POWERSCHOOL HOLDINGS, INC. [PWSC] Filings

10-Q 1 pwsc-20230930.htm 10-Q pwsc-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-40684

PowerSchool Holdings, Inc.

(Exact name of registrant as specified in its charter)


Delaware			85-4166024
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
150 Parkshore Drive Folsom, CA (Address of Principal Executive Offices)			95630 (Zip Code)

(877) 873-1550

(Registrant’s telephone number, including area code)

Not applicable

(Former name or former address, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol	Name of each exchange on which registered
Class A Common Stock, par value $0.0001 per share	PWSC	The New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

The registrant had 201,940,559 shares of common stock outstanding as of October 31, 2023.

TABLE OF CONTENTS


Part I - Financial Information		4
	Item 1. Condensed Consolidated Financial Statements (Unaudited)	4
	Condensed consolidated balance sheets as of September 30 , 2023 and December 31, 2022	4
	Condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30 , 2023 and 2022	6
	Condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30 , 2023 and 2022	8
	Condensed consolidated statements of cash flows for the nine months ended September 30 , 2023 and 2022	10
	Notes to unaudited condensed consolidated financial statements	12
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	28
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	47
	Item 4. Controls and Procedures	47
Part II - Other Information		48
	Item 1. Legal Proceedings	48
	Item 1A. Risk Factors	48
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	48
	Item 3. Defaults Upon Senior Securities	48
	Item 4. Mine Safety Disclosures	48
	Item 5. Other Information	49
	Item 6. Exhibits	50
Signatures		51

Part I - Financial Information

Item 1. - Condensed Consolidated Financial Statements (Unaudited)

POWERSCHOOL HOLDINGS, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for number of shares and par value)


	As of September 30, 2023		As of December 31, 2022
Assets
Current Assets:
Cash and cash equivalents	$	322,831	$	137,471
Accounts receivable - net of allowance of $7,331 and $4,712, respectively	134,621		54,296
Prepaid expenses and other current assets	37,840		36,886
Total current assets	495,292		228,653
Property and equipment - net	4,823		6,173
Operating lease right-of-use assets	18,399		8,877
Capitalized product development costs - net	109,564		100,861
Goodwill	2,492,649		2,487,007
Intangible assets - net	657,824		722,147
Other assets	32,131		29,677
Total assets	$	3,810,682	$	3,583,395
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable	$	9,019	$	5,878
Accrued expenses	102,464		84,270
Operating lease liabilities, current	4,271		5,263
Deferred revenue, current	407,956		310,536
Revolving credit facility	10,000		—
Current portion of long-term debt	8,797		7,750
Total current liabilities	542,507		413,697
Noncurrent Liabilities:
Other liabilities	2,152		2,099
Operating lease liabilities - net of current	16,390		8,053
Deferred taxes	268,171		281,314
Tax Receivable Agreement liability	392,671		410,361
Deferred revenue - net of current	5,680		5,303
Long-term debt, net	822,744		728,624
Total liabilities	2,050,315		1,849,451
Commitments and contingencies (Note 12)


Stockholders' Equity:

Class A common stock, $0.0001 par value per share, 500,000,000 shares authorized, 164,207,976 and 159,596,001 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively.	16		16
Class B common stock, $0.0001 par value per share, 300,000,000 shares authorized, 37,654,059 and 39,928,472 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively.	4		4
Additional paid-in capital	1,508,256		1,438,019
Accumulated other comprehensive loss	(2,186)		(2,122)
Accumulated deficit	(202,771)		(187,250)
Total stockholders' equity attributable to PowerSchool Holdings, Inc.	1,303,319		1,248,667
Non-controlling interest	457,048		485,277
Total stockholders' equity	1,760,367		1,733,944
Total liabilities and stockholders' equity	$	3,810,682	$	3,583,395

See notes to condensed consolidated financial statements.

POWERSCHOOL HOLDINGS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands except for per-share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenue:
Subscriptions and support	$	148,990	$	137,095	$	436,566	$	401,870
Service	20,722		19,933		57,152		55,114
License and other	12,452		5,406		21,797		12,633
Total revenue	182,164		162,434		515,515		469,617
Cost of revenue:
Subscriptions and support	36,595		39,009		111,570		114,303
Service	14,140		14,852		43,586		45,585
License and other	4,608		1,087		6,575		2,790
Depreciation and amortization	16,507		14,839		48,637		43,069
Total cost of revenue	71,850		69,787		210,368		205,747
Gross profit	110,314		92,647		305,147		263,870
Operating expenses:
Research and development	26,751		27,821		78,035		80,528
Selling, general, and administrative	53,606		45,530		156,293		133,117
Acquisition costs	2,461		11		2,461		2,630
Depreciation and amortization	15,835		15,955		47,370		48,050
Total operating expenses	98,653		89,317		284,159		264,325
Income (loss) from operations	11,661		3,330		20,988		(455)
Interest expense - net	16,409		11,158		46,539		26,923


Other expenses (income) - net	33		(3,100)		107		(3,677)
Loss before income taxes	(4,781)		(4,728)		(25,658)		(23,701)
Income tax (benefit) expense	(3,475)		(811)		(5,244)		794
Net loss	(1,306)		(3,917)		(20,414)		(24,495)
Less: Net loss attributable to non-controlling interest	(833)		(1,389)		(4,893)		(5,330)
Net loss attributable to PowerSchool Holdings, Inc.	$	(473)	$	(2,528)	$	(15,521)	$	(19,165)


Net loss attributable to PowerSchool Holdings, Inc. Class A common stock:
Basic	(473)		(2,528)		(15,521)		(19,165)
Diluted	(481)		(2,528)		(15,521)		(19,165)
Net loss attributable to PowerSchool Holdings, Inc. per share of Class A common stock, basic	$	0.00	$	(0.02)	$	(0.10)	$	(0.12)
Net loss attributable to PowerSchool Holdings, Inc. per share of Class A common stock, diluted	$	0.00	$	(0.02)	$	(0.10)	$	(0.12)
Weighted average shares of Class A common stock:
Basic	163,785,972		158,812,536		162,465,480		158,387,266
Diluted	165,666,867		158,812,536		162,465,480		158,387,266
Other comprehensive income, net of taxes:
Foreign currency translation	(174)		(741)		(66)		(1,744)
Change in unrealized gain on investments	—		—		3		—
Total other comprehensive income (loss)	(174)		(741)		(63)		(1,744)
Less: comprehensive income (loss) attributable to non-controlling interest	(33)		(149)		(12)		(350)
Comprehensive loss attributable to PowerSchool Holdings, Inc.	$	(614)	$	(3,120)	$	(15,572)	$	(20,559)

See notes to condensed consolidated financial statements

POWERSCHOOL HOLDINGS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)


	Class A common stock			Class B common stock			Additional paid-in capital		Accumulated other comprehensive loss		Accumulated deficit		Non-controlling interest		Total
	Shares	Amount		Shares	Amount
Balance—December 31, 2022	159,596	$	16	39,928	$	4	$	1,438,019	$	(2,122)	$	(187,250)	$	485,277	$	1,733,944
Issuance of common stock upon vesting of Restricted Stock Awards	1,000	—		—	—		—		—		—		—		—
Share-based compensation	—	—		—	—		15,280		—		—		—		15,280
Net share settlement of equity awards	—	—		—	—		(1,284)		—		—		—		(1,284)
Other comprehensive income (loss)	—	—		—	—		—		89		—		—		89
Allocation of equity to noncontrolling interests	—	—		—	—		(772)		—		—		772		—
Exchange of Class B common stock for Class A common stock related to secondary offering	2,274	—		(2,274)	—		27,642		—		—		(27,642)		—
Adjustments to deferred taxes and Tax Receivable Agreement liability related to secondary offering	—	—		—	—		(1,255)		—		—		—		(1,255)
Net loss	—	—		—	—		—		—		(11,853)		(2,960)		(14,813)
Balance—March 31, 2023	162,870	$	16	37,654	$	4	$	1,477,630	$	(2,033)	$	(199,103)	$	455,447	$	1,731,961
Issuance of common stock upon vesting of Restricted Stock Awards	586	—		—	—		—		—		—		—		—
Share-based compensation	—	—		—	—		18,261		—		—		—		18,261
Net share settlement of equity awards	—	—		—	—		(141)		—		—		—		(141)
Adjustments to deferred taxes	—	—		—	—		223		—		—		—		223
Other comprehensive income (loss)	—	—		—	—		—		21		—		—		21
Allocation of equity to noncontrolling interests	—	—		—	—		(2,387)		—		—		2,387		—
Net loss	—	—		—	—		—		—		(3,195)		(1,100)		(4,295)
Balance—June 30, 2023	163,456	$	16	37,654	$	4	$	1,493,586	$	(2,012)	$	(202,298)	$	456,734	$	1,746,030
Issuance of common stock upon vesting of Restricted Stock Awards	751	—		—	—		—		—		—		—		—
Share-based compensation	—	—		—	—		15,539		—		—		—		15,539
Net share settlement of equity awards	—	—		—	—		(113)		—		—		—		(113)
Adjustments to deferred taxes	—	—		—	—		391		—		—		—		391
Other comprehensive income (loss)	—	—		—	—		—		(174)		—		—		(174)
Allocation of equity to noncontrolling interests	—	—		—	—		(1,147)		—		—		1,147		—
Net loss	—	—		—	—		—		—		(473)		(833)		(1,306)
Balance—September 30, 2023	164,207	$	16	37,654	$	4	$	1,508,256	$	(2,186)	$	(202,771)	$	457,048	$	1,760,367


	Class A common stock				Class B common stock				Additional paid-in capital		Accumulated other comprehensive (loss) income		Accumulated deficit		Non-controlling interest		Total
	Shares		Amount		Shares		Amount
Balance—December 31, 2021	158,034		$	16	39,928		$	4	$	1,399,967	$	(216)	$	(165,026)	$	488,213	$	1,722,958
Issuance of common stock upon vesting of Restricted Stock Awards	116		—		—		—		—		—		—		—		—
Share-based compensation	—		—		—		—		12,209		—		—		—		12,209
Foreign currency translation	—		—		—		—		—		(469)		—		—		(469)
Allocation of equity to noncontrolling interests	—		—		—		—		(2,024)		—		—		2,024		—
Deferred offering costs	—		—		—		—		(295)		—		—		—		(295)
Adjustments to deferred taxes	—		—		—		—		212		—		—		—		212
Cumulative effect adjustment upon adoption of ASC 842	—		—		—		—		—		—		(1,437)		—		(1,437)
Net loss	—		—		—		—		—		—		(12,113)		(2,007)		(14,120)
Balance—March 31, 2022	158,150		$	16	39,928		$	4	$	1,410,069	$	(685)	$	(178,576)	$	488,230	$	1,719,058
Issuance of common stock upon vesting of Restricted Stock Awards	116		—		—		—		—		—		—		—		—
Share-based compensation	—		—		—		—		14,937		—		—		—		14,937
Foreign currency translation	—		—		—		—		—		(534)		—		—		(534)
Allocation of equity to noncontrolling interests	—		—		—		—		(2,605)		—		—		2,605		—
Net loss	—		—		—		—		—		—		(4,525)		(1,933)		(6,458)
Balance—June 30, 2022	158,266		$	16	39,928		$	4	$	1,422,401	$	(1,219)	$	(183,101)	$	488,902	$	1,727,003
Issuance of common stock upon vesting of Restricted Stock Awards	1,099		—		—		—		—		—		—		—		—
Share-based compensation	—		—		—		—		13,300		—		—		—		13,300
Net share settlement of equity awards	—		—		—		—		(8,825)		—		—		—		(8,825)
Adjustments to deferred taxes	—		—		—		—		843		—		—		—		843
Foreign currency translation	—		—		—		—		—		(741)		—		—		(741)
Allocation of equity to noncontrolling interests	—		—		—		—		1,945		—		—		(1,945)		—
Net loss	—		—		—		—		—		—		(2,528)		(1,389)		(3,917)
Balance—September 30, 2022	$	159,365	$	16	$	39,928	$	4	$	1,429,664	$	(1,960)	$	(185,629)	$	485,568	$	1,727,663

See notes to condensed consolidated financial statements.

POWERSCHOOL HOLDINGS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)


	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities:
Net loss	$	(20,414)	$	(24,495)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	96,007		91,119
Share-based compensation	46,904		38,100
Amortization of operating lease right-of-use assets	2,610		(1,189)
Change in fair value of acquisition-related contingent consideration	(273)		(5,586)
Amortization of debt issuance costs	2,745		2,656
Provision for allowance for doubtful accounts	2,706		(329)
Gain on lease modification	(454)		—
Write-off of right-of-use assets and disposal of property and equipment	52		8,675
Changes in operating assets and liabilities — net of effects of acquisitions:
Accounts receivables	(82,468)		(52,651)
Prepaid expenses and other current assets	(905)		1,635
Other assets	(2,896)		(1,526)
Accounts payable	2,986		(5,621)
Accrued expenses	(6,101)		(521)
Other liabilities	(4,162)		(5,948)
Deferred taxes	(6,548)		(507)
Tax Receivable Agreement liability	676		(2,342)
Deferred revenue	97,186		65,312
Net cash provided by operating activities	127,651		106,782
Cash flows from investing activities:
Purchases of property and equipment	(1,331)		(2,844)
Proceeds from sale of property and equipment	23		—
Investment in capitalized product development costs	(28,714)		(33,285)
Purchase of internal use software	(259)		—
Acquisitions—net of cash acquired	(9,753)		(31,155)
Payment of acquisition-related contingent consideration	(3,528)		(1,392)
Net cash used in investing activities	(43,562)		(68,676)
Cash flows from financing activities:
Taxes paid related to the net share settlement of equity awards	(1,538)		(8,824)
Proceeds from Revolving Credit Agreement	20,000		70,000
Proceeds from First Lien Debt amendment	99,256		—
Repayment of Revolving Credit Agreement	(10,000)		(70,000)
Repayment of First Lien Debt	(6,074)		(5,813)
Payment of debt issuance costs	(309)		—
Payments of deferred offering costs	—		(295)
Net cash provided by (used in) financing activities	101,335		(14,932)


	Nine Months Ended September 30,
	2023		2022
Effect of foreign exchange rate changes on cash	(75)		(782)
Net decrease in cash, cash equivalents, and restricted cash	185,349		22,392
Cash, cash equivalents, and restricted cash—Beginning of period	137,982		86,991
Cash, cash equivalents, and restricted cash—End of period	$	323,331	$	109,383
Supplemental disclosures of cash flow information:
Cash paid for interest	$	43,522	$	24,700
Cash paid for income taxes	2,330		1,586
Supplemental disclosures of noncash investing and financing activities:
Property and equipment additions in accounts payable and accrued liabilities	$	48	$	326
Capitalized interest related to investment in capitalized product development costs	1,296		497
Reconciliation of cash, cash equivalents, and restricted cash
Cash and cash equivalents	$	322,831	$	108,873
Restricted cash, included in other current assets	500		510
Total cash, cash equivalents, and restricted cash	$	323,331	$	109,383

See notes to condensed consolidated financial statements.

POWERSCHOOL HOLDINGS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. BUSINESS

Background and Nature of Operations

PowerSchool Holdings, Inc. (the “Company,” “PowerSchool,” “we,” “us,” or “our”) was formed as a Delaware corporation on November 30, 2020 for the purpose of completing an initial public offering (“IPO”) and a series of transactions in order to carry on the business of PowerSchool Holdings LLC (“Holdings LLC”), formerly known as Severin Holdings, LLC. Our Principal Stockholders are Onex Partners Managers LP (“Onex”) and Vista Equity Partners (“Vista”).

The transactions included amendments to the Company’s operating agreement to modify its capital structure by replacing the membership interests then held by its existing owners with a new class of membership interests (“LLC Units”) held initially by Severin Topco LLC (“Topco LLC”), a portion of which have a participation threshold (the “Participation Units”) and appointing the Company as the sole managing member of Holdings LLC; issuance of unrestricted and restricted Class A common stock in exchange for vested and unvested pre-IPO share-based awards, issuance of 39,928,472 shares of Class B common stock, par value $0.0001 per share to Topco LLC, on a one-to-one basis with the number of LLC Units (other than Participation Units), restructuring of certain entities (“Blocker Entities”) associated with the Principal Stockholders, and execution of an exchange agreement (the “Exchange Agreement”) with Topco LLC. Pursuant to the Exchange Agreement, Topco LLC is entitled to exchange LLC Units (other than Participation Units), together with an equal number of shares of Class B common stock, for shares of Class A common stock on a one-for-one basis or, at its election, for cash from a substantially concurrent public offering or private sale. Participation Units may be exchanged for a number of shares of Class A common stock based on an exchange formula that takes into account the current value of a share of Class A common stock and a pre-determined participation threshold. Additionally, the Company entered into a tax receivable agreement (the “TRA”) with Topco LLC, and the Principal Stockholders that provides for the payment by the Company to Topco LLC and the Principal Stockholders, collectively, of 85% of the amount of cash savings, if any, in U.S. federal, state and local income taxes. Collectively, these transactions are referred to as “Organizational Transactions”.

The Company’s cloud platform is an integrated, enterprise-scale suite of solutions purpose-built for the K-12 education market. The Company’s platform is embedded in school workflows and is used by educators, students, administrators, and parents. Its cloud-based technology platform helps schools and districts efficiently manage state reporting and related compliance, special education, finance, human resources, talent, registration, attendance, funding, learning, instruction, grading, assessments and analytics in one unified platform. The Company’s integrated technology approach streamlines operations, aggregates disparate data sets, and develops insights using predictive modelling and machine learning.

The Company is headquartered in Folsom, California, and together with its subsidiaries has locations in the United States (“U.S.”), Canada, India, and the United Arab Emirates.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying interim condensed consolidated balance sheet as of September 30, 2023, the interim condensed consolidated statements of operations and comprehensive loss and stockholders’ equity for the three and nine months ended September 30, 2023 and 2022, and cash flows for the nine months ended September 30, 2023 and 2022, and the notes to such interim condensed consolidated financial statements are unaudited.

These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information. As permitted under those rules, we have condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements.

These unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in management’s opinion, include all adjustments necessary to

state fairly the consolidated financial position of the Company as of September 30, 2023, the results of operations for the three and nine months ended September 30, 2023 and 2022 and cash flows for the nine months ended September 30, 2023 and 2022. These adjustments consist of normal and recurring items. The results of operations for the nine months ended September 30, 2023 and cash flows for the nine months ended September 30, 2023 are not necessarily indicative of the results expected for the year ending December 31, 2023 or any future interim or annual period. Our unaudited interim condensed consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and related notes provided in our Annual Report on Form 10-K for the year ended December 31, 2022.

The Company is an Emerging Growth Company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, Emerging Growth Companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an Emerging Growth Company or (ii) it affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act.

On June 30, 2023, the last day of our second fiscal quarter in 2023, the market value of our Class A common stock held by non-affiliates exceeded $700.0 million. Accordingly, we will be deemed a large accelerated filer as of December 31, 2023. As such, we will no longer (i) qualify as an Emerging Growth Company and (ii) be able to take advantage of the extended timeline to comply with new or revised accounting standards applicable to public companies beginning with our Annual Report on Form 10-K for the year ending December 31, 2023.

Principles of Consolidation

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

Use of Estimates

Use of estimates is required in the preparation of the consolidated financial statements in conformity with GAAP. Management makes estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that it believes are reasonable under the circumstances.

The estimates the Company evaluates include, but are not limited to:

•the fair value of assets acquired and liabilities assumed in business combinations, including acquired intangible assets, goodwill, contingent consideration and liabilities associated with deferred revenue and deferred taxes;

•the average period of benefit related to contract cost assets;

•the allowance for doubtful accounts;

•the fair value of certain stock awards;

•the useful lives and recoverability of long-lived assets, including capitalized product development costs;

•the recognition, measurement and valuation of deferred income taxes; and

•the actual amounts and timing of payments under the Tax Receivable Agreement

Actual results could differ from those estimates under different assumptions or conditions.

Recent Accounting Pronouncements Not Yet Adopted

There are no recently issued accounting pronouncements that are expected to have a material impact on the Company’s condensed consolidated financial statements.

Accounting Pronouncements Recently Adopted

On January 1, 2023, the Company prospectively adopted ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). This update changes the accounting for recognizing impairments of financial assets, such that credit losses for certain types of financial instruments will be estimated based on expected losses. The update also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The adoption of the accounting pronouncement did not have a material impact on the valuation of the Company’s financial instruments.

Cash and cash equivalents

The Company considers all highly liquid investment securities with remaining maturities at the date of purchase of three months or less to be cash equivalents.

Significant Accounting Policies

There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2022 that have had a material impact on our condensed consolidated financial statements and related notes.

3. BUSINESS COMBINATIONS

We completed one acquisition during the nine months ended September 30, 2023 and three acquisitions in fiscal year 2022. The purchase price allocation for acquisitions, discussed in detail below, reflects various fair value estimates and analyses, including certain tangible assets acquired and liabilities assumed, the valuation of intangible assets acquired, income taxes and goodwill, which are subject to change within the measurement period as preliminary valuations are finalized. Measurement period adjustments are recorded in the reporting period in which the estimates are finalized and adjustment amounts are determined. The fair value of the assets and liabilities acquired are based on valuations using the Level 3, unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The results of operations of these business combinations have been included in the Company’s consolidated financial statements from their respective acquisition dates.

Fiscal 2023 Acquisitions

Jarulss Software Solutions Private Limited (“Neverskip”)

On August 9, 2023, the Company acquired all of the equity interests of Neverskip. Neverskip is a leading provider of school solutions software in India. The purpose of the acquisition was to enhance and expand PowerSchool’s product offering.

The total purchase price for Neverskip was $10.0 million, which was paid in cash. Transaction costs of $0.7 million are recorded in acquisition costs in the consolidated statements of operations and comprehensive loss. The Company has accounted for this acquisition as a business combination and recognized provisional intangible assets and net tangible liabilities of $6.5 million and $2.2 million, respectively. The Company recorded provisional goodwill of $5.6 million arising from the acquisition, none of which is expected to be deductible for U.S. income tax

purposes. The goodwill is a result of the growth expected from continuing to create a comprehensive education technology portfolio.

Fiscal 2022 Acquisitions

Kinvolved, Inc.

On February 1, 2022, the Company acquired all of the equity interests of Kinvolved, Inc. (“Kinvolved”). Kinvolved is a leading provider of K-12 communications, attendance and engagement solutions software. The purpose of the acquisition was to enhance and expand PowerSchool’s product offering.

The total purchase price for Kinvolved was $23.3 million, which included $16.2 million of cash and additional contingent cash consideration, payable based on the achievement of certain performance conditions. The acquisition-date fair value of the contingent consideration was $7.1 million. Transaction costs of $1.2 million are recorded in acquisition costs in the consolidated statements of operations and comprehensive loss. The Company has accounted for this acquisition as a business combination and recognized intangible assets of $4.5 million and net tangible assets of $0.2 million. The Company recorded $18.6 million of goodwill arising from the acquisition, none of which is expected to be deductible for tax purposes. The goodwill is a result of the growth expected from continuing to create a comprehensive education technology portfolio.

Chalk.com Education ULC

On May 2, 2022, the Company acquired all of the equity interests of Chalk.com Education ULC (“Chalk”). Chalk is an integrated curriculum planning and analytics platform for K-12 schools. The purpose of the acquisition was to enhance and expand PowerSchool’s product offering.

The total purchase price for Chalk was $13.5 million, which included $10.4 million of cash and additional contingent cash consideration payable based on the achievement of certain performance conditions. The acquisition-date fair value of the contingent consideration was $3.1 million. Transaction costs of $0.9 million are recorded in acquisition costs in the consolidated statements of operations and comprehensive loss. The Company has accounted for this acquisition as a business combination and recognized intangible assets of $3.6 million and net tangible liabilities of $0.2 million. The Company recorded goodwill of $10.0 million arising from the acquisition, all of which is expected to be deductible for U.S. income tax purposes. The goodwill is a result of the growth expected from continuing to create a comprehensive education technology portfolio.

Headed2, LLC

On June 1, 2022, the Company acquired all of the equity interests of Headed2, LLC (“Headed2”). Headed2 is a career path planning platform that delivers state-level support for college, career, military, and life readiness to students of all ages by providing a more complete approach to researching and preparing for future success. The purpose of the acquisition was to enhance and expand PowerSchool’s product offering.

The total purchase price for Headed2 was $5.8 million, which was paid in cash. Transaction costs of $0.5 million are recorded in acquisition costs in the consolidated statements of operations and comprehensive loss. The Company has accounted for this acquisition as a business combination and recognized intangible assets of $2.3 million and net tangible assets of $0.2 million. The Company recorded goodwill of $3.3 million arising from the acquisition, all of which is expected to be deductible for U.S. income tax purposes. The goodwill is a result of the growth expected from continuing to create a comprehensive education technology portfolio.

4. REVENUE

Disaggregation of Revenue

The following table depicts the disaggregation of revenue according to the Company’s revenue streams. The Company believes this depicts the nature, amount, timing and uncertainty of revenue and cash flows consistent with how we evaluate our financial statements (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022

SaaS	$	118,931	$	109,526	$	351,183	$	319,742
Professional services	20,722		19,933		57,152		55,114
Software maintenance	30,059		27,569		85,383		82,128
License and other	12,452		5,406		21,797		12,633
Total revenue	$	182,164	$	162,434	$	515,515	$	469,617

Revenue recognized for the three and nine month periods ended September 30, 2023 and 2022 from performance obligations satisfied in the prior periods was immaterial.

Revenue by principal geographic areas based on where the customer is located was as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022

United States	$	169,728	$	150,626	$	481,114	$	434,194
Canada	9,099		9,260		25,753		27,243
Other	3,337		2,548		8,648		8,180
Total revenue	$	182,164	$	162,434	$	515,515	$	469,617

The Company had no customers accounting for more than 10% of total revenue for the periods presented.

Deferred Revenue

The changes in the deferred revenue balance were as follows (in thousands):


	September 30, 2023		December 31, 2022


Balance at beginning of period	$	315,839	$	301,157
Decrease from revenue recognized	(292,575)		(289,328)
Increase from acquisitions	308		1,586
Increase from current period net deferred revenue additions	390,064		302,424
Balance at end of period	$	413,636	$	315,839

As of September 30, 2023, the Company expects to recognize revenue on approximately 98.6% of these remaining performance obligations over the next 12 months, with the balance recognized thereafter.

The estimated revenues from the remaining performance obligations do not include uncommitted contract amounts such as (i) amounts that are cancellable by the customer without significant penalty, (ii) future billings for time and material contracts, and (iii) amounts associated with optional renewal periods.

Contract Cost Assets

Contract cost assets are included in prepaid expenses and other current assets and other assets, respectively, on the consolidated balance sheets as follows (in thousands):


	September 30, 2023		December 31, 2022

Contract costs, current	$	7,122	$	6,103
Contract costs, noncurrent	26,838		23,843
Total contract costs	$	33,960	$	29,946

Amortization expense for contract cost assets was $1.7 million and $4.7 million for the three and nine months ended September 30, 2023, respectively, and $1.3 million and $3.4 million as of the three and nine months ended September 30, 2022, respectively. There was no impairment of contract cost assets during the periods presented.

5. PROPERTY AND EQUIPMENT - NET

Property and equipment by category are as follows (in thousands):


	September 30, 2023		December 31, 2022

Computer and software	$	16,240	$	16,272
Furniture and fixtures	1,551		1,563
Leasehold improvements	2,384		2,377
Property and equipment	20,175		20,212
Less: accumulated depreciation	(15,352)		(14,039)
Property and equipment—net	$	4,823	$	6,173

Depreciation expense was $0.8 million and $2.6 million for the three and nine months ended September 30, 2023, respectively and $1.1 million and $3.7 million for the three and nine months ended September 30, 2022, respectively.

6. CAPITALIZED PRODUCT DEVELOPMENT COSTS - NET

Capitalized product development costs and related accumulated amortization consist of the following (in

thousands):


	September 30, 2023		December 31, 2022

Gross capitalized product development costs	$	183,709	$	152,663
Less accumulated amortization	(74,145)		(51,802)
Capitalized product development costs—net	$	109,564	$	100,861

Amortization of capitalized product development costs, included in the cost of revenue section of the consolidated statements of operations and comprehensive loss, were $7.8 million and $22.3 million for the three and nine months ended September 30, 2023, respectively, and $6.0 million and $16.9 million for the three and nine months ended September 30, 2022, respectively.

7. GOODWILL

The changes in the carrying amounts of goodwill were as follows (in thousands):


Balance—December 31, 2022	$	2,487,007
Additions due to acquisitions	5,650
Other adjustments	(8)
Balance—September 30, 2023	$	2,492,649

8. OTHER INTANGIBLE ASSETS—NET

Intangible assets are amortized using the straight-line method based on the expected useful lives of the assets. The carrying values of acquired amortizing intangible assets are as follows (in thousands):


	September 30, 2023		Weighted- Average Useful Life	December 31, 2022		Weighted- Average Useful Life

Intangible Assets—Gross
Developed technology	$	295,366	8 years	$	293,599	8 years
Customer relationships	747,349		14 years	742,600		14 years
Trademarks	53,474		9 years	53,474		9 years
Other	259		3 years	—		—
	$	1,096,448		$	1,089,673
Accumulated Amortization
Developed technology	$	(160,412)		$	(134,691)
Customer relationships	(251,551)			(210,120)
Trademarks	(26,596)			(22,715)
Other	(65)			—
	$	(438,624)		$	(367,526)
Intangible Assets—Net
Developed technology	$	134,954		$	158,908
Customer relationships	495,798			532,480
Trademarks	26,878			30,759
Other	194			—
	$	657,824		$	722,147

Amortization of developed technology is recorded in cost of revenue, while the amortization of trademarks, customer relationships and other intangibles is included in operating expense on the Company’s consolidated statements of operations and comprehensive loss.

The following table summarizes the classification of amortization expense of intangible assets (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022

Cost of revenue	$	8,574	$	8,571	$	25,721	$	25,416
Operating expense	15,168		15,104		45,377		45,138
Total amortization of acquired intangible assets	$	23,742	$	23,675	$	71,098	$	70,554

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


Year Ending December 31,
2023 (remaining three months)	$	24,001
2024	95,365
2025	95,176
2026	84,022
2027	67,740
Thereafter	291,520
Total	$	657,824

9. ACCRUED EXPENSES

The following table presents the detail of accrued expenses (in thousands):


	September 30, 2023		December 31, 2022

Accrued compensation	$	33,338	$	38,966
Accrued interest	12,086		9,094
Accrued taxes	2,377		2,130
Tax Receivable Agreement liability, current	28,947		1,862
Other accrued expenses	25,716		32,218
Total accrued expenses	$	102,464	$	84,270

Included within other accrued expenses was the contingent consideration liability related to the acquisition of Chalk. The fair value of the contingent consideration was determined using the Monte Carlo simulation and is recorded as selling, general, and administrative expenses within operating expenses in the consolidated statements of operations and comprehensive loss. The fair value was estimated quarterly and was based on unobservable inputs, including management estimates and assumptions about achieving future revenues and the Company's share price, and was, therefore, classified as Level 3 in the fair value hierarchy. The outstanding balance of the contingent consideration was paid in the third quarter of fiscal year 2023.

The changes in the fair value of the contingent consideration liability is as follows (in thousands):


Balance—January 1, 2022	$	—
Acquisition date fair value	10,079
Payment	(1,392)
Fair value adjustments	(4,886)
Balance—December 31, 2022	$	3,801
Fair value adjustments	(273)
Payment	(3,528)
Balance—September 30, 2023	$	—

10. LONG-TERM DEBT AND REVOLVING CREDIT AGREEMENT

First Lien Credit Agreement (“First Lien”)

In August 2018, the Company entered into a loan agreement with a consortium of lenders which provided $775.0 million of term loans. The First Lien also provides for a Revolving Credit Agreement, discussed in more detail below.

On July 31, 2023, the Company entered into an incremental facility to the First Lien to borrow an additional $100.0 million aggregate principal amount of incremental term loans, increasing the principal balance outstanding under the First Lien to $840.1 million as of the date of the amendment. Debt issuance costs of $0.8 million were recorded as a reduction to the face amount. As of September 30, 2023, the First Lien was repayable in quarterly payments of $2.2 million through July 31, 2025, with all remaining outstanding principal due on July 31, 2025.

As of September 30, 2023, the interest rate for the First Lien is the rate per annum equal to the Secured Overnight Financing Rate (“SOFR”), plus the applicable margin. The applicable margin was initially 3.25% per annum with a 0.25% step down based on the First Lien Net Leverage Ratio. The interest rate for the First Lien as of September 30, 2023 and December 31, 2022 was 8.37% and 7.09%, respectively.

The First Lien is collateralized on a first lien basis by substantially all of the assets and property of Holdings LLC and its domestic subsidiaries.

Revolving Credit Agreement

The First Lien provides for a Revolving Credit Agreement allowing the Company to borrow funds from time to time. In July 2021, the Revolving Credit Agreement was amended and permitted the Company to borrow up to $289.0 million. As of September 30, 2023, the Revolving Credit Agreement matured on May 2, 2025.

The interest rate of the Revolving Credit Agreement is equal to SOFR, plus the applicable margin. The applicable margin was initially 3.25% per annum with up to a 0.50% step down based on the First Lien Net Leverage Ratio. We are also required to pay a commitment fee on the unused portion of the Revolving Credit Agreement of 0.50% per annum with up to a 0.25% step down based on the First Lien Net Leverage Ratio, payable quarterly in arrears.

During the nine months ended September 30, 2023, the Company borrowed $20.0 million on the Revolving Credit Agreement. The outstanding balance on the facility as of September 30, 2023 was $10.0 million and there was no outstanding balance as of December 31, 2022.

The Revolving Credit Agreement requires the Company to maintain a First Lien Net Leverage Ratio of not more than 7.75 to 1.00 if the Company has an outstanding balance on the Revolving Credit Agreement of greater than 35% of the borrowing capacity (excluding certain letters of credit) at a quarter end. As of September 30, 2023 and December 31, 2022, the Company’s outstanding balances under the Revolving Credit Agreement were less than 35% of the borrowing capacity.

The following table presents the outstanding long-term debt (in thousands):


	September 30, 2023		December 31, 2022

Total outstanding principal—First Lien	$	837,926	$	744,000
Less: current portion of long-term debt	(8,797)		(7,750)
Less: unamortized debt discount	(957)		(715)
Less: unamortized debt issuance costs	(5,428)		(6,911)
Total long-term debt—net	$	822,744	$	728,624

Maturities on long-term debt outstanding as of September 30, 2023 are as follows (in thousands):


Year Ending December 31,
2023 (remaining three months)	$	2,199
2024	8,797
2025	826,930

Total	$	837,926

11. Leases

The Company leases its office and data center facilities under non-cancelable operating leases that expire at various times through 2033. The Company is also responsible for certain real estate taxes, utilities, and maintenance costs related to its office facilities. Rent expense was $1.1 million and $3.1 million for the three and nine months ended September 30, 2023, respectively, and $1.1 million and $4.3 million for the three and nine months ended September 30, 2022, respectively.

In August 2023, the Company entered into an operating lease agreement for an office in Bangalore, India. The lease requires future minimum undiscounted payments of approximately $18.0 million over the ten year lease term. The lease includes a rent abatement period of six months, from August 2023 through January of 2024, during which the Company is exempt from paying the base rent. As a result, a lease liability of approximately $12.2 million and corresponding right-of-use asset of approximately $12.3 million were recorded.

Lease costs for the three and nine months ended September 30, 2023 and 2022 are as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022

Operating lease cost	$	1,151	$	1,138	$	3,048	$	12,291
Short-term lease cost	3		49		23		149
Variable lease cost and other, net	309		346		882		1,006
Total lease cost	$	1,463	$	1,533	$	3,953	$	13,446

Supplemental cash flow information related to leases as of September 30, 2023 and 2022 is as follows (in thousands):


	Nine Months Ended September 30,
	2023		2022

Cash paid for operating leases	$	4,498	$	7,136
ROU assets obtained in exchange for new lease liabilities	12,298		5,484

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


Year Ending December 31,
2023 (remaining three months)	$	1,196
2024	5,622
2025	3,287
2026	2,701
2027	2,562
Thereafter	11,506
Total undiscounted cash flows	$	26,874
Less imputed interest	6,214
Present value of lease liabilities	$	20,660
Weighted average remaining term (years)	6.9
Weighted average discount rate	6.4		%

12. COMMITMENTS AND CONTINGENCIES

Contractual Obligations

We have contractual obligations related to, among others, data centers, cloud hosting arrangements and other services we purchase as part of our normal operations. In certain cases, these arrangements require a minimum annual purchase commitment by us. As of September 30, 2023, the remaining aggregate minimum purchase commitment under these arrangements was approximately $221.3 million through 2027.

Self-Insured Health Plan

The Company is generally self-insured for losses and liabilities related to health benefits. The estimated liability for incurred, but not reported, medical claims was $2.6 million and $2.2 million as of September 30, 2023 and December 31, 2022, respectively.

Indemnification

The Company enters into indemnification arrangements within customer contracts as part of the ordinary course of its business. Under the Company’s standard contractual terms, these arrangements typically consist of the Company agreeing to indemnify, hold harmless and reimburse the indemnified customer(s) for losses suffered or incurred directly, in connection with any trade secret, copyright, patent, or other intellectual property infringement claim by any third-party with respect to the Company’s technology. The term of these indemnification agreements is generally concurrent with the term of the contract, but in some cases, may survive the expiration or termination of the underlying contract. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable because it involves claims that may be made against the Company in the future, but have not yet been made.

The Company carries directors and officers insurance policies pursuant to the Company’s certificate of incorporation, bylaws, and applicable Delaware law.

Legal Proceedings

From time to time, the Company is involved in disputes, litigation, and other legal actions. On a quarterly basis, the Company evaluates developments in its legal matters that could affect the amount of liability that has been previously accrued, if any, or result in the Company accruing a liability, and the matters and related ranges of possible losses disclosed, and makes adjustments and changes to our disclosures as appropriate. Significant judgment is required to determine both (i) the likelihood of loss and (ii) the estimated amount of such loss related to such legal matters. Until the final resolution of such legal matters, there may be an exposure to loss, and such amounts could be material. For legal proceedings for which there is a reasonable possibility of loss (meaning those losses for which the likelihood is more than remote but less than probable), the Company has determined it does not have material exposure on an aggregate basis at this time.

13. STOCKHOLDERS’ EQUITY AND NON-CONTROLLING INTEREST

Stockholders’ Equity

The Company’s amended and restated certificate of incorporation effective July 27, 2021 authorizes (i) 50,000,000 shares of preferred stock, par value $0.0001 per share, (ii) 500,000,000 shares of Class A common stock, par value $0.0001 per share, and (iii) 300,000,000 shares of Class B common stock, par value $0.0001 per share. Holders of our Class A common stock and Class B common stock vote together as a single class on all matters presented to stockholders for their vote or approval, except as otherwise required by law. Each share of Class A common stock and Class B common stock entitles its holder to one vote on all matters presented to our stockholders generally.

As of September 30, 2023, the holders of our issued Class A common stock collectively held approximately 81.3% of the economic interest and voting power in the Company and holders of our issued Class B common stock collectively held approximately 18.7% of the economic interest and voting power in the Company. As of December 31, 2022, the Class B common stock collectively held approximately 20.0% of the economic interest and voting power in the Company.

Non-controlling interest

The weighted average non-controlling interest percentage used to calculate the net loss and other comprehensive loss attributable to the non-controlling interest holders in the three and nine months ended September 30, 2023 and 2022 was 18.7% and 20.1%, respectively.

14. SHARE-BASED COMPENSATION

Prior to the IPO, Holdings LLC maintained an equity incentive plan for purposes of retaining and incentivizing certain employees of the Company. This plan was replaced by the Company’s 2021 Omnibus Incentive Plan (“2021 Plan”), approved on July 27, 2021 in connection with the IPO. The 2021 Plan reserves 19,315,000 shares of the Company’s Class A common stock and provides for the granting of stock options, stock appreciation rights, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), dividend equivalents, other share-based awards, other cash-based awards, substitute awards, and performance awards to eligible employees, consultants, and directors.

Market-share Units (“MSUs”)

In the first quarter of fiscal 2023, the Company granted MSUs to certain executives. The target number of awards granted was based on the relative growth of the Company's share price over a two- and three-year performance period beginning on the date of grant and ending on the second and third anniversary of the grant date. These awards are subject to continuous employment through each individual vesting period.

The fair value of the MSUs was determined using a Monte Carlo simulation approach with the following assumptions: a historical volatility of 58%, 0% dividend yield, and a risk-free interest rate of 3.7%. The historical volatility was determined based on the observed equity volatility for comparable companies. The dividend yield was 0% as the Company does not currently offer a dividend. The risk-free interest rate is based on the yield from the Treasury Constant Maturities consistent with a three-year term associated with the market condition of the awards. The fair value of the awards granted during the first quarter of 2023 was $12.6 million which is recognized on a straight-line basis over the performance periods. The share-based compensation expense of these awards was $1.3 million and $2.7 million for the three and nine months ended September 30, 2023, respectively.

MSU activity for the nine-months ended September 30, 2023 is as follows:


	Market-Share Units	Weighted-Average Grant-Date Fair Value
Balance—December 31, 2022	—	—
Granted	474,846	$	26.64
Vested	—	—
Canceled	—	—
Balance—September 30, 2023	474,846	$	26.64

RSUs/RSAs

The RSUs and RSAs vest upon the satisfaction of a service-based vesting condition, generally over a four-year period, with 25% vesting at the end of one year and the remainder quarterly thereafter.

RSU and RSA activity for the nine months ended September 30, 2023 is as follows:


	Restricted Stock Units	Weighted Average Grant Date Fair Value		Restricted Stock Awards	Weighted Average Grant Date Fair Value
Balance—December 31, 2022	7,880,419	$	20.52	54,516	$	8.43
Granted	3,120,570	$	19.47	—	—
Vested	(2,377,011)	$	20.20	(29,085)	$	8.63
Canceled	(941,891)	$	19.32	—	—
Balance—September 30, 2023	7,682,087	$	20.34	25,431	$	8.19

The following table presents the classification of share-based compensation in the accompanying condensed consolidated statements of operations and comprehensive loss (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022

Cost of revenue
Subscriptions and support	$	1,556	$	1,352	$	4,567	$	3,629
Service	817		557		2,547		2,803
Research and development	3,959		3,462		12,224		9,890
Selling, general, and administrative	8,528		7,119		27,565		21,778
Total stock-based compensation	$	14,860	$	12,490	$	46,903	$	38,100

Share-based compensation capitalized as product development costs was $0.7 million and $2.2 million for the three and nine months ended September 30, 2023, respectively, and $0.8 million and $2.3 million for the three and nine months ended September 30, 2022, respectively.

As of September 30, 2023, the total future compensation cost related to unvested share awards is $154.3 million, which is expected to be recognized over a weighted-average period of 2.6 years.

15. EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS (EPS)

The table below sets forth a calculation of basic and diluted EPS.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Basic net income (loss) per share:
Numerator:
Net Loss	$	(1,306)	$	(3,917)	$	(20,414)	$	(24,495)
Less: net loss attributable to non-controlling interest	(833)		(1,389)		(4,893)		(5,330)
Net loss attributable to PowerSchool Holdings, Inc., basic	$	(473)	$	(2,528)	$	(15,521)	$	(19,165)
Denominator:
Weighted average shares of Class A common stock, basic	163,785,972		158,812,536		162,465,480		158,387,266
Net loss attributable to PowerSchool Holdings, Inc. per share of Class A common stock, basic	$	0.00	$	(0.02)	$	(0.10)	$	(0.12)
Diluted net income (loss) per share:
Numerator:
Net loss attributable to PowerSchool Holdings, Inc., basic	$	(473)	$	(2,528)	$	(15,521)	$	(19,165)
Adjustment from RSUs and RSAs	(6)		—		—		—
Adjustment from MSUs	(2)		—		—		—
Net loss attributable to PowerSchool Holdings, Inc., diluted	$	(481)	$	(2,528)	$	(15,521)	$	(19,165)
Denominator:
Weighted average shares of Class A common stock, basic	163,785,972		158,812,536		162,465,480		158,387,266
Dilutive impact of RSUs and RSAs	1,346,717		—		—		—
Dilutive impact of MSUs	534,178		—		—		—
Weighted average shares of Class A common stock, diluted	165,666,867		158,812,536		162,465,480		158,387,266
Net loss attributable to PowerSchool Holdings, Inc. per share of Class A common stock, diluted	$	0.00	$	(0.02)	$	(0.10)	$	(0.12)

As shares of our Class B common stock are considered non-participating securities, separate presentation of EPS of Class B common stock under the two-class method has not been presented.

In addition, the following securities were not included in the computation of diluted shares outstanding for the three and nine months ended September 30, 2023 and 2022 because they were antidilutive, but could potentially dilute earnings (loss) per share in the future:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2023	2022	2023	2022
Unvested RSAs and RSUs	—	8,151,595	7,707,518	8,151,595
LLC Units	37,654,059	39,928,472	37,654,059	39,928,472
Unvested MSUs	—	—	474,846	—
Total excluded from diluted EPS calculation	37,654,059	48,080,067	45,836,423	48,080,067

16. INCOME TAXES

The Company recorded income tax expense (benefit) of $(3.5) million and $(5.2) million for the three and nine months ended September 30, 2023, respectively, and $(0.8) million and $0.8 million for the three and nine months ended September 30, 2022, respectively. The Company’s effective tax rate was 72.7% and 20.4% for the three and nine months ended September 30, 2023, respectively, and 17.1% and (3.3)% for the three and nine months ended September 30, 2022, respectively. The income tax expense (benefit) for the three and nine months ended September 30, 2023 was different than the U.S. federal statutory income tax rate of 21% primarily due to the loss allocated to the non-controlling interest, nondeductible executive compensation, and the impact of a decrease to uncertain tax positions during the three and nine month period. The income tax expense (benefit) for the three and nine months ended September 30, 2022 was different than the U.S. federal statutory income tax rate of 21% primarily due to the loss allocated to the non-controlling interest, nondeductible executive compensation, the impact of remeasuring deferred taxes for a Pennsylvania tax law change, and adjustments to deferred tax expense relating to the business combination completed during the nine month period.

As of September 30, 2023, the Company had gross unrecognized tax benefits of $10.6 million, all of which, if recognized, would impact the Company’s effective tax rate. The amount of interest and penalties accrued related to the Company’s unrecognized tax benefits is not material to the consolidated financial statements in all periods presented.

Tax Receivable Agreement

In connection with the Organizational Transactions, the Company entered into a TRA with Topco LLC, Vista Equity Partners and Onex. The TRA provides for the payment by the Company to Topco LLC, Vista Equity Partners and Onex, collectively, of 85% of the amount of tax benefits, if any, that are realized, or in some circumstances are deemed to realize, as a result of (i) certain increases in the tax basis of assets of Holdings LLC and its subsidiaries resulting from purchases of LLC Units with the proceeds of the IPO or exchanges of LLC Units in the future or any prior transfers of interests in Holdings LLC, (ii) certain tax attributes of the Blocker Entities and of Holdings LLC and subsidiaries of Holdings LLC that existed prior to the IPO and (iii) certain other tax benefits related to our making payments under the TRA. The payment obligations under the TRA are not conditioned upon any LLC Unit holder maintaining a continued ownership interest in us or Holdings LLC and the rights of Topco LLC under the TRA are assignable. The Company expects to benefit from the remaining 15% of the tax benefits, if any, that are actually realized.

During the nine months ended September 30, 2023, the Company recorded an increase of $8.7 million to the TRA liability and a decrease of $7.1 million to the deferred tax liability due to the secondary offering conducted in the first quarter of 2023. These changes resulted in a net noncash impact to additional paid-in capital of $1.6 million.

POWERSCHOOL HOLDINGS, INC. [PWSC] Filings
10-Q	[2023-11-09]
10-Q	[2023-08-08]
10-Q	[2023-05-05]
10-K	[2023-02-24]
10-Q	[2022-11-08]
10-Q	[2022-08-08]
10-Q	[2022-05-05]
10-K	[2022-03-24]
10-Q	[2021-11-10]
10-Q	[2021-09-09]
S-1	[2021-04-06]