10-Q 1 pwsc-20240331.htm 10-Q pwsc-20240331
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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 March 31, 2024
OR
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)
Delaware85-4166024
(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
PWSCThe 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 203,652,282 shares of common stock outstanding as of April 30, 2024.





TABLE OF CONTENTS



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 March 31, 2024As of December 31, 2023
Assets
Current Assets:
Cash and cash equivalents$17,425 $39,054 
Accounts receivable—net of allowance of $6,543 and $7,930 respectively
61,121 76,618 
Prepaid expenses and other current assets51,609 40,449 
Total current assets130,155 156,121 
Property and equipment - net8,181 5,003 
Operating lease right-of-use assets15,900 15,998 
Capitalized product development costs - net112,810 112,089 
Goodwill2,770,971 2,740,725 
Intangible assets - net692,953 710,635 
Other assets35,897 36,311 
Total assets$3,766,867 $3,776,882 
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable$12,686 $13,629 
Accrued expenses110,858 116,271 
Operating lease liabilities, current3,837 4,958 
Deferred revenue, current275,461 373,672 
Revolving credit facility125,000  
Current portion of long-term debt8,379 8,379 
Total current liabilities536,221 516,909 
Noncurrent Liabilities:
Other liabilities1,902 2,178 
Operating lease liabilities—net of current13,461 13,359 
Deferred taxes276,629 275,316 
Tax Receivable Agreement liability375,647 396,397 
Deferred revenue—net of current8,196 6,111 
Long-term debt, net810,497 811,325 
Total liabilities2,022,553 2,021,595 
Commitments and contingencies (Note 12)
4


Stockholders' Equity:
Class A common stock, $0.0001 par value per share, 500,000,000 shares authorized, 165,726,673 and 164,796,626 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively.
16 16 
Class B common stock, $0.0001 par value per share, 300,000,000 shares authorized, 37,654,059 and 37,654,059 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively.
4 4 
Additional paid-in capital1,532,371 1,520,288 
Accumulated other comprehensive loss(2,828)(2,094)
Accumulated deficit(237,945)(218,387)
Total stockholders' equity attributable to PowerSchool Holdings, Inc. 1,291,618 1,299,827 
Non-controlling interest452,696 455,460 
Total stockholders' equity 1,744,314 1,755,287 
Total liabilities and stockholders' equity$3,766,867 $3,776,882 
See notes to condensed consolidated financial statements.
5



POWERSCHOOL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands except for per-share data)
Three Months Ended March 31,
20242023
Revenue:
Subscriptions and support$166,927 $141,073 
Service16,686 16,233 
License and other1,354 2,148 
Total revenue184,967 159,454 
Cost of revenue:
Subscriptions and support46,327 38,194 
Service13,383 14,323 
License and other1,071 951 
Depreciation and amortization19,080 16,021 
Total cost of revenue79,861 69,489 
Gross profit105,106 89,965 
Operating expenses:
Research and development31,651 25,421 
Selling, general, and administrative52,432 49,558 
Acquisition costs753  
Depreciation and amortization17,349 15,771 
Total operating expenses102,185 90,750 
Income (loss) from operations2,921 (785)
Interest expense—net20,996 14,029 
Other expenses (income)—net(99)44 
Loss before income taxes(17,976)(14,858)
Income tax expense (benefit)
4,872 (45)
Net loss(22,848)(14,813)
Less: Net loss attributable to non-controlling interest(3,290)(2,960)
Net loss attributable to PowerSchool Holdings, Inc. (19,558)(11,853)
Net loss attributable to PowerSchool Holdings, Inc. Class A common stock:
Basic$(19,558)$(11,853)
Diluted$(24,131)$(11,853)
Net loss attributable to PowerSchool Holdings, Inc. per share of Class A common stock, basic and diluted$(0.12)$(0.07)
Weighted average shares of Class A common stock:
Basic165,037,089 160,506,571 
Diluted202,691,148 160,506,571 
Other comprehensive income (loss), net of taxes:
Foreign currency translation(734)86 
Change in unrealized loss on investments 3 
Total other comprehensive income (loss)(734)89 
Less: Other comprehensive income (loss) attributable to non-controlling interest$(136)$17 
Comprehensive loss attributable to PowerSchool Holdings, Inc. $(20,156)$(11,781)
See notes to condensed consolidated financial statements
6



POWERSCHOOL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Class A common stockClass B common stockAdditional paid-in capitalAccumulated other comprehensive income (loss)Accumulated deficitNon-controlling interestTotal
SharesAmountSharesAmount
Balance—December 31, 2023164,796 $16 37,654 $4 $1,520,288 $(2,094)$(218,387)$455,460 $1,755,287 
Issuance of common stock upon vesting of Restricted Stock Awards931 — — — — — — — — 
Share-based compensation— — — — 14,843 — — — 14,843 
Net share settlement of equity awards— — — — (65)— — — (65)
Other comprehensive income (loss)— — — — — (734)— — (734)
Allocation of equity to non-controlling interests— — — — (526)— — 526 — 
Adjustments to deferred taxes and Tax Receivable Agreement liability— — — — (2,169)— — — (2,169)
Net loss— — — — — — (19,558)(3,290)(22,848)
Balance—March 31, 2024165,727 $16 37,654 $4 $1,532,371 $(2,828)$(237,945)$452,696 $1,744,314 
Class A common stockClass B common stockAdditional paid-in capitalAccumulated other comprehensive lossAccumulated deficitNon-controlling interestTotal
SharesAmountSharesAmount
Balance—December 31, 2022159,596 $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 Awards1,000 — — — — — — — — 
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 offering2,274 — (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, 2023162,870 $16 37,654 $4 $1,477,630 $(2,033)$(199,103)$455,447 $1,731,961 
See notes to condensed consolidated financial statements.
7



POWERSCHOOL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended
March 31,
20242023
Cash flows from operating activities:
Net loss$(22,848)$(14,813)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization36,429 31,792 
Share-based compensation14,155 14,549 
Amortization of operating lease right-of-use assets851 788 
Change in fair value of contingent consideration20 (450)
Amortization of debt issuance costs1,487 876 
(Benefit from) provision for allowance for doubtful accounts(1,272)369 
Loss (gain) on lease modification(37)52 
Loss (gain) on sale/disposal of property and equipment(816)48 
Changes in operating assets and liabilities — net of effects of acquisitions:
Accounts receivables17,748 8,360 
Prepaid expenses and other current assets(9,922)(7,135)
Other assets191 (2,283)
Accounts payable(646)250 
Accrued expenses(25,371)(16,512)
Other liabilities(1,654)(1,753)
Deferred taxes4,533 (494)
Tax Receivable Agreement liability323 16 
Deferred revenue(102,856)(73,687)
Net cash used in operating activities
(89,685)(60,027)
Cash flows from investing activities:
Purchases of property and equipment(3,887)(356)
Investment in capitalized product development costs(8,956)(9,676)
Acquisitions—net of cash acquired(36,062) 
Payment of acquisition-related deferred consideration(5,800)— 
Net cash used in investing activities(54,705)(10,032)
8


Three Months Ended
March 31,
20242023
Cash flows from financing activities:
Taxes paid related to the net share settlement of equity awards(65)(1,284)
Proceeds from Revolving Credit Agreement140,000  
Repayment of Revolving Credit Agreement(15,000) 
Repayment of First Lien Debt(2,095)(1,938)
Payment of contingent consideration(245)— 
Net cash provided by (used in) financing activities
122,595 (3,222)
Effect of foreign exchange rate changes on cash166 73 
Net decrease in cash, cash equivalents, and restricted cash
(21,629)(73,208)
Cash, cash equivalents, and restricted cash—Beginning of period39,554 137,981 
Cash, cash equivalents, and restricted cash—End of period$17,925 $64,773 
Supplemental disclosures of cash flow information:
Cash paid for interest$19,129 $13,695 
Cash paid for income taxes890 390 
Supplemental disclosures of noncash investing and financing activities:
Property and equipment additions in accounts payable and accrued liabilities$507 $317 
Capitalized interest related to investment in capitalized product development costs374 296 
Reconciliation of cash, cash equivalents, and restricted cash
Cash and cash equivalents$17,425 $64,273 
Restricted cash, included in other current assets500 500 
Total cash, cash equivalents, and restricted cash$17,925 $64,773 
See notes to condensed consolidated financial statements.
9


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, communications, 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 March 31, 2024, the interim condensed consolidated statements of operations and comprehensive loss and stockholders’ equity for the three months ended March 31, 2024 and 2023, and cash flows for the three months ended March 31, 2024 and 2023, 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.
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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 March 31, 2024, the results of operations for the three months ended March 31, 2024 and 2023 and cash flows for the three months ended March 31, 2024 and 2023. These adjustments consist of normal and recurring items. The results of operations for the three months ended March 31, 2024 and cash flows for the three months ended March 31, 2024 are not necessarily indicative of the results expected for the year ending December 31, 2024 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, 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
the actual amounts and timing of payments under the Tax Receivable Agreement
Actual results could differ from those estimates under different assumptions or conditions.
Accounting Pronouncements Recently Adopted
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740), Improvements to Income Tax Disclosure. This update enhances the disclosures for income tax rate reconciliation whereby entities are required to disclose specific categories in the rate reconciliation and provide additional information for reconciling items which meet a certain qualitative threshold. The guidance is effective for the Company beginning on January 1, 2024. The accounting pronouncement did not have a material impact on our Consolidated Financial Statements and related disclosures.
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.
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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, 2023 that have had a material impact on our condensed consolidated financial statements and related notes.
3. BUSINESS COMBINATIONS
The Company completed one acquisition during the three months ended March 31, 2024 and two acquisitions in fiscal year 2023. The purchase price allocation for these 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. Measurement period adjustments are recorded in the reporting period in which the estimates are finalized and adjustment amounts are determined. The measurement period is one year from the acquisition date. 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 valuation techniques include the use of a discounted cash flow model in an income or market based valuation approach.
The results of operations of these business combinations have been included in the Company’s consolidated financial statements from their respective acquisition dates.

Fiscal 2024 Acquisitions

Allovue, Inc (“Allovue”)

On January 22, 2024, the Company acquired all of the equity interests of Allovue. Allovue is a leading provider of K-12 financial budgeting and planning software. The purpose of the acquisition was to enhance and expand PowerSchool’s product offerings.

The total purchase price for Allovue was $38.2 million, which included cash of $37.0 million and deferred consideration of $1.2 million. Transaction costs of $1.3 million were incurred related to this acquisition and 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 net tangible liabilities of $1.9 million and recognized $9.0 million of intangible assets consisting of developed technology of $5.4 million, customer relationships of $2.8 million, and trademarks of $0.8 million. The acquired net assets assumed were recorded at their estimated fair values. The estimated values of the intangible assets were determined by the assistance of valuation specialists and estimates made by management.

The Company recorded goodwill of $31.0 million, none of which is expected to be deductible for tax purposes. The goodwill is a result of the growth expected by creating a comprehensive education technology portfolio.

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 offerings.

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 net tangible liabilities of $2.4 million and recognized $6.6 million of intangible assets consisting of developed technology of $1.8 million customer relationships of $4.9 million and $0.01 million of trademarks. The Company recorded goodwill of $5.7 million arising from the acquisition, none of which is expected to be deductible for U.S. income tax purposes.
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The goodwill is a result of the growth expected from continuing to create a comprehensive education technology portfolio.
SchoolMessenger

On October 2, 2023, the Company acquired all of the equity interests of SchoolMessenger. SchoolMessenger is a leading provider of K-12 communication tools in North America. The purpose of the acquisition was to enhance and expand PowerSchool’s product offerings.

The total purchase price for SchoolMessenger was $300.3 million, which included cash of $290.3 million and deferred consideration of $10.0 million. Transaction costs of $2.3 million were incurred in the year-ended December 31, 2023 related to this acquisition and 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. The consideration and the acquisition date fair values of the assets acquired and liabilities assumed are as follows (in thousands):

Accounts receivable$14,027 
Prepaid expenses and other assets1,128 
Property and equipment63 
Right of use asset409 
Intangible asset - developed technologies26,500 
Intangible asset - customer relationships43,600 
Intangible asset - trademarks8,100 
Total assets acquired93,827 
Accounts payable(2,326)
Accrued expenses(5,693)
Lease liability(409)
Other liabilities(539)
Deferred revenue(30,240)
Deferred taxes(2,169)
Net assets acquired52,451 
Goodwill247,815 
Total consideration$300,266 
The acquired net assets assumed were recorded at their estimated fair values. The estimated values of the intangible assets were determined by the assistance of valuation specialists and estimates made by management. The Company recorded $247.8 million of goodwill arising from the acquisition of SchoolMessenger, the majority of which is expected to be deductible for tax purposes. The goodwill is a result of the growth expected by creating a comprehensive education technology portfolio.

Historical results of operations for Neverskip, SchoolMessenger, and Allovue were not material. Therefore, historical results of operations subsequent to the acquisition date and pro forma results of operations have not been presented.
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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 March 31,
20242023
SaaS
$138,316 $113,964 
Professional services
16,686 16,233 
Software maintenance
28,611 27,109 
License and other
1,354 2,148 
Total revenue
$184,967 $159,454 
Revenue recognized for the three months ended March 31, 2024 and 2023 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 March 31,
20242023
United States
$170,172 $148,807 
Canada
11,004 8,178 
Other
3,791 2,469 
Total revenue
$184,967 $159,454 
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):
March 31, 2024December 31, 2023
Balance at beginning of period
$379,783 $315,839 
Decrease from revenue recognized
(150,512)(311,189)
Increase from acquisitions
5,148 20,526 
Increase from current year net deferred revenue additions
49,238 354,607 
Balance at end of period
$283,657 $379,783 
As of March 31, 2024, the Company expects to recognize revenue on approximately 97% 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.
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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):
March 31, 2024December 31, 2023
Contract costs, current
$7,900 $7,695 
Contract costs, noncurrent
27,933 28,473 
Total contract costs
$35,833 $36,168 
Amortization expense for contract cost assets was $1.9 million and $1.5 million for the three months ended March 31, 2024 and 2023, 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):
March 31, 2024December 31, 2023
Computer and software
15,524 16,073 
Furniture and fixtures
1,568 1,641 
Leasehold improvements
5,514 2,387 
Property and equipment
22,606 20,101 
Less accumulated depreciation
(14,425)(15,098)
Property and equipment—net
$8,181 $5,003 
Depreciation expense was $0.9 million and $0.9 million for the three months ended March 31, 2024 and 2023, respectively.

6.    CAPITALIZED PRODUCT DEVELOPMENT COSTS—NET
Capitalized product development costs and related accumulated amortization consist of the following (in thousands):
March 31, 2024December 31, 2023
Gross capitalized product development costs$204,070 $194,341 
Less accumulated amortization(91,260)(82,252)
Capitalized product development costs—net$112,810 $112,089 
Amortization of capitalized product development costs, included in the cost of revenue section of the consolidated statements of operations and comprehensive loss, were $9.1 million and $7.2 million for the three months ended March 31, 2024 and 2023, respectively.

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7.    GOODWILL
The changes in the carrying amounts of goodwill were as follows (in thousands):
Balance—December 31, 2023$2,740,725 
Additions due to acquisition31,035 
Other adjustments1
(789)
Balance—March 31, 2024$2,770,971 
_____________
1    Includes adjustments of acquisition-date fair value within the one-year measurement period and effects of foreign currency translation.

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):
March 31, 2024Weighted- Average Useful LifeDecember 31, 2023Weighted- Average Useful Life
Intangible Assets—Gross
Developed technology$327,273 8 years$321,957 8 years
Customer relationships793,882 14 years791,253 14 years
Trademarks62,387 9 years61,595 9 years
Other
259 3 years259 3 years
$1,183,801 $1,175,064 
Accumulated Amortization
Developed technology$(179,640)$(169,777)
Customer relationships(281,406)(266,473)
Trademarks(29,694)(28,092)
Other
(108)(87)
$(490,848)$(464,429)
Intangible Assets—Net
Developed technology$147,633 $152,180 
Customer relationships512,476 524,780 
Trademarks32,693 33,503 
Other
151 172 
$692,953 $710,635 
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.
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The following table summarizes the classification of amortization expense of intangible assets (in thousands):
Three Months Ended March 31,
20242023
Cost of revenue
$9,872 $8,574 
Operating expense
16,563 15,105 
Total amortization of acquired intangible assets
$26,435 $23,679 
The estimated future amortization of intangible assets as of March 31, 2024, is as follows (in thousands):
Year Ending December 31,
2024 (remaining nine months)$78,730 
2025104,854 
202692,412 
202776,049 
202873,664 
Thereafter
267,244 
Total
$692,953 

9. ACCRUED EXPENSES
The following table presents the detail of accrued expenses (in thousands):
March 31, 2024December 31, 2023
Accrued compensation
$23,575 $43,075 
Accrued interest
13,197 12,654 
Accrued taxes
1,896 1,530 
TRA liability, current43,030 21,957 
Other accrued expenses
29,160 37,055 
Total accrued expenses
$110,858 $116,271 

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 provided 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 carrying value of the related debt.

On October 12, 2023, the Company amended the First Lien to extend the maturity date on the agreement from July 31, 2025 to August 1, 2027. Debt issuance costs of $13.1 million were recorded as a reduction to the carrying value of the related debt. The amended First Lien is repayable in quarterly payments of $2.1 million through August 1, 2027, with all remaining outstanding principal due on August 1, 2027.
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As of March 31, 2024, 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 is 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 March 31, 2024 and December 31, 2023 was 8.31% and 8.38%, respectively.
The First Lien is collateralized on a first lien basis by certain assets and property of the Company and includes covenants that among other things limit our ability to incur additional debt or issue dividends. As of March 31, 2024, we were in compliance with all covenants associated with the First Lien.
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. On October 12, 2023, the Revolving Credit Agreement was further amended to permit the Company to borrow up to $400.0 million and extended the maturity date from May 2, 2025 to May 2, 2027. In connection with the increase of the borrowing capacity and the extension of the maturity date, the Company paid fees of $2.0 million, which was recorded as capitalized debt issuance cost and presented within other assets on the consolidated balance sheet.
The interest rate is equal to SOFR, plus the applicable margin. The applicable margin is 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 three months ended March 31, 2024, the Company borrowed $140.0 million on the Revolving Credit Agreement. As of March 31, 2024, the outstanding balance on the revolving credit facility was $125.0 million and there was no outstanding balance on the facility as of December 31, 2023.
The Revolving Credit Agreement requires the Company to maintain a First Lien Net Leverage Ratio (as defined therein) 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 March 31, 2024 and 2023, 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):
March 31, 2024December 31, 2023
Total outstanding principal—First Lien$835,831 $837,926 
Less current portion of long-term debt(8,379)(8,379)
Less unamortized debt discount(4,496)(4,832)
Less unamortized debt issuance costs(12,459)(13,390)
Total long-term debt—net$810,497 $811,325 
Maturities on long-term debt outstanding as of March 31, 2024 are as follows (in thousands):
Year Ending December 31,
2024 (remaining nine months)$6,284 
20258,379 
20268,379 
2027812,789 
Total$835,831 

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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 $1.2 million and $1.0 million for the three months ended March 31, 2024 and 2023, 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.

Operating lease costs for the three months ended March 31, 2024 and 2023 are as follows (in thousands):

Three Months Ended
March 31,
20242023
Operating lease cost
$1,166 $954 
Short-term lease cost30 17 
Variable lease cost and other, net384 374 
Total lease cost$1,580 $1,345 

Supplemental cash flow information related to leases as of March 31, 2024 and 2023 is as follows (in thousands):

Three Months Ended
March 31,
20242023
Cash paid for operating leases$2,041 $1,769 
ROU assets obtained in exchange for new lease liabilities$786 $ 

Future minimum lease payments under non-cancelable operating lease agreements as of March 31, 2024 are as follows (in thousands):

Year Ending December 31,
2024 (remaining nine months)$3,808
20253,559
20261,987
20271,913
20281,904
Thereafter9,659
Total undiscounted cash flows$22,830
Less imputed interest5,532
Present value of lease liabilities$17,298
Weighted average remaining term (years)7.2
Weighted average discount rate7.1 %


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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 March 31, 2024, the remaining aggregate minimum purchase commitment under these arrangements was approximately $186.8 million through 2028.
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 is $1.8 million and $1.6 million as of March 31, 2024 and December 31, 2023, 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 formation, 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 amended and restated its certificate of incorporation effective July 27, 2021 to authorize (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 March 31, 2024, the holders of our issued Class A common stock collectively represented approximately 81.5% of the economic interest and voting power in the Company and Class B common stock collectively represented approximately 18.5% of the voting power in the Company. As of December 31, 2023, the Class B common stock collectively held approximately 18.6% of the voting power in the Company.
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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 months ended March 31, 2024 and 2023 was 18.6% and 19.6%, respectively.


14. SHARE-BASED COMPENSATION

Prior to the IPO, Holdings LLC had historically maintained equity incentive plans 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 initially 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 year 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 immaterial for the three months ended March 31, 2024 and 2023, respectively.

MSU activity for the three months ended March 31, 2024 is as follows:

Market-Share UnitsWeighted-Average
Grant-Date
Fair Value
Balance—December 31, 2023474,846 26.64 
Granted  
Vested  
Canceled  
Balance—March 31, 2024474,846 26.64 
RSUs/RSAs

The RSUs granted under the 2021 Plan 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 three months ended March 31, 2024 is as follows:


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Restricted Stock UnitsWeighted Average Grant Date Fair ValueRestricted Stock AwardsWeighted Average Grant Date Fair Value
Balance—December 31, 20237,170,788 $20.22 16,530 $8.19 
Granted198,260 $24.14  $ 
Vested(1,048,340)$20.23 (8,901)$8.20 
Canceled(290,193)$19.56  $ 
Balance—March 31, 20246,030,515 $20.38 7,629 $8.17 
The following table presents the classification of share-based compensation in the accompanying condensed consolidated statements of operations and comprehensive income (loss) (in thousands):
Three Months Ended March 31,
20242023
Cost of revenue
Subscriptions and support$1,463 $1,388 
Service679 811 
Research and development3,480 3,729 
Selling, general, and administrative8,533 8,621 
Total share-based compensation$14,155 $14,549 

Share-based compensation capitalized as product development costs was $0.7 million and $0.7 million for the three months ended March 31, 2024 and 2023, respectively.

As of March 31, 2024, the total future compensation cost related to unvested share awards is $124.6 million, which is expected to be recognized over a weighted-average period of 2.3 years.


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

The table below sets forth a calculation of basic EPS based on net loss attributable to PowerSchool Holdings, Inc., divided by the basic weighted average number of Class A common stock outstanding for the corresponding periods. Diluted EPS of Class A common stock is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of Class A common stock outstanding adjusted to give effect to all potentially dilutive securities, using the treasury stock method.

The Company excluded the shares of Class B common stock from the computation of basic and diluted EPS, as holders of Class B common stock do not have any rights to receive dividends or distributions upon the liquidation or winding up of the Company. Accordingly, separate presentation of EPS of Class B common stock under the two-class method has not been presented.


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Three Months Ended March 31,
20242023
Basic net income (loss) per share:
Numerator:
Net loss$(22,848)$(14,813)
Less: net loss attributable to non-controlling interest(3,290)(2,960)
Net loss attributable to PowerSchool Holdings, Inc., basic (19,558)(11,853)
Denominator:
Weighted average shares of Class A common stock, basic165,037,089 160,506,571 
Net loss attributable to PowerSchool Holdings, Inc. per share of Class A common stock, basic$(0.12)$(0.07)
Diluted net income (loss) per share:
Numerator:
Net loss attributable to PowerSchool Holdings, Inc., basic$(19,558)$(11,853)
Adjustment from LLC Units(4,573)— 
Net loss attributable to PowerSchool Holdings, Inc., diluted(24,131)(11,853)
Denominator:
Weighted average shares of Class A common stock, basic165,037,089 160,506,571 
Dilutive impact of LLC Units37,654,059 — 
Weighted average shares of Class A common stock, diluted202,691,148 160,506,571 
Net loss attributable to PowerSchool Holdings, Inc. per share of Class A common stock, diluted$(0.12)$(0.07)

In addition, the following securities were not included in the computation of diluted shares for the three months ended March 31, 2024 and 2023 because they were antidilutive, but could potentially dilute earnings (loss) per share in the future:

Three Months Ended
March 31,
20242023
Unvested RSAs and RSUs6,038,144 9,536,739 
LLC units 37,654,059 
Market share units474,846 474,846 
Total excluded from diluted EPS calculation6,512,990 47,665,644 


16. INCOME TAXES

The Company recorded an income tax expense of $4.9 million and effective tax rate of -27.1% for the three months ended March 31, 2024 and an insignificant amount of income tax benefit and an effective tax rate of 0.3% for the three months ended March 31, 2023. The income tax expense for the three months ended March 31, 2024 was different than the U.S. federal statutory income tax rate of 21.0% primarily due to earnings not subject to tax, nondeductible executive compensation, and deferred tax expense recognized due to the tax restructuring completed as part of the Allovue acquisition during the three month period. The income tax benefit for the three months ended March 31, 2023 was different than the U.S. federal statutory income tax rate of 21.0% primarily due to earnings not subject to tax and nondeductible executive compensation.

As of March 31, 2024, the Company had gross unrecognized tax benefits of $10.7 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.

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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 (collectively, the “Tax Attributes”). 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.

As of March 31, 2024, $43.0 million of the TRA was classified as a current liability and $375.6 million was classified as non-current in the consolidated balance sheet.

17. RELATED-PARTY TRANSACTIONS

The Company has entered into arrangements with Vista Equity Partners for certain services, and the Vista Consulting Group for management consulting, systems implementation, and manpower support (collectively, “Vista”). These services were provided on a time and material basis and were generally related to integration of the various companies acquired by the Company. Total costs of these related party services were de minimis for the three months ended March 31, 2024 and 2023, respectively. We may continue to engage Vista from time to time, subject to compliance with our related party transactions policy. The Company also entered into arrangements with Onex Partners Manager LP (“Onex”) for general management services, acquisition advisory, and treasury services. Total costs of these related-party services were de minimis for the three months ended March 31, 2024 and 2023, respectively. Total aggregate amounts due to Vista and Onex entities were de minimis and less than $0.1 million as of March 31, 2024 and December 31, 2023.
The Company also purchased services from entities that share common ownership with Vista and Onex. The cost was $1.3 million and $4.8 million for all other services purchased from entities with common ownership for the three months ended March 31, 2024 and 2023, respectively. Substantially all of the expenses related to the Vista and Onex services are included in selling, general, and administrative expense in the consolidated statements of operations and comprehensive loss. Amounts due to entities that share common ownership were de minimis and $0.2 million as of March 31, 2024 and December 31, 2023, respectively, and are included in accounts payables and accrued liabilities in the consolidated balance sheet. There were no sales to or outstanding accounts receivable arising from this agreement during or as of the end of any of the periods presented.
The Company has a strategic partnership with EAB Global, Inc. (“EAB”), a portfolio company of Vista, pursuant to a Reseller Agreement (the “Agreement”). Pursuant to the Agreement, EAB serves as, among other terms, the exclusive reseller of the Intersect product in the U.S. and Canada. The Agreement has a ten-year term and includes annual minimum revenue commitments from EAB. The commitment amount for the period was $40.4 million, and will increase upon the anniversary of the Agreement. The Company may begin to revoke its exclusivity with EAB after the fourth year of the Agreement or terminate the relationship upon material breach of the contract. Under the terms of the Agreement, the Company pays a fee to EAB for selling products to third party customers on the Company’s behalf. The Company recognized $4.0 million and $2.3 million in selling, general, and administrative expense and, to a lesser extent, cost of revenue, for fees owed to EAB under the Agreement for the three months ended March 31, 2024 and 2023, respectively.

In February 2023, certain selling stockholders, which included Hardeep Gulati, the Company’s Chief Executive Officer, Topco LLC, and certain funds affiliated with Vista and Onex, conducted a secondary offering of 8,700,000 shares of the Company’s Class A common stock. The Company did not receive any proceeds from the sale of the Class A common stock by the selling stockholders, but bore the costs associated with the secondary offering (other than underwriting discounts and commissions), which were approximately $1.4 million and were recorded as selling, general, and administrative expenses in the consolidated statements of operations and comprehensive loss.

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18. EMPLOYEE BENEFIT PLANS
Defined Contribution Plan—The Company has a defined contribution plan under Section 401(k) of the Internal Revenue Code (“401(k) Plan”) covering all full-time employees who meet certain eligibility requirements. Eligible employees may defer a percentage of their pretax compensation, up to the annual maximum allowed by the Internal Revenue Service. Under the 401(k) Plan, the Company matches a portion of the employee contributions up to a defined maximum. The Company made matching contributions of $2.7 million and $2.6 million for the three months ended March 31, 2024 and 2023, respectively.
19. SUBSEQUENT EVENTS

The Company has evaluated subsequent events from the consolidated balance sheets date.

In April 2024, the Company borrowed an additional $30.0 million on its Revolving Credit Agreement. As of May 7, 2024, the outstanding balance on the Revolving Credit Agreement was $155.0 million.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in Part I, Item 1A, “Risk Factors” in our most recent Annual Report on Form 10-K and Part II, Item 1A, “Risk Factors” and in other parts of this Quarterly Report on Form 10-Q. Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our,” and “PowerSchool” and similar references refer to PowerSchool Holdings, Inc. and its consolidated subsidiaries, including PowerSchool Holdings LLC (formerly known as Severin Holdings, LLC) (“Holdings LLC”).

Overview
We provide a comprehensive suite of solutions that includes the mission-critical system of record used by state Departments of Education, districts, and schools, who leverage our solutions to deliver insights and analytics to improve education outcomes. As of March 31, 2024, we serve more than 17,000 customers, including over 90 of the 100 largest districts by student enrollment in the U.S., over 30 state-, province-, and territory-wide contracts in North America, and sell solutions in over 90 countries globally. Our platform is embedded in school workflows and is used by educators, students, administrators, and parents on a daily basis.
PowerSchool’s cloud platform is the most comprehensive, integrated, enterprise-scale suite of solutions purpose-built for the K-12 market. Our cloud-based technology platform helps our customers efficiently manage state reporting and related compliance, special education, finance, HR, talent, registration, attendance, funding, learning, instruction, behavior, grading, college and career readiness, assessments, communications, and analytics in one unified platform. Through our integrated technology approach, we are positioned to streamline operations, aggregate disparate data sets, and develop insights using predictive modelling, AI, and machine learning. Our ability to transform information into actionable insights improves the efficiency of school operations, the quality of instruction delivered by teachers, and the pace of student growth, generating a profound effect on K-12 educational outcomes.
We have created a strong competitive moat by investing over the past 20 years to build, maintain, and continuously update our K-12 regulatory compliance reporting capabilities that solve state-specific, funding-related regulatory pain points for our customers.
Building the PowerSchool Platform
Our focus and strategy on delivering a comprehensive, integrated platform led to years of coordinated efforts to build an expansive suite of core capabilities required by our customers. Starting as the first web-based SIS, we combined our deep domain expertise in K-12 education with over twenty years of innovation and disciplined acquisition activity to become the core K-12 software platform, with a full suite of cloud-based offerings across student information, enrollment, learning management, assessment, special education, finance, HR, data analytics, communications, and talent management.
From 2015 through March 31, 2024, we completed 19 strategic acquisitions to thoughtfully build out our platform of K-12 software solutions, building upon years of leadership.

Our Business Model
We offer our software platform through a cloud-based, SaaS business model under contracts with annual price escalators, and we recognize subscription revenues ratably over annual subscription terms of the contracts. Our SaaS solutions include access to hosted software, software maintenance, product updates and upgrades, and technical and developer support. We sell our SaaS solutions through recurring fee arrangements where revenue is recognized on an annual basis following contract start date, which we refer to as recurring revenue. Our business model provides flexibility and optionality for our customers to purchase and deploy our software platform either through individual add-on solutions, or as a unified platform. The majority of new bookings come from our SaaS
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offerings and are thus recurring in nature, with recurring revenue accounting for more than 90.2% of our total revenue for the three months ended March 31, 2024, respectively.
We generally price our SaaS and license agreements at individually negotiated rates with occasional discounts, typically for multi-solution sales or to help districts meet their budget and funding timing constraints. Contracts are typically sold on a three-year basis with one-year rolling renewals and annual price escalators. We typically invoice our customers annually, in advance, for subscription fees and maintenance, while a portion of customers are billed semiannually, quarterly, or monthly. SaaS revenues are recognized over time to appropriately reflect progress towards full completion of our performance obligations.
To help customers go live with our software and achieve success, we offer professional services such as professional consultation, implementation, and training services as requested by our customers. Revenue from these services is primarily classified as non-recurring revenue, with the exception of the revenue from recurring managed services, which is classified as recurring revenue. For our SaaS business, these services generally take less than one year to complete.
Key Factors Affecting Our Performance
Our historical financial performance has been, and we expect our financial performance in the future to be, impacted by the following key factors:
Cross-Selling New Solutions to Existing Customers
Many of our customers begin their journey with us by using only a small portion of our overall platform. As customers begin to appreciate the benefits of an integrated software platform across student data, classroom learning, back-office functions, and talent management, they increase the number of solutions they buy from us over time. Our future revenue growth is dependent upon our ability to expand our customers’ use of our platform, and our go-to-market efforts are designed to drive cross-sell growth. Our ability to increase sales to existing customers will depend on a number of factors, including the level of satisfaction with our solutions, competition, pricing, economic conditions, and spending by customers on our solutions. We have adopted a customer success strategy and implemented processes across our customer base to drive revenue retention and expansion, which combined with our cross-selling success has resulted in a Net Revenue Retention Rate (as defined below) of 107.0% as of March 31, 2024, compared to 109.1% as of March 31, 2023.
Attracting New Customers in North America
We believe there is significant opportunity to increase market adoption of our platformed products by new customers. Our ability to attract new customers is dependent upon a number of factors including the features and pricing of our competitors’ offerings, the effectiveness of our marketing efforts, the effectiveness of our channel partners in selling, the marketing and deploying of our software solutions, and the growth in demand of cloud-based technology solutions in K-12 education. We intend to expand our customer base by continuing to make significant and targeted investments in direct sales and marketing to attract new customers and to drive broader awareness of our software solutions.
Continuing to Expand Into Complementary Adjacencies
From 2015 to March 31, 2024, we have acquired and successfully integrated 19 complementary businesses to enhance our software and technology capabilities. We have a demonstrated track record of driving growth from our acquired assets and delivering positive return on investment. Acquisitions are core to our strategy, and we intend to continue pursuing targeted acquisitions that further complement our portfolio of technology offerings or provide us access to new markets. This adjacency expansion strategy is complementary to our cross-selling strategy, as it both introduces acquired solutions to our existing customers and introduces a base of net new customers to whom we may sell our other solutions. Additionally, we intend to continue providing adjacent solutions by other means, which may include organic development and strategic partnerships. Our position as the leading system of record, engagement, and intelligence provides us with a unique vantage point to identify the most critical needs of our customers and most innovative companies within the K-12 education ecosystem. We will continue to carefully evaluate acquisition, partnership, and development opportunities to assess whether they meet our strategic objectives and enhance our platform.
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Sustaining Innovation and Technology Leadership
Our success is dependent on our ability to sustain innovation and technology leadership to maintain our competitive advantage. We believe that we have built a highly differentiated platform that will position us to further extend the adoption of our solutions. We intend to continue to invest in building additional solutions, features, and functionality that expand our capabilities and facilitate the extension of our platform to new adjacencies. We also intend to continue to evaluate strategic acquisitions and investments in businesses and technologies to drive solutions and market expansion. Our future success is dependent on our ability to successfully develop, market, and sell existing and new solutions to both new and existing customers.
Expanding Internationally
We believe there is a significant opportunity to expand usage of our platform outside of North America. As of March 31, 2024, PowerSchool served customers in over 90 countries outside of the U.S. and Canada, primarily American international schools. On August 9, 2023, we acquired all of the equity interest of Neverskip, a leading provider of school solutions software in India. We plan to continue to make product, personnel, partnership, and acquisition-related investments to expand geographically. Although these investments may adversely affect our operating results in the near-term, we believe that they will contribute to our long-term growth.

Currency Fluctuations

Our operating expenses are denominated in the currencies of the countries in which our operations are located, which are primarily in the U.S., Canada, and India. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. Fluctuations in foreign currency exchange rates did not have a significant impact on our reported results in the three months ended March 31, 2024.

High Interest Rates

As a result of increased federal funds interest rates, the interest rate applicable to our First Lien loan increased from 7.7% as of March 31, 2023 to 8.3% as of March 31, 2024. As a result, our net interest expense has increased from $14.0 million for the three months ended March 31, 2023 to $21.0 million for the three months ended March 31, 2024. If interest rates continue to increase, our cost of debt may also continue to increase and we may have to divert available cash to the payment of interest.

Inflation and other Macroeconomic Events

Adverse macroeconomic conditions, including but not limited to the current inflationary environment and slower economic growth and risk of recession could impact our business and customer spending. Certain of our customers may also be negatively impacted by these events. While inflation may impact our net revenues and costs of revenues, we believe the effects of inflation, if any, on our results of operations and financial condition have not been material. However, there can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future.

Key Business Metrics
In addition to our GAAP financial information, we review a number of operating and financial metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
Annualized Recurring Revenue (“ARR”)
ARR represents the annualized value of all recurring contracts as of the end of the period. ARR mitigates fluctuations due to seasonality, contract term, one-time discounts given to help customers meet their budgetary and cash flow needs, and the sales mix for recurring and non-recurring revenue. We record ARR at the time a customer purchases a new product or renews an existing product, and at a value that represents the contracted annual recurring revenue value excluding any granted one-time discounts. ARR does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and deferred revenue and is not intended to be combined with or to replace
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either of those items. ARR is not a forecast, and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers.
We closed the three months ended March 31, 2024 with ARR of $720.3 million compared to $612.3 million as of March 31, 2023.
Net Revenue Retention Rate (“NRR”)

We believe that our ability to retain and grow recurring revenues from our existing customers over time strengthens the stability and predictability of our revenue base and is reflective of the value we deliver to them through upselling and cross selling our solution portfolio. Typically, our customer agreements are sold on a three-year basis with one-year rolling renewals and annual price escalators. These annual renewal processes provide us an additional opportunity to upsell and cross sell additional products. We assess our performance in this area using a metric we refer to as Net Revenue Retention Rate (“NRR”). For the purposes of calculating NRR, we exclude from our calculation any changes in ARR attributable to Intersect customers, as this product is sold through our channel partnership with EAB Global, Inc. and is pursuant to annual revenue minimums, therefore the business will not be managed based on our NRR. We calculate our dollar-based NRR as of the end of a reporting period as follows:
Numerator. We measure ARR from renewed and new sale opportunities booked as of the last day of the current reporting period from customers with associated ARR as of the last day of the prior year comparative reporting period.
Denominator. We measure, as of the last day of the current reporting period, the last twelve months of ARR that was scheduled for renewal.
The quotient obtained from this calculation is our dollar-based net revenue retention rate. Our NRR provides insight into the impact on current year recurring revenues of expanding adoption of our solutions by our existing customers during the current period. Our NRR is subject to adjustments for acquisitions, consolidations, spin-offs and other market activity.
We closed the twelve-month period ended March 31, 2024 with a Net Revenue Retention Rate of 107.0%, compared to 109.1% as of March 31, 2023. The most significant drivers of changes in our Net Revenue Retention Rate each year have historically been our propensity to secure contract renewals with annual price escalators and sell new solutions or additional licenses to our existing customer base. Our use of Net Revenue Retention Rate has limitations as an analytical metric, and investors should not consider it in isolation. Net Revenue Retention Rate does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies.

Components of Results of Operations
Revenues
We recognize revenue under Accounting Standard Codification Topic 606 (“ASC 606”) and 340-40 (“ASC 340-40”). Under ASC 606, we recognize revenue when our customer obtains control of goods or services in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. See “Critical Accounting Estimates.”
Subscriptions and Support. Subscriptions and support revenues consist primarily of fees from customers accessing our solutions. Revenue is recognized ratably over the contract period as the software is provided.
Service. Service revenues consist primarily of fees related to new product implementations, customizations, and customer training. Revenue is recognized when the services are rendered.
License and other. License and other revenues consist primarily of one-time perpetual license and partner royalty fees or reseller arrangements. Revenue is recognized at a point in time when the customer is able to use and benefit from the software.
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Cost of Revenue
Cost of revenue consists primarily of employee compensation costs for employees associated with supporting our subscription, support, professional services arrangements and customer success, as well as certain third-party expenses. Employee compensation and related costs include cash compensation and benefits to employees, costs of third-party contractors, and associated overhead costs. Third-party expenses consist of cloud infrastructure costs, third-party licensing costs, and other expenses directly associated with our customer support. We expect cost of revenues to increase in absolute dollars as we continue to hire personnel, to provide hosting services, technical support, customer success, and consulting services to our growing customer base.
Operating Expenses
Research and development. Research and development expenses consist primarily of personnel costs. Research and development expenses also include costs associated with contractors and consultants, equipment, and software to support our development and quality assurance teams and overhead expenses. We will continue to invest in innovation and offer our customers new solutions to enhance our existing platform.
Selling, general, and administrative. Selling, general, and administrative expenses consist primarily of employee compensation and benefits costs for corporate personnel, such as those in our executive, legal, human resource, facilities, accounting and finance, and information technology departments. In addition, general and administrative expenses include third-party professional fees and principal stockholder-related costs, as well as all other supporting corporate expenses not allocated to other departments. We expect our selling, general, and administrative expenses to increase on an absolute dollar basis as our business grows.
Acquisition costs. Acquisition costs consist primarily of third-party professional fees incurred in conjunction with acquisitions.
Interest Expense, Net
Interest expense, net consists primarily of interest payments on our outstanding borrowings under our First Lien and Revolving Credit Agreement, interest income from our investments, and amortization of debt issuance costs.
Other Expense, Net
Other expense, net primarily consists of foreign currency gains/losses.
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Results of Operations
The following table sets forth our consolidated statement of operations and comprehensive loss for the periods indicated:
Three Months Ended
March 31,
20242023
(in thousands)
Consolidated Statement of Operations and Comprehensive Loss:
Revenue:
Subscriptions and support$166,927 $141,073 
Service16,686 16,233 
License and other1,354 2,148 
Total revenue184,967 159,454 
Cost of revenue:
Subscriptions and support46,327 38,194 
Service13,383 14,323 
License and other1,071 951 
Depreciation and amortization19,080 16,021 
Total cost of revenue79,861 69,489 
Gross profit105,106 89,965 
Operating expenses:
Research and development31,651 25,421 
Selling, general, and administrative52,432 49,558 
Acquisition costs753 — 
Depreciation and amortization17,349 15,771 
Total operating expenses102,185 90,750 
Income (loss) from operations2,921 (785)
Interest expense—net20,996 14,029 
Other expenses (income)—net(99)44 
Loss before income taxes(17,976)(14,858)
Income tax expense (benefit)
4,872 (45)
Net loss(22,848)(14,813)
Less: Net loss attributable to non-controlling interest(3,290)(2,960)
Net loss attributable to PowerSchool Holdings, Inc. (19,558)(11,853)
Other comprehensive income (loss), net of taxes:
Foreign currency translation(734)86 
Change in unrealized loss on investments— 
Total other comprehensive income (loss)(734)89 
Less: Other comprehensive income (loss) attributable to non-controlling interest$(136)$17 
Comprehensive loss attributable to PowerSchool Holdings, Inc. $(20,156)$(11,781)
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The following table sets forth our consolidated statement of operations and comprehensive loss expressed as a percentage of total revenue for the periods indicated:
Three Months Ended
March 31,
20242023
Consolidated Statement of Operations and Comprehensive Loss:
Revenue:
Subscriptions and support90 %88 %
Service11 
License and other
Total revenue100 100 
Cost of revenue:
Subscriptions and support25 24 
Service
License and other<1
Depreciation and amortization10 10 
Total cost of revenue43 44 
Gross profit57 56 
Operating expenses:
Research and development17 16 
Selling, general, and administrative28 31 
Acquisition costs<1
Depreciation and amortization10 
Total operating expenses55 57 
Income (loss) from operations(<1)
Interest expense—net11 
Other expenses (income)—net(<1)(<1)
Loss before income taxes(10)(9)
Income tax expense (benefit)
3(<1)
Net loss(12)(9)
Less: Net loss attributable to non-controlling interest(2)(2)
Net loss attributable to PowerSchool Holdings, Inc. (11)(7)
Other comprehensive income (loss), net of taxes:
Foreign currency translation(<1)<1
Change in unrealized loss on investments<1
Total other comprehensive income (loss)(<1)<1
Less: Other comprehensive income (loss) attributable to non-controlling interest(<1)<1
Comprehensive loss attributable to PowerSchool Holdings, Inc. (11)%(7)%
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Discussion of Results of Operations

Revenues
Three Months Ended March 31,
20242023$ Change% Change
(in thousands)
Revenue:
Subscriptions and support$166,927 $141,073 $25,854 18 %
Service16,686 16,233 453 %
License and other1,354 2,148 (794)(37)%
Total revenue$184,967 $159,454 $25,513 16 %
The period-over-period increase in subscriptions and support and service revenue for the three months ended March 31, 2024 was driven by increased sales of our solutions to new customers, and by cross-selling and upselling to existing customers. The period-over-period change in license and other revenue was driven primarily by the variability caused by the point in time nature of this revenue stream; we expect this variability to continue in future quarters.

Total Cost of Revenue
Three Months Ended March 31,
20242023$ Change% Change
(in thousands)
Cost of Revenue:
Subscriptions and support$46,327 $38,194 $8,133 21 %
Service13,383 14,323 (940)(7)%
License and other1,071 951 120 13 %
Depreciation and amortization19,080 16,021 3,059 19 %
Total cost of revenue$79,861 $69,489 $10,372 15 %
The period-over-period increase in subscriptions and support cost of revenue for the three months ended March 31, 2024 was primarily driven by $3.6 million increase in cloud hosting expenses, $1.0 million increase personnel-related costs, and $1.0 million increase in restructuring expenses. The period-over-period decrease in service cost of revenue was primarily attributable to a $1.0 million decrease in personnel-related costs. The period-over-period increase in license and other cost of revenue was primarily attributable to an increase in royalty costs.

The period-over-period increase in depreciation and amortization cost of revenue for the three months ended March 31, 2024 was driven by amortization related to increased investment in innovation projects.
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Operating Expenses
Three Months Ended March 31,
20242023$ Change% Change
(in thousands)
Operating expenses:
Research and development$31,651 $25,421 $6,230 25 %
Selling, general, and administrative52,432 49,558 2,874 %
Acquisition costs753 — 753 N/M
Depreciation and amortization17,349 15,771 1,578 10 %
Total operating expenses$102,185 $90,750 11,435 13 %
Research and development. The period-over-period increase in research and development expense for the three months ended March 31, 2024 was primarily attributable to an increase of $3.0 million in personnel-related costs, $2.3 million increase in restructuring expenses, and $0.4 million increase in hardware and software support costs.
Selling, general, and administrative. The period-over-period increase in selling, general and administrative expense for the three months ended March 31, 2024 was primarily attributable to an increase of $4.1 million in personnel related expenses and $1.1 million increase in third-party commissions, and $0.6 million increase in software support costs. The increase was partially offset by decreases of $1.7 million in bad debt expense, $0.5 million in professional services fees, and $0.5 million in insurance costs.
Acquisition costs. The period-over-period increase in acquisition costs for the three months ended March 31, 2024 was attributable to the acquisition of Allovue.
Depreciation and amortization. The period-over-period increase in depreciation and amortization expense for the three months ended March 31, 2024 was primarily due to a higher balance of intangible assets from the acquisitions of Neverskip, SchoolMessenger, and Allovue.
Interest Expense
Three Months Ended March 31,
20242023$ Change% Change
(in thousands)
Interest Expense$20,996 $14,029 $6,967 50 %

The period-over-period increase in interest expense for the three months ended March 31, 2024 was driven by a higher average debt balance throughout the period and higher interest rates on our First Lien Term Loan.
Other Income (Expense) - Net
Three Months Ended March 31,
20242023$ Change% Change
(in thousands)
Other (income) expense - net$(99)$44 $(143)(325)%
The period-over-period fluctuation in other (income) expense - net for the three months ended March 31, 2024 was primarily due to the fluctuation on the remeasurement of foreign denominated cash and accounts receivable balances.
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Income Tax Expense (Benefit)
Three Months Ended March 31,
20242023$ Change% Change
(in thousands)
Income tax expense (benefit)$4,872 $(45)$4,917 N/M

The period-over-period fluctuation in income tax benefit for the three months ended March 31, 2024 was primarily due to deferred tax expense recognized due to the tax restructuring completed as part of the Allovue acquisition.

Liquidity and Capital Resources
General
PowerSchool Holdings, Inc. is a holding company with no operations of our own and, as such, we depend on distributions by our current and future subsidiaries, including Holdings LLC, for cash to fund all of our operations and expenses. The terms of the agreements governing our senior secured credit facilities contain certain negative covenants prohibiting certain of our subsidiaries from making cash dividends or distributions to us or to Holdings LLC unless certain financial tests are met. We currently anticipate that such restrictions will not impact our ability to meet our cash obligations.
As of March 31, 2024, our principal sources of liquidity were cash and cash equivalents totaling $17.4 million, which were held for working capital purposes, as well as the available balance of our Revolving Credit Agreement, described below. Our cash equivalents were comprised of bank deposits and are generally held with large, diverse financial institutions worldwide with high investment-grade credit ratings or financial institutions that meet investment-grade ratings criteria, which we believe mitigates credit risk.
We believe our existing cash and cash equivalents, our Revolving Credit Agreement and cash provided by sales of our solutions and services will be sufficient to meet our working capital and capital expenditure needs beyond the next twelve months. We also expect our operating cash flows to further improve as we increase our operational efficiency and experience economies of scale in the long term.
Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the timing of required TRA payments, the expansion of sales and marketing activities, the introduction of new and enhanced solutions and services offerings, and the continuing market acceptance of our solutions. In the future, we may enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights.
We may be required to seek additional equity or debt financing in the future. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies, this could reduce our ability to compete successfully and harm our results of operations.
A majority of our customers pay in advance for subscriptions, which is recorded as deferred revenue. Deferred revenue consists of the unearned portion of billed fees for our subscriptions, which is later recognized as revenue in accordance with our revenue recognition policy. As of March 31, 2024, we had deferred revenue of $283.7 million, of which $275.5 million was recorded as a current liability and is expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria have been met.
Credit Facilities
On August 1, 2018, we entered into a First Lien with lending institutions for term loan borrowings. The First Lien also provides for a Revolving Credit Agreement (the “Revolving Credit Agreement”).

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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 carrying value of the related debt.

On October 12, 2023, the Company further amended the First Lien and Revolving Credit Agreement. The amendment, among other things, refinanced the then outstanding term loans with $837.9 million of new term loans, extended the maturity date on the First Lien from July 31, 2025 to August 1, 2027, extended the maturity date of the Revolving Credit Agreement from May 2, 2025 to May 2, 2027, and increased the borrowing capacity on the Revolving Credit Agreement from $289.0 million to $400.0 million. Following the amendment, the First Lien is repayable in quarterly payments of $2.1 million.

As of March 31, 2024, there were $835.8 million of term loans outstanding under the First Lien and $125.0 million under the Revolving Credit Agreement.
Borrowings under the First Lien bear interest at the SOFR, as administered by the Federal Reserve Bank of New York, plus the initial margin 3.25% per annum. As of March 31, 2024, the interest rate on the First Lien was 8.31%.
Other Contractual Obligations
Our material cash requirements from other known contractual and other obligations primarily consist of contractual obligations under operating leases for office space, data facilities, cloud hosting arrangements and other services we purchase as part of our normal operations.
See Note 12. Commitments and Contingencies of the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
Cash Flows
The following table presents a summary of our consolidated cash flows from operating, investing, and financing activities for the periods presented:
Three Months Ended March 31,
20242023
(in thousands)
Net cash used in operating activities
$(89,685)$(60,027)
Net cash used in investing activities
(54,705)(10,032)
Net cash provided by (used in) financing activities
122,595 (3,222)
Effect of foreign exchange rate on cash and cash equivalents
166 73 
Net (decrease) increase in cash and cash equivalents and restricted cash
$(21,629)$(73,208)
Cash and cash equivalents and restricted cash at beginning of period
39,554 137,981 
Cash and cash equivalents and restricted cash at end of period
$17,925 $64,773 
Operating Activities
Net cash used in operating activities of $89.7 million for the three months ended March 31, 2024 was primarily related to our net loss of $22.8 million, adjusted for non-cash charges of $50.8 million, and net cash outflows of $117.7 million, resulting from changes in our operating assets and liabilities, net of acquisitions. Non-cash charges primarily consisted of depreciation and amortization of $36.4 million, share-based compensation expense of $14.2 million, and $1.5 million from the amortization of debt issuance costs. The main drivers of net cash outflows from changes in operating assets and liabilities were decreases in deferred revenue of $102.9 million primarily due to the seasonality of our billing cycle.
Net cash used in operating activities of $60.0 million for the three months ended March 31, 2023 was primarily related to our net loss of $14.8 million, adjusted for non-cash charges of $48.0 million, and net cash outflows of $93.2 million resulting from change in our operating assets and liabilities, net of acquisitions. Non-cash charges
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primarily consisted of depreciation and amortization of $31.8 million and share-based compensation expense of $14.5 million. The main drivers of the net cash inflows from changes in operating assets and liabilities were increases in deferred revenue of $73.7 million due to increases in sales and accounts receivable of $8.4 million due to the seasonality of our billing cycle.
Investing Activities
Net cash used in investing activities of $54.7 million for the three months ended March 31, 2024 was primarily related to the net cash paid for our acquisition of Allovue for $36.1 million, investment in capitalized product development costs of $9.0 million, purchases of property and equipment of $3.9 million, and payment of acquisition-related deferred consideration of $5.8 million.
Net cash used in investing activities of $10.0 million for the three months ended March 31, 2023 was primarily related to our investment in capitalized product development costs of $9.7 million and purchases of property and equipment of $0.4 million.
Financing Activities
Net cash provided by financing activities of $122.6 million for the three months ended March 31, 2024 was primarily related to the net proceeds from our Revolving Credit Agreement of $125.0 million offset by scheduled repayment of our First Lien debt of $2.1 million, the payment of deferred consideration of $0.2 million, and the payment of taxes related to the net settlement of equity awards of $0.1 million.
Net cash used in financing activities of $3.2 million for the three months ended March 31, 2023 was primarily related to payment of taxes related to the net settlement of equity awards of $1.3 million and scheduled repayment of our First Lien debt of $1.9 million.
Indemnification Agreements
In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify customers, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. In addition, in connection with the completion of our IPO, we entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations and comprehensive loss, or consolidated statements of cash flows.

Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities, as applicable, at the date of our consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions, impacting our reported results of operations and financial condition.

Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of assets and liabilities and the recognition of income and expenses. Management considers these accounting policies to be critical accounting policies. The estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. The critical accounting estimates, assumptions, and judgements that we believe to have the most significant impact on our consolidated financial statements are revenue recognition, accounts receivable, capitalized product development costs, goodwill and intangible assets, business combinations, share-based compensation, tax receivable agreement liability, and income taxes.
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There have been no material changes to our critical accounting policies and estimates as described in our Annual Report on Form 10-K for the year ended December 31, 2023.
Recent Accounting Pronouncements
For a description of our recently adopted accounting pronouncements and recently issued accounting standards not yet adopted, see Note 2. Summary of Significant Accounting Policies to the condensed consolidated financial statements.
Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results. The non-GAAP financial information is presented for analytical and supplemental informational purposes only, and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.
These non-GAAP financial measures have their limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, these non-GAAP financial measures should not be considered as a replacement for their respective comparable financial measures, as determined by GAAP, or as a measure of our profitability or liquidity. We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP measures only for supplemental purposes.

Adjusted Gross Profit
Adjusted Gross Profit is a supplemental measure of operating performance that is not made under GAAP and that does not represent, and should not be considered as, an alternative to gross profit, as determined in accordance with GAAP. We define Adjusted Gross Profit as gross profit, adjusted for depreciation, share-based compensation expense and the related employer payroll tax, restructuring and acquisition-related expenses, amortization of acquired intangible assets, and capitalized product development costs. We use Adjusted Gross Profit to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, and to develop short-term and long-term operating plans. We believe that Adjusted Gross Profit is a useful measure to us and to our investors because it provides consistency and comparability with our past financial performance and between fiscal periods, as the metric generally eliminates the effects of the variability of depreciation, share-based compensation, restructuring expense, acquisition-related expenses, and amortization of acquired intangibles and capitalized product development costs from period to period, which may fluctuate for reasons unrelated to overall operating performance. We believe that the use of this measure enables us to more effectively evaluate our performance period-over-period and relative to our competitors.

Adjusted EBITDA

Adjusted EBITDA is a supplemental measure of operating performance that is not made under GAAP and that does not represent, and should not be considered as, an alternative to net income (loss), as determined by GAAP. We define Adjusted EBITDA as net income (loss) adjusted for net interest expense, depreciation and amortization, provision for (benefit from) income tax, share-based compensation expense and the related employer payroll tax, management fees, restructuring expense, acquisition-related expense, and nonrecurring litigation expense. We use Adjusted EBITDA to understand and evaluate our core operating performance and trends and to develop short-term and long-term operating plans. We believe that Adjusted EBITDA facilitates comparison of our operating performance on a consistent basis between periods and, when viewed in combination with our results prepared in accordance with GAAP, helps provide a broader picture of factors and trends affecting our results of operations.
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Free Cash Flow

Free Cash Flow is a supplemental measure of liquidity that is not made under GAAP and does not represent, and should not be considered as, an alternative to cash flow from operations, as determined by GAAP. We define Free Cash Flow as net cash provided by operating activities less cash used for purchases of property and equipment and capitalized product development costs. We believe that Free Cash Flow is a useful indicator of liquidity that provides information to management and investors about the amount of cash generated by our operations inclusive of that used for investments in property and equipment and capitalized product development costs.

Reconciliation of Gross profit to Adjusted gross profit

 Three Months Ended March 31,
(in thousands except percentages)20242023
Gross profit$105,106$89,965
Depreciation151252
Share-based compensation (1)
2,2732,458
Restructuring(2)
1,27913
Acquisition-related expense(3)
17387
Amortization18,92915,769
Adjusted Gross Profit$127,911$108,544
Gross Profit Margin(4)
56.8 %56.4 %
Adjusted Gross Profit Margin(5)
69.2 %68.1 %
(1)    Refers to expenses flowing through gross profit associated with share-based compensation.
(2)    Refers to expenses flowing through gross profit related to migration of customers from legacy to core products, and severance expense related to offshoring activities and executive departures.
(3)    Refers to expenses flowing through gross profit incurred to execute and integrate acquisitions, including retention awards and severance for acquired employees.  
(4)    Represents gross profit as a percentage of revenue.
(5)    Represents Adjusted Gross Profit as a percentage of revenue.

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Reconciliation of Net Loss to Adjusted EBITDA
 
Three Months Ended March 31,
(in thousands)20242023
Net loss$(22,848)$(14,813)
Add:
 
 
Amortization35,49230,873
Depreciation937918
Interest expense - net(1)
20,99614,029
Income tax expense (benefit)4,872(45)
Share-based compensation    
14,68515,481
Management fees(2)
8063
Restructuring(3)
3,8581,366
Acquisition-related expense(4)
3,2021,534
Adjusted EBITDA$61,274$49,406
Net loss margin(5)
(12.4)%(9.3)%
Adjusted EBITDA margin(6)
33.1 %31.0 %
(1)    Interest expense, net of interest income.
(2)    Refers to expense associated with collaboration with our principal stockholders and their internal consulting groups.
(3)    Refers to costs incurred related to migration of customers from legacy to core products, remaining lease obligations for abandoned facilities, severance expense related to offshoring activities, facility closures, nonrecurring litigation expense, and executive departures.
(4)    Refers to direct transaction and debt-related fees reflected in our acquisition costs line item of our consolidated income statements and incremental acquisition-related costs that are incurred to perform diligence, execute and integrate acquisitions, including retention awards and severance for acquired employees, and other transaction and integration expenses. Also, refers to the fair value adjustments recorded to the contingent consideration liability related to the acquisitions of Kinvolved, Chalk, and SchoolMessenger. These incremental costs are embedded in our research and development, selling, general and administrative, and cost of revenue line items.
(5)    Represents net loss as a percentage of revenue
(6)    Represents Adjusted EBITDA as a percentage of revenue.

 Reconciliation of Net Cash Used in Operating Activities to Free Cash Flow
 
Three Months Ended March 31,
(in thousands)20242023
Net cash used in operating activities
$(89,685)$(60,027)
Less:
Purchases of property and equipment(3,887)(356)
Capitalized product development costs(8,956)(9,676)
Free Cash Flow$(102,528)$(70,059)
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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q are forward-looking statements. Forward-looking statements give our current expectations relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

our history of cumulative losses and expectation that we will not be profitable for the foreseeable future;
risks associated with failing to continue our recent growth rates;
the competitiveness of the market in which we operate;
risks and uncertainties associated with potential acquisitions and divestitures;
our ability to retain, hire and integrate skilled personnel including our senior management team;
our ability to develop, introduce and market new and enhanced versions of our solutions to meet customer needs and expectations;
our use of AI and our management thereof;
the impact of adverse general and industry-specific economic and market conditions;
risks related to the unavailability of additional U.S. federal government stimulus packages focused on educational initiatives following the COVID-19 pandemic;
the impact of inflation, rising interest rates, and global conflicts, including disruptions in European economies as a result of the war in Ukraine; the Israel-Hamas war, the relationship between China and Taiwan, and ongoing trade disputes between the United States and China;
risks to our revenue from changes in the spending policies or budget priorities for government funding of K-12 schools;
risks related to the procurement process and budget decision by government entities;
our ability to correctly estimate market opportunity and forecast market growth;
our ability to successfully develop new solutions or materially enhance current solutions through our research and development efforts;
risks caused by delays in upturns or downturns being reflected in our financial position and results of operations;
the length and variability of our sales cycles;
risks related to negotiating leverage and the demands of our large customers;
our ability to change our pricing models, if necessary to compete successfully;
our ability to acquire new accounts and successfully retain existing accounts;
our ability to maintain, enhance and protect our brand;
the impact of any catastrophic events;
the seasonality of our sales and customer growth;
the effects of interruptions or delays in services provided by our data centers or other third parties;
risks associated with lawsuits by third parties for alleged infringement, misappropriation or other violation of their intellectual property and proprietary rights;
our ability to obtain, maintain, protect and enforce intellectual property protection for our current and future solutions;
the impact of potential information technology or data security breaches or other cyber-attacks or other disruptions;
the risks associated with indemnity provisions in some of our agreements;
the risks related to our use of open source software in certain of our solutions;
the impact of interruptions or performance problems associated with our technology or infrastructure;
the impact of real or perceived errors, failures or bugs in our solutions;
risks related to incorrect or improper use of our solutions or our failure to properly train customers on how to utilize our solutions;
our ability to offer high-quality support;
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our ability to predict and respond to rapidly evolving technological trends and our customers’ changing needs;
the fact that our activities are and will continue to be subject to extensive government regulation;
our ability to comply with privacy laws and regulations;
risks related to changes in tax laws;
the impact of export and import control laws and regulations;
risks relating to non-compliance with anti-corruption, anti-bribery and similar laws;
risks related to future litigation;
changes in privacy laws and regulations applicable to our business;
our ability to comply with legal requirements, contractual obligations and industry standards relating to security, data protection and privacy;
risks to our reputation and of liability from a failure to comply with a variety of complex procurement rules and regulation;
our reliance on third-party software and intellectual property licenses;
our ability to develop and maintain proper and effective internal control over financial reporting;
the impact of variation in our quarterly operating results on the trading price of our stock; and
other factors disclosed in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023.

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