computer equipment		3 years
Office furniture and equipment		3-5 years
Software		3 years
Leasehold improvements (1)		5 years

(1)

Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the improvements.

The Company’s intangible assets are amortized on a straight-line basis over the period in which the Company expects to receive the benefit of the assets. Estimated useful lives for the Company’s intangible assets are as follows:


Acquired technology		1-10 years
Trademarks & tradenames		1-10 years
Customer relationships		5-10 years

Goodwill

Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value assigned to the individual assets acquired and liabilities assumed. The Company assesses goodwill for impairment at least annually on October 1st.

In order to test goodwill for impairment, the Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Relevant events and circumstances must be assessed in that evaluation.

Examples of such events or circumstances include macroeconomic conditions such as limitations on accessing capital, industry, and market conditions such as an increased competitive environment, cost factors that have a negative impact on earnings and cash flows, overall financial performance such as declining revenues or cash flows, changes in management or key personnel, and a sustained decrease in share price, among other examples.

If, after assessing the totality of events or circumstances such as those described above, the Company determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company must perform the quantitative goodwill impairment test. The quantitative goodwill impairment

test compares the fair value of the reporting unit to it carrying value, including goodwill, to determine if there is a potential impairment. If the fair value of the reporting unit exceeds it carrying amount, the goodwill of the reporting unit is considered not impaired. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. When measuring the goodwill impairment loss in that scenario, the income tax effect from any tax-deductible goodwill on the carrying amount of the reporting unit is also considered.

The Company may electively bypass the qualitative assessment described above for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test and also may resume performing the qualitative assessment in any subsequent period.

The Company determined it has only one operating segment, comprised of a single component, and thus only one reporting unit. During the nine months ended September 30, 2023, no impairment charge related to goodwill has been recorded.

Leases

The Company enters into operating lease arrangements for office space and equipment. The Company accounts for leases under Accounting Standards Codification (“ASC”) 842, Leases. Operating leases are presented as right-of-use assets, net and current and noncurrent lease liabilities in the condensed consolidated balance sheet. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term calculated using the Company’s incremental borrowing rate unless the implicit rate is readily determinable. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.

Lease agreements with lease and non-lease components are combined as a single lease component. Lease expense is recognized on a straight-line basis over the lease term in general and administrative in the Company’s condensed consolidated balance sheet. Variable lease payments are generally expensed as incurred. Leases with an initial term of 12 months or less, and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise, are not recorded on the condensed consolidated balance sheet.

Revenue Recognition

The Company applies the five-step model outlined in ASC 606, Revenue from Contracts with Customers (Topic 606) (“ASC 606”). Revenues are recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services.

A performance obligation is a promise in a contract or sales order to transfer a distinct good or service to the customer and is the unit of account in ASC 606.

The Company provides services through various types of arrangements, and, thus, the revenue recognition criteria may be applied in a manner unique to the performance obligations identified in the contract.

Revenues consists mainly of fees for credential ordering, premium services, award services, and education marketing on a secure, electronic exchange. The services are provided to secondary and postsecondary institutions, state agencies, and other organizations under the software as a service (“SAAS”) model for

contracts that generally range from one to five years. The fees are paid for on a transactional or subscription basis.

Transactional Services Revenues

Transactional revenues are recognized at the time the transaction is performed. The processing of the transaction and the delivery of the credential(s) is the only performance obligation in the contract. Fees are generally due and paid for using credit cards at the time the order is placed.

The time between order and delivery is minimal and the Company has determined that its contracts do not include significant financing components. The fees may also include other handling charges associated with the transaction.

Subscription Services Revenues

The Company typically invoices for the subscription fee at the beginning of the subscription term and the balance is typically due within 30 days.

Subscription agreements are for a fixed term. Revenues under these arrangements is recognized ratably over the term of the subscription because the nature of the Company’s performance obligation is to stand ready to provide access to its platform and perform processing services.

Certain agreements include implementation services. The amounts charged for implementation services are recognized as services are performed and are immaterial for the nine months ended September 30, 2023.

All customer contracts contain standard language addressing the cancellation of the agreement outside of the set terms. There have been no material or significant cancellations during the nine months ended September 30, 2023.

All revenues are presented net of taxes imposed on specific revenue generating transactions, including sales tax.

Cost of Revenues

Cost of revenues includes direct costs associated with delivery and print of credentials, including royalties and other third-party costs, costs to run the technology platform supporting delivery of credentials, costs to integrate student information systems with the Company’s systems, and costs of personnel associated with the implementation, support, and adoption processes.

Deferred Commissions

Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a period of benefit. The Company determined this period of benefit by taking into consideration type of customers, type of product and type of services provided and other factors. There are no direct commissions relating to the renewal of contracts. As of September 30, 2023, the average period of benefit was five years.

Amortization of deferred commissions is included in sales and marketing expenses on the condensed consolidated statement of operations and comprehensive loss.

The Company evaluates the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. The Company did not recognize an impairment charge during the nine months ended September 30, 2023.

As of September 30, 2023, the Company had total deferred commissions of $4.5 million, of which $1.2 million is classified as a current asset. For the nine months ended September 30, 2023, the Company had amortization expense related to deferred commissions of $0.8 million.

Income Taxes

The Company is a disregarded entity for tax purposes, as it was formed as a limited liability corporation and is taxed as a partnership for federal and state tax purposes. However, the Company’s wholly owned subsidiaries, Pathway Acquisition Holdings Inc., and Pathway Acquisition Inc. (collectively, “Pathway”) and Digitary were formed as corporations and are taxed as such. Pathway and Digitary are subject to certain U.S. federal, state and foreign income taxes with respect to their allocable share of taxable income or loss.

Since Pathway and Digitary are corporations, deferred tax assets (“DTAs”) and liabilities (“DTLs”) are recognized under the asset and liability method, which requires the recognition of deferred tax assets and deferred tax liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

DTAs, including tax loss and credit carryforwards, and DTLs 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income (loss) in the period that includes the enactment date. DTAs are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized in future tax years. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income in each tax jurisdiction and, to the extent the Company believes recovery is not likely, establishes a valuation allowance.

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the condensed consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

Fair Value of Financial Instruments

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The Company categorizes its fair value measurements into one of the following three levels based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy prioritizes the quality and reliability of the information used to determine fair values.


Input Level		Definitions
Level 1		Inputs are quoted market prices in active markets for identical assets or liabilities (these are observable market inputs).

Level 2		Inputs other than quoted prices included within Level 1 that are observable for the asset or liability (includes quoted market prices for similar assets or identical or similar assets in markets in which there are few transactions, prices that are not current or prices that vary substantially).

Level 3		Inputs are unobservable inputs that reflect the entity's own assumptions in pricing the asset or liability (used when little or no market data is available).

The fair value of cash and cash equivalents, accounts receivable, prepaids expenses, other current assets, accounts payable and accrued expenses and other current liabilities, approximate their carrying value due to their short-term maturities. Debt is presented at amortized costs, which is based on borrowing rates available to the Company when the term loan agreements were executed.

Member Unit-Based Compensation

The Company has granted profit interest units (“Class B Units”) to certain executives and an external consultant of the Company which vest upon satisfaction of a requisite service period or vest upon the achievement of a specific investor return multiple following a distribution made or proceeds from a sale. The time-vesting Class B units include provisions for accelerated vesting upon a sale transaction. The time-vesting Class B Units are measured at fair value upon the grant date and the related expense is recognized over the requisite service period on a straight-line basis. Forfeitures are recognized as incurred. Class B Units subject to performance conditions are recognized once the event is deemed probable to occur.

The Company also issued Unit Appreciation Rights (“UARs”) to certain employees of Parchment or its subsidiaries that include time-vesting and/or performance-vesting conditions. The vesting conditions for time-vesting UARs and performance-vesting UARs are similar to those of Class B Units; except that recipients of the UARs must be employed by the Company when a change in control occurs. Given this requirement, the time-vesting UARs effectively include a performance vesting condition. The UARs are cash-settled liability classified awards and the earned amount will be marked to market based on the fair value of the UARs at each reporting period after the performance condition is determined to be probable.

Recently Adopted Accounting Standards and Guidance

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, that changes the impairment model for most financial assets and certain other instruments. For receivables, loans, and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for losses. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. In addition, an entity will have to disclose significantly more

information about allowances and credit quality indicators. The Company adopted this ASU on January 1, 2023. The adoption of ASU 2016-13 had no material impact on the Company’s condensed consolidated financial statements and related disclosures.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). This ASU provides optional expedients and exceptions for a limited period of time for accounting for contracts, hedging relationships, and other transactions affected by the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. Specifically, to the extent the Company’s loan agreement is modified to replace LIBOR with another interest rate index, ASU 2020-04 will permit the Company to account for the modification as a continuation of the existing contract without additional analysis. Effective June 23, 2023, the Company transitioned its loan agreement from LIBOR to the Secured Overnight Financing Rate (“SOFR”), as discussed in Note 12, and adopted the optional expedient to account for the modification as a continuation of the existing contract.

Revenues

Revenues is disaggregated by type of services for the nine months ended September 30, 2023 as follows (in thousands):


	Nine Months Ended September 30, 2023
Transactional services revenues	$	58,831
Subscription services revenues		22,074
Revenues	$	80,905

Contract Balances (Deferred Revenue)

As of September 30, 2023, deferred revenue was $22.9 million, of which $22.0 million is classified as current and is expected to be recognized as revenue within 12 months, with the remainder to be recognized over the following year. The change in the Company’s contract liabilities of $8.9 million during the nine months ended September 30, 2023, is based on the opening balance amount of $14.0 million as of January 1, 2023, and the closing balance amount of $22.9 million as of September 30, 2023.

The change is due to cash received upfront from customers and amounts for which the Company has an unconditional right to receive cash related to subscription services of $37.3 million, and the recognition of $28.4 million in subscription services revenues as the Company satisfies its performance obligations over the term of the subscription.

Acquisition and Merger

Quottly

On March 10, 2023 (the acquisition date), the Company acquired Quottly in a non-taxable stock transaction. As a result of the acquisition, the Company will offer a new service that helps students manage their course and program sharing, transfer articulation, and dual enrollment, all from a single, cloud-based technology platform.

The decision to acquire is based on the expectation that this will broaden the Company’s existing product portfolio and customer base. The Company plans to transform the student and institutional experience around credit transfer by combining Quottly’s course and credit transfer solutions with the Company’s scaled network of school districts, colleges, and universities.

The Company’s condensed consolidated results for the nine months ended September 30, 2023, include Quottly’s operations since the acquisition date.

The transaction costs associated with the acquisition were $0.9 million which are recorded in general and administrative expenses in the condensed consolidated statement of operations and comprehensive loss.

The acquisition-date fair value of the purchase price consideration for Quottly totaled $16.6 million. The purchase price consideration consisted of $14.0 million paid in cash at the closing of the acquisition, $0.9 million related to the fair value of the “acquisition earnout” or contingent consideration issued at the closing of the acquisition, and $1.7 million is deferred. Of the $1.7 million deferred, $0.2 million was paid in August 2023 and the remaining $1.5 million will be paid 18-months after the closing of the acquisition.

If the acquired business attains $5.3 million in annual recurring revenue during the 12-month period beginning as of the acquisition date and the Company renews certain customer contracts of Quottly, the Company will pay an additional cash consideration of up to $1.5 million to the sellers’ of Quottly. The acquisition earnout is accounted for as a liability and recorded at fair value as of the acquisition date. The acquisition earnout liability is remeasured at the end of each reporting period, with the corresponding gain or loss recorded within general and administrative in the condensed consolidated statement of operations and comprehensive loss.

As of September 30, 2023, the fair value of the earnout liability was $1.1 million and a charge of $0.2 million was recorded during the nine months ended September 30, 2023.

The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):


	Fair Value
Cash	$	402
Accounts receivable		912
Fixed assets		7
Intangible assets		10,699
Goodwill		9,182
Other assets, current and non-current		1,509
Accounts payable, accrued expenses and other current and long-term liabilities		(384	)
Deferred revenue, current and noncurrent		(3,877	)
Deferred tax liability		(1,845	)
Net assets acquired	$	16,605

The excess of purchase price over the fair value of net tangible and intangible assets acquired was recorded as goodwill, which is primarily attributed to the assembled workforce and expanded cross-sell opportunities.

The Company used a third-party specialist to value certain intangible assets. The fair value of customer relationships was determined using a multi-period excess earnings method, and the fair values of trademarks and tradenames and developed technology were determined using a relief from royalty method.

Of the $10.7 million of intangible assets acquired, $8.6 million related to Quottly’s customer base, existing customer contracts, estimated growth as well as expected attrition of customers. Based on the low attrition of Quottly customers, the growth model developed by management and the current customer base, a life of 10 years was applied and will be amortized straight-line over that period.

Developed technology represents $2.0 million of the acquired intangible assets. This technology is used for facilitating course sharing, transfer articulation and dual enrollment. Management has identified this technology as compatible with the Company’s core stack and plans to migrate the Quottly stack into the existing Company platform; therefore the useful life for this is 5 years. Parchment expects to fully combine the Quottly technology platform into their own by the end of 2028.

Trademarks and tradenames represent $0.1 million of the acquired intangible assets and a 5- year useful life was ascribed.

The fair values assigned to tangible assets acquired and liabilities assumed are based on management’s estimates and assumptions and certain amounts noted above are preliminary and subject to change during the remaining measurement period as the Company obtains additional information. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.

Fixed Assets, Net

Fixed assets, net consisted of the following as of September 30, 2023 (in thousands):


	As of September 30, 2023
Computer equipment	$	725
Office furniture and equipment		598
Software		85
Leasehold improvements		358
		1,766
Less: Accumulated depreciation		(1,207	)
Fixed assets, net	$	559

Depreciation expense on fixed assets for the nine months ended September 30, 2023 was $0.3 million.

Goodwill

The Company’s goodwill was $182.3 million as of September 30, 2023. Goodwill activity was as follows for the nine months ended September 30, 2023 (in thousands):


Balance as of December 31, 2022	$	173,105
Addition for acquisition of Quottly		9,182
Balance as of September 30, 2023	$	182,287

Intangible Assets

Intangible assets, net consisted of the following as of September 30, 2023 (in thousands):


	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Tradenames & trademarks	$	17,549	$	(6,649	)	$	10,900
Acquired technology		58,644		(29,333	)		29,311
Customer relationships		141,440		(48,602	)		92,838
Total intangible assets	$	217,633	$	(84,584	)	$	133,049

Amortization expense related to intangible assets was $15.1 million for the nine months ended September 30, 2023.

The estimated future amortization expense related to the intangible assets as of September 30, 2023 is as follows (in thousands):


	Amounts
Remainder of 2023	$	5,303
2024		20,639
2025		20,585
2026		20,585
2027		20,585
Thereafter		45,352
Total	$	133,049

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following as of September 30, 2023 (in thousands):


	As of September 30, 2023
Payroll and related benefits	$	4,158
Customer payables		7,055
Holdbacks of consideration for business acquisitions		2,807
Accrued interest		3,263
Sales tax accruals		1,329
Other		2,579
Total accrued expenses and other current liabilities	$	21,191

In 2021, the Company began offering a 401k match to employees. To be eligible for the match, employees must be 18 years of age, have worked 1,000 hours during the year, and be employed by the Company as of December 31st. The employer match is discretionary and equals 50% of the first 5% contributed by employees, with an annual cap of $5 per employee. The match is funded annually and will be paid by the Company after the end of the year in one lump sum deposit to into each employee’s 401k account. Both 401k

and Roth contributions are eligible for the discretionary match of $5 per employee. As of September 30, 2023, $0.5 million was accrued for the employer match.

Customer payables relate to surcharges billed to and collected from members of the customer’s organization for transaction processing services. These are surcharges charged by the Company’s customer to members of its organization.

The Company bills for and collects these surcharges directly from the members of the customer’s organization at the time the transaction is processed. The amounts are not fees of the Company and are not recognized in the statement of operations. The amounts are included in accrued expenses and other current liabilities are amounts that have been collected and have not yet remitted to the customer.

Holdbacks of consideration for business combinations relates to amounts not yet paid to the sellers. The amounts are typically withheld from the initial payment as a source for the Company to recover and satisfy representations, warranties and indemnities made by the seller. The amounts may be retained for up to a 24-month period from the date of closing.

10.

Members’ Equity

Outstanding equity interests in the Company consists of Class A units (“Class A Units”). The Company is authorized to issue an unlimited number of Class A Units, at the sole discretion of the Board of Managers.

As of September 30, 2023, the Company had 30,319,958 Class A Units issued and outstanding. The Company did not issue any Class A Units during the nine months ended September 30, 2023.

The Class A Units are entitled to a cumulative yield that accrues at a rate of 8% per annum, compounded quarterly, on the amount of the unreturned capital contributions and unpaid yield. As of September 30, 2023, the total unpaid yield for the Class A Units was approximately $102.1 million. The Class A Units are not redeemable and only the holders of Class A Units are entitled to voting rights in the Company.

Distributions are payable as, if, and when declared by the Company’s Board of Managers, or upon the liquidation or dissolution of the Company. Distributions paid by the Company are first allocated to Class A Units until the balance of the unreturned capital contributions and accrued and unpaid yield have been fully settled. Any remaining distributable cash is allocated pro rata among holders of the Class A Units and the Class B Units, subject to any applicable vesting conditions and participation thresholds of the Class B Units that may be set from time to time as the Class B Units are issued. As of September 30, 2023, the Company has not returned any capital or declared any dividends on the Class A Units.

The total liquidation preference for the Class A Units as of September 30, 2023 was approximately $405.3 million.

Pursuant to the Company’s LLC Agreement, and except as otherwise provided by the Delaware Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, are solely the debts, obligations and liabilities of the Company. No unitholder of the Company shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a unitholder or acting as a member or manager of the Company. A unitholder’s liability (in its capacity as such) for the Company’s liabilities and losses shall be limited to such unitholder’s interest of the Company’s assets.

11.

Member Unit-Based Compensation

Class B Units

The Class B Units are profits interests granted to certain executives and an external consultant of the Company. Time-vesting Class B Units vest over four to five years with 20% to 25% vesting after year one and monthly vesting thereafter. Performance-vesting Class B Units vest upon the achievement of a specific investor return multiple following a distribution made or proceeds from a sale.

The Company recorded $0.5 million of compensation expense related to the time-vesting Class B Units for the nine months ended September 30, 2023 as a component of general and administrative expenses in the condensed consolidated statement of operations and comprehensive loss. As the performance condition is not probable to occur, no compensation expense has been recognized related to the performance-vesting Class B Units.

A summary of the activity for the Class B Units subject to time-vesting for the nine months ended September 30, 2023 is as follows:


	Amount of time-vesting Class B Units			Weighted average grant date fair value
Outstanding and unvested as of December 31, 2022		57,025		$	4.79
Units granted		40,427		$	6.93
Units vested		(79,906	)	$	5.87
Units forfeited		—		$	—
Outstanding and unvested as of September 30, 2023		17,546		$	4.79
Vested as of September 30, 2023		298,006		$	5.36

In some cases, a grant date has not been established for certain Class B Units subject to time- vesting due to a discretionary clawback feature that hinders the Company and employee from having a mutual understanding of the key terms and conditions of the Class B Units. The discretionary clawback feature provides the Company the right to cancel any Class B Units whether vested or unvested upon a separation for any reason. As of September 30, 2023, the amount of Class B Units without an established grant date is 825,377, and therefore no compensation expense has been recognized for these Class B Units.

During the nine months ended September 30, 2023, the Company granted 16,844 Class B Units subject to-performance vesting with a weighted-average grant date of $2.54 per unit. As of September 30, 2023, the amount of unvested Class B Units subject to performance- vesting is 707,466 units with a weighted-average grant date fair value of $2.36 per unit. No Class B Units subject to performance-vesting have vested as of September 30, 2023.

As of September 30, 2023, the Company had $0.1 million of unrecognized compensation expense related to the granted and unvested Class B units subject to time-vesting, which will be recognized on a straight-line basis over the requisite service period, and $1.7 million of unrecognized compensation expense related to the granted and unvested Class B units subject to performance-vesting, which will be recognized when the event is deemed probable. The Class B units subject to time-vesting, but without an established grant date, represent approximately $3.7 million in additional unrecognized compensation expense.

Unit Appreciation Rights

The UARs are cash-settled liability-classified awards granted to certain employees of Parchment or its subsidiaries. The Company issues UARs with two distinct vesting criteria. The Company typically issues UARs that are subject to time-vesting and/or UARs that are subject to performance-vesting.

The vesting conditions for time-vesting UARs and performance-vesting UARs are similar to those of Class B Units; except that recipients of the UARs must be employed by the Company when a change in control occurs. Given this requirement, the time-vesting UARs effectively include a performance vesting condition. As the performance condition is not probable to occur, no liability related to the UARs with time or performance conditions has been recognized, and therefore, no compensation expense has been recognized.

The Company granted 143,178 UARs during the nine months ended September 30, 2023 with a weighted average fair value of $3.10 per unit. As of September 30, 2023, the total outstanding and unvested UARs is 1,153,507, of which 783,098 are subject to time-vesting and 370,409 are subject to performance-vesting only.

As of September 30, 2023, the Company had $4.7 million of unrecognized compensation expense related to the unvested UARs.

The Company estimates the fair value of the Class B Units and UARs using an option pricing model (“OPM”). The equity value of the Company is allocated between the equity securities comprising the capital structure based on the terms described in the Company’s LLC Agreement and the Class B/UAR grant agreements. The term used in the OPM is the Company’s expected term to a liquidity event. The Company estimates volatility for Class B Units and UARs granted by leveraging the third-quartile asset volatility of a peer group of companies based on the Company’s capital structure. The asset volatility is estimated using the Merton model, based on the historical equity volatilities for the period immediately preceding the valuation date for the term that is approximately equal to the expected term to the liquidity event. The risk-free interest rate is based on the U.S. Constant Maturity Treasury rate for the term to the liquidity event, in effect at the valuation date. The dividend yield of zero is based on the Company’s current expectations for the future.The following table provides the weighted-average inputs for the expected term, equity value of the Company, volatility, risk-free interest rate, and dividend yield for Class B Units granted during the nine months ended September 30, 2023 and for UARs as of September 30, 2023:


	Nine Months Ended September 30, 2023
Expected term		1.05 years
Equity value of the Company	$	659.4 million
Volatility			55.00	%
Risk-free interest rate			4.71	%
Dividend yield			—

12.

Debt

Debt consisted of the following as of September 30, 2023 (in thousands):


	As of September 30, 2023
Term loan	$	122,789
Unamortized issuance costs		(1,300	)
Total debt		121,489
Less: current portion		(1,270	)
Debt, net of current portion	$	120,219

In January 2020, in connection with the purchase of Parchment, the Company entered into a term loan agreement for $110.0 million in principal with a financial institution (the “Lender”). The term loan matures on January 30, 2026. Principal payments are due on a quarterly basis and commenced in June of 2020.

In this same agreement with the Lender, the Company also entered a line of credit (“LOC”) agreement for $10.0 million. The same interest rate as the term loan is also applied to anything outstanding on the LOC. The Company drew a total of $6.0 million on the LOC in March and May of the current year to fund the acquisition of Quottly. The total amount drawn on the LOC was repaid in August 2023. As of September 30, 2023, there was no outstanding balance on the LOC. The LOC matures and terminates on January 30, 2026.

In June of 2021 the Company expanded its loan agreement by $17.0 million to fund the acquisition of Digitary. For the nine months ended September 30, 2023, the Company made term loan payments totaling $1.0 million. On June 23, 2023, the Company entered into an amendment to the loan agreement whereby all borrowings, which were determined by reference to the LIBOR, were replaced with the SOFR. For SOFR loans, the loans now bear interest at the Adjusted Term SOFR Rate, which is equal to the Term SOFR Reference Rate, as published by the CME term SOFR administrator, plus the term SOFR adjustment (“Term SOFR Adjustment”) as dictated by the interest rate period elected by the Company.The Term SOFR Adjustment ranges from 0.10% to 0.25% per annum. The transition from LIBOR to SOFR became effective on June 23, 2023. As of September 30, 2023, the interest rate on the term loan was 10.25%.

All the Company’s units and assets are pledged as collateral in the event of a default.

There were $2.8 million credit agreement fees for the initial term loan and $0.4 million for the amendment in 2021, totaling $3.2 million. For the nine months ended September 30, 2023, $0.4 million was amortized and included within interest expense. The remaining balance associated with these fees as of September 30, 2023, was $1.3 million. These fees are amortized on a straight-line basis over the life of the loan, which is not materially different than the effective interest method.

The Company is required to meet certain financial and reporting covenants to maintain good standing with the Lender.

The primary financial covenant is a maximum total net debt to consolidated adjusted EBITDA ratio. As of September 30, 2023, the Company was in compliance with these covenants.

The future principal debt payments under long term debt agreements are as follows as of September 30, 2023 (in thousands):


	Amounts
Remainder of 2023	$	318
2024		1,270
2025		1,270
2026		119,931
Total	$	122,789

The estimated fair value of our term loan is determined by Level 3 inputs (unobservable inputs that are not corroborated by market data). As of September 30, 2023, the fair value of our term loan is approximately $127.5 million.

13.

Commitments and Contingencies

Leases

The Company leases its office space and equipment under non-cancelable operating leases with remaining lease terms of up to 5 years.

During the nine months ended September 30, 2023, the Company recorded operating lease expense of $0.4 million and short-term lease expense of $0.5 million.

Supplemental cash flow information related to leases was as follows for the nine months ended September 30, 2023 (in thousands):


	Nine Months Ended September 30, 2023
Cash paid for amounts included in the measurement of lease liabilities	$	365
Right-of-use assets obtained in exchange for lease obligations	$	–

The future minimum lease payments under non-cancelable operating leases are as follows as of September 30, 2023 (in thousands):


	Amounts
Remainder of 2023	$	122
2024		482
2025		433
2026		382
2027		143
Thereafter		2
Total minimum operating lease payments	$	1,564
Less: Imputed interest		(145	)
Total lease liabilities	$	1,419

As of September 30, 2023, the weighted average remaining lease term was 3.4 years and the weighted average discount rate used to determine operating lease liabilities was 5.87%.

State Jurisdiction Taxes

The Company is subject to sales taxes in various states and may be audited by the taxing authorities. Provisions are made for tax liabilities and penalties that might arise from such examinations when it is both probable that a liability has been incurred and the amounts can be reasonably estimated. The Company has accrued $1.3 million for potential sales tax exposure as of September 30, 2023.

14.

Related Party Transactions

The Company agreed to pay a management fee to its financial sponsor with respect to the calendar year 2018 and each calendar year thereafter. The management fee paid is based on the Company’s EBITDA. During the nine months ended September 30, 2023, the Company paid $0.9 million in management fees.

In addition, the Company incurred transaction costs of $0.3 million for services rendered by its financial sponsor on behalf of the Company during the acquisitions in 2023.

The management fees and transaction fees are reflected in general and administrative expenses in the statement of operations.

The Company has a consulting agreement with its financial sponsor representative. During the nine months ended September 30, 2023, the Company paid $0.1 million in consulting fees.

With the acquisition of Scrip-Safe, Pete Slamkowski, the president and owner of Scrip-Safe, at the time of acquisition was retained post-acquisition as a full-time employee of the company as Vice President, Print Services. Mr. Slamkowski’s property management company is the owner of the facility that Scrip-Safe rents in Ohio and as a result receives rental income from this space. The current contract for the facility ends December 31, 2026. Rent payments made since the acquisition date in 2022 were $0.1 million.

15.

Taxes

The Company is a disregarded entity for tax purposes, as it was formed as a limited liability corporation and is taxed as a partnership for federal and state tax purposes. However, the Company’s wholly owned subsidiaries, Pathway Acquisition Holdings Inc., and Pathway Acquisition Inc. (collectively, “Pathway”), Digitary, and Quottly were formed as corporations and are taxed as such. Pathway, Digitary, and Quottly are subject to certain U.S. federal, state and foreign income taxes with respect to their corresponding share of taxable income or loss.

Parchment’s effective tax rate was -112.04% for the nine months ended September, 30, 2023. The change in the effective tax rate when compared to the statutory tax rate of 21.00%, was primarily driven by changes to the valuation allowance for certain foreign entities and the effect of flow-through entities not being subject to income taxes.

During the nine months end September 30, 2023, the Company has recorded an unrecognized tax benefit of $0.7 million, none of which would impact the effective tax rate if realized. Interest and penalties related to uncertain tax positions would be recognized in income tax expense when incurred. As of the nine months ended September 30, 2023, the Company has not recorded any interest and penalties related to uncertain tax positions.

The Company maintains a valuation allowance against certain deferred tax assets in foreign jurisdictions, as it is more likely than not that such amounts will not be fully realized.

16.

Subsequent Events

Subsequent events have been analyzed through January 31, 2024 which is the day the financial statements were available for issuance.

Unit Purchase Agreement

On October 30, 2023, the Company entered into a Unit Purchase Agreement with Instructure, Inc., a Delaware corporation (“Instructure”) and other parties. Pursuant to the Unit Purchase Agreement, Instructure will acquire all of the issued and outstanding equity interests of the Company in an all-cash transaction valued at $835.0 million.