What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-02-19 compared with 2024-02-29 · 87 added, 152 removed, 362 unchanged (40% of the section changed)

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This section of this Annual Report on Form 10-K discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023.

Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 can be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section within our Final Prospectus under the Securities Act, and are incorporated herein by reference.

Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 29, 2024, which is incorporated herein by reference.

The period‑to‑period comparison of financial results is not necessarily indicative of future results.

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This enables business users of any skill level to harness their data in order to send the right message at the right time across email, SMS, and push notifications, more accurately measure and predict performance, and deploy the specific actions and campaigns that drive the highest impact.

Our reviews add-on allows our customers (as defined below) to collect product reviews within our platform to provide a seamless experience across the customer lifecycle, and our CDP offering gives customers user-friendly ways to track new types of data, transform and cleanse data, run more advanced reporting and predictive analysis to drive revenue growth, and sync data in to and out of Klaviyo at scale.

Our reviews add-on allows our customers to collect product reviews within our platform to provide a seamless experience across the customer lifecycle, and our CDP offering gives customers user-friendly ways to track new types of data, transform and cleanse data, run more advanced reporting and predictive analysis to drive revenue growth, and sync data in to and out of Klaviyo at scale.

We focused on marketing automation within eCommerce as our first application use case, and we believe our software is highly extensible across a broad range of functions and verticals.

As of December 31, 2023, our platform had efficiently scaled to over 143,000 customers.

Today, our customers primarily operate within the retail and eCommerce vertical.

Due to the flexibility and adaptability of our technology, we also see organic demand

growth from customers in other verticals, such as education, events and entertainment, restaurants, and travel, as well as from B2B companies.

Based upon our available data today, we estimate verticals outside of retail represented less than 5% of our revenue for the year ended December 31, 2023.

See the section below titled “Key Performance Metrics – Customers” for additional information on how we define customers and customers outside of retail.

Due to the flexibility and adaptability of our technology, we also see organic growth from customers in other verticals, such as education, events and entertainment, restaurants, and travel, as well as from B2B companies.

As of December 31, 2024, our platform had efficiently scaled to over 167,000 customers.

We generate revenue through the sale of subscriptions to our customers for the use of our platform.

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The vast majority of our subscription plans today are monthly.

Our land-and-expand strategy is designed to align our success with that of our customers.

Our land-and-expand strategy aligns our success with that of our customers.

As our customers’ businesses grow, they utilize more active consumer profiles and send more emails and SMS messages, which naturally increases their usage of our platform.

Our revenue also expands when our customers add additional channels, such as SMS, and additional use cases, such as reviews and our CDP offering, or when their other brands, business units, and geographies start using the platform.

Initial Public Offering

On September 22, 2023, we completed our IPO of 19,200,000 shares of our Series A common stock at a price to the public of $30.00 per share.

We sold 11,507,693 of such shares and existing stockholders sold an aggregate of 7,692,307.

Our shares of Series A common stock began trading on the New York Stock Exchange on September 20, 2023.

We received net proceeds from the IPO of approximately $320.1 million, after deducting approximately $17.7 million in underwriting discounts and commissions, and $7.4 million in offering-related expenses.

On October 19, 2023, the underwriters for the IPO exercised their option to purchase additional shares granted in connection with the IPO, with respect to 2,764,066 shares of Series A common stock of a possible 2,880,000 shares.

The Company received no proceeds from this transaction, as the option was an option to purchase additional shares of Series A common stock from the existing stockholders.

Immediately following the effectiveness of the registration statement relating to our IPO, we filed our Amended and Restated Certificate of Incorporation, which authorized a total of 3,000,000,000 shares of Series A common stock, 350,000,000 shares of Series B common stock, and 100,000,000 shares of undesignated preferred stock.

All shares of common stock then outstanding were reclassified as Series B common stock.

Factors Affecting Our Future Performance

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Attracting new customers to our platform is a key driver of our revenue growth strategy.

We have successfully grown our retail and eCommerce customer base and believe we have significant room to expand within this vertical as well as expand into other industries, including education, events and entertainment, restaurants, and travel as well as from B2B customers.

Our ability to attract new customers will depend on a number of factors, including our ability to innovate, the effectiveness and pricing of our new and existing products and capabilities, and the success of our selling and marketing efforts.

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We focus on expansion in three primary ways.

First, as our customers increase their usage of our platform through the number of active consumer profiles they have and email and SMS messages they send, they move to higher subscription tiers.

First, as our customers increase their usage of our platform through the number of active consumer profiles they store and email and SMS messages they send, they move to higher subscription tiers.

Second, we cross-sell additional communication channels, such as SMS to customers who started on our platform with our email offering, as well as add-ons, such as reviews and our CDP offering.

Finally, we sell our platform to our customers’ other brands, business units, and geographies.

Finally, we offer our platform to our customers’ other brands, business units, and geographies.

Going forward, our ability to increase sales to existing customers will depend on a number of factors, including our customers’ satisfaction with our solutions and the ability of our customers to attract new consumers.

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In 2022, we opened our office in Sydney, Australia to capitalize on the opportunities in Asia Pacific.

Although we only recently expanded to these regions, we have already experienced significant growth with international sales outside of the Americas accounting for 31.0% of our revenue for the year ended December 31, 2023.

We believe that the introduction of additional languages and currencies to our platform will increase our efficacy and ease of use in other regions, as our platform is currently only available in English and US Dollars.

In 2024, we expanded our presence in the European region by adding operations in Dublin, Ireland.

We have already experienced significant growth with international sales outside of the Americas accounting for 32.6% of our revenue for the year ended December 31, 2024.

We also continue to expand our product offerings to better serve the international market.

As of the date of this Annual Report on Form 10-K, we offer SMS capabilities in more than 15 countries, and we offer our platform in English, French, German, Portuguese, Korean, Spanish and Italian.

We believe that the introduction of additional languages to our platform will increase our efficacy and ease of use in other regions.

We also currently only bill in U.S.

Dollars, and we believe that adding additional currencies to our platform will help us further our international expansion efforts.

Investment in Innovation and Product Development

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We originally launched our platform with email messaging as our first channel.

Since then, we have successfully added other channels, such as SMS and push notifications, as well additional use cases, such as reviews and our CDP offering.

then, we have successfully added other channels, such as SMS and push notifications, as well additional use cases, such as reviews and our CDP offering.

In 2024, we also launched Klaviyo AI, a suite of features that provide customers with AI-powered tools to streamline data segmentation, create and orchestrate campaigns, and drive better engagement.

Our continued success depends on our ability to sustain product and technology innovation to continue delivering value to our customers.

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Expansion into New Industry Verticals and Use Cases

As more customers use our platform, we are seeing organic demand from customers in other verticals, such as education, events and entertainment, restaurants, and travel, as well as from B2B companies.

As more customers use our platform, we are seeing organic growth from customers in other verticals, such as education, events and entertainment, restaurants, and travel, as well as from B2B companies.

While we started with consumer engagement as our initial use case in the retail and eCommerce vertical, we see a large opportunity into other products and verticals.

Without an active sales motion, we have attracted customers from verticals other than retail and eCommerce, which indicates the strong interest and applicability of our platform to new verticals.

We have begun to explore ways to serve these new verticals more intentionally.

For example, we launched Klaviyo for Wellness in June 2023, which is tailored for fitness studios, salons, and other client-based services within the vertical.

We continue to explore ways to serve these new verticals more intentionally.

In the future, we intend to more actively invest in addressing new industry verticals and product use cases.

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Customers do not include persons or entities that use our platform on a free trial basis.

We define customers outside of retail as those customers who have an identified industry outside of retail, either through in-product selection or as part of the sales process.

Customers Generating Over $50,000 of ARR .

We calculate our number of customers generating over $50,000 of ARR as those customers that have an average ARR of greater than $50,000 over the prior twelve months (or the entire duration of the customer’s paying relationship, if it is less than twelve months) as of the date of determination.

We calculate our number of customers generating over $50,000 of ARR (as defined below) as those customers that have an average ARR of greater than $50,000 over the prior twelve months (or the entire duration of the customer’s paying relationship, if it is less than twelve months) as of the date of determination.

We believe the number of customers generating over $50,000 of ARR is a key performance metric to help investors and others understand and evaluate our results of operations in the same manner as our management team, as it is an indicator of our ability to grow the number of customers that are exceeding this ARR threshold, both from our existing customers expanding their usage of our platform and from our sales to larger customers.

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We calculate our Dollar-Based Net Revenue Retention rate (“NRR”) by first identifying the cohort of customers as of twelve months prior to the date of determination.

We then calculate the Annualized Recurring Revenue (“ARR”) from this customer cohort as of twelve months prior to the date of determination (the “Prior Period ARR”) and the ARR from this customer cohort as of the date of determination (the “Current Period ARR”).

We then calculate the

Annualized Recurring Revenue (“ARR”) from this customer cohort as of twelve months prior to the date of determination (the “Prior Period ARR”) and the ARR from this customer cohort as of the date of determination (the “Current Period ARR”).

ARR, for any date of determination, is the annualized value of existing paid subscriptions, which we calculate by taking the amount of revenue that we expect to receive in the next monthly period for our existing paid subscriptions, assuming no changes to such subscriptions in the next month, as of that date of determination, and multiplying that amount by twelve.

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This price increase also impacted the various measures we use to assess our usage and subscription levels based on revenue, such as NRR and our revenue growth rate, and following its implementation, those measures experienced corresponding increases as a result.

As we have reached the one year anniversary of this price increase, these measures have seen a corresponding decrease.

The decrease in these measures from December 31, 2023 to December 31, 2024 was largely driven by lapping the one year anniversary of this price increase in September 2023.

Klaviyo Attributed Value.

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Components of Results of Operations

A significant majority of our revenues are derived from sales of subscriptions, which are comprised of fees paid by customers to access our cloud-based software platform for storing consumer’s first-party data and using it to create and deliver personalized and targeted email and SMS marketing services.

A significant majority of our revenues are derived from sales of subscriptions, which are comprised of fees paid by customers to access our cloud-based software platform for storing first-party consumer data and using it to create and deliver personalized and targeted consumer experiences across digital channels.

A small portion of our revenue is currently derived from professional services.

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Our cost of revenue primarily consists of cloud-based infrastructure costs, outbound communication sending costs, employee-related costs including payroll, benefits, bonuses, and stock-based compensation expense related to our customer support team, amortization of capitalized internal-use software development costs, and allocated overhead costs, including rent, facilities, depreciation, and costs related to information technology.

We expect our cost of revenue to increase in dollar amount as we continue to invest in our platform infrastructure and support, acquire new customers, and existing customers increase their usage of our platform.

We expect our cost of revenue to increase in dollar amount as we continue to invest in our platform infrastructure and support, acquire new customers, and drive existing customers to expand their usage of our platform.

Our gross profit represents revenue, less all cost of revenue.

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Our selling and marketing costs primarily consist of employee-related costs including payroll, benefits, bonuses, and stock-based compensation;

sales commissions, partnership expenses for revenue sharing agreements, including to Shopify Inc.

(“Shopify”), other commerce platform partners, and agency partners;

sales commissions and partnership expenses for revenue sharing agreements, including to Shopify, other commerce platform partners, and agency partners;

costs associated with advertising and marketing activities;

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Sales commissions are considered an incremental cost to obtain contracts with customers and these costs are deferred and amortized over the expected benefit period.

On July 28, 2022, we entered into a collaboration agreement and strategic partnership with Shopify pursuant to which we issued warrants to Shopify (and certain of its affiliates) (the “Shopify Warrants”), in exchange for promotion of our marketing services with customers within the Shopify ecosystem.

In accordance with relevant accounting policies, we recognize a prepaid marketing expense in connection with the Shopify Warrants.

On July 28, 2022, we entered into a collaboration agreement and strategic partnership with Shopify pursuant to which we issued warrants to Shopify (the “Shopify Warrants”), in exchange for promotion of our marketing services with customers within the Shopify ecosystem.

In accordance with relevant accounting policies, we recognize a prepaid marketing expense in connection with vesting of the Shopify Warrants.

This prepaid marketing expense represents the probable future economic benefit being amortized over a seven-year expected benefit period and is recorded based on the fair value of the warrants on the grant date.

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Our research and development costs primarily consist of employee-related costs associated with research and development staff, including payroll, benefits, bonuses, stock-based compensation, and allocated overhead costs, including rent, facilities, depreciation, and costs related to information technology.

We capitalize a portion of our research and development costs that meets the criteria for capitalization of internal-use software.

We capitalize a portion of our research and development costs that meet the criteria for capitalization of internal-use software.

All other research and development costs are expensed as incurred.

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General and Administrative

Our general and administrative expenses consist of employee-related costs including payroll, benefits, bonuses, and stock-based compensation in general corporate functions;

procurement, accounting and finance, tax, legal, project management, and human resources, as well as allocated overhead costs, including rent, facilities, depreciation, and costs related to information technology.

Our general and administrative expenses consist of employee-related costs including payroll, benefits, bonuses, and stock-based compensation in general corporate functions, such as procurement, accounting and finance, tax, legal, project management, and human resources, as well as allocated overhead costs, including rent, facilities, depreciation, and costs related to information technology.

Credit card processing fees are also part of general and administrative expenses.

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As a result, we expect our general and administrative expenses to increase in dollar amount for the foreseeable future but to generally decrease as a percentage of our revenue over the longer term as we scale our business.

This percentage may fluctuate from period to period depending on the timing and amount of our general and administrative expenses, including in the short term due to increased costs in connection with our initial public offering and heightened compliance requirements associated with operating as a public company.

This percentage may fluctuate from period to period depending on the timing and amount of our general and administrative expenses, including in the short term due to heightened compliance requirements associated with operating as a public company.

These expenses include increased professional service costs, the increased cost of directors’ and officers’ liability insurance, and costs associated with increasing our employee headcount in certain departments, such as accounting, internal audit, and investor relations.

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Provision for income taxes consists primarily of income taxes related to U.S.

states and foreign jurisdictions in which we conduct business.

and foreign jurisdictions in which we conduct business.

We maintain a full valuation allowance on our U.S.

federal and state net deferred tax assets as we have concluded that it is not more likely than not that the deferred tax assets will be realized.

We operate our business through one reportable segment, as well as one business activity, providing software that brings consumers’ first-party data together and uses it to create and deliver highly personalized consumer experiences across digital channels.

The OECD is coordinating negotiations among more than 140 countries with the goal of achieving consensus around substantial changes to international tax policies, including the implementation of a minimum global effective tax rate of 15%.

Various countries have implemented or are in the process of implementing the legislation, which does not currently apply to us.

As additional jurisdictions enact such legislation, we expect our effective tax rate and cash tax payments could increase in future years.

We operate our business through one reportable segment, as well as one business activity, providing software that brings first-party consumer data together and uses it to create and deliver highly personalized consumer experiences across digital channels.

Results of Operations

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Other income (expense), net

816 (470) 388

Interest income

39,582 24,051 5,538

Interest expense

Total other income (expense), net

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Provision for income taxes

2,462 1,192 83

Net loss $ (46,142) $ (308,233) $ (49,193)

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Capitalized stock-based compensation expense

3,555 1,349 —

Total stock-based compensation expense

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Other income (expense), net

0.1 (0.1) 0.1

Interest income

Interest expense

Total other income (expense), net 4.3 3.3 1.3

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Provision for income taxes

Net income (loss)

(4.9) % (44.2) % (10.4) %

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The increase was primarily due to expansion with existing customers driven by expanded usage of our platform as well as our SMS channel.

For the year ended December 31, 2023, sales to existing customers accounted for approximately 68% of the increase in revenue.

We estimate our price increase in September 2022 represented a low-double digit increase of incremental revenue dollars in 2023.

For the year ended December 31, 2023, approximately 32% of the increase in revenue was related to new customers, particularly in the mid-market and outside of the Americas.

For the year ended December 31, 2024, sales to existing customers accounted for approximately 54% of the increase in revenue while approximately 46% of the increase in revenue was related to new customers, particularly in the mid-market and outside of the Americas.

Sales to new customers represent the revenue recognized from new customers acquired in the 12 months prior to the period end.

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Cost of revenue for the year ended December 31, 2024 increased by $43.4 million or 24.4%, to $221.3 million compared to $177.9 million for the year ended December 31, 2023.

This increase was primarily due to an increase of approximately $24.8 million of stock-based compensation mainly due to the vesting of Double-Trigger RSUs upon and subsequent to the IPO, $17.4 million in outbound communication sending costs on behalf of our customers, and $7.3 million in salaries and personnel expenses as a result of increases in headcount and the implementation of a company-wide sabbatical program.

This increase was primarily due to an increase of $24.5 million in cloud-based infrastructure costs, $24.2 million in outbound communication sending costs on behalf of our customers, $8.6 million in salaries and personnel expenses as a result of increases in headcount, and $2.8 million in

amortization related to capitalized software development costs.

The increase was offset by a decrease of approximately $16.1 million in stock-based compensation expense related to the vesting of restricted stock units (“RSUs”) in connection with our IPO in September 2023.

Year Ended December 31,

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Gross profit for the year ended December 31, 2024 increased by $195.9 million or 37.7%, to $716.2 million compared to $520.2 million for the year ended December 31, 2023.

This increase was primarily due to revenue growth and ongoing efforts to optimize our costs including (i) higher volume-based discounts and pricing improvements on our purchases of third party cloud hosting infrastructure and (ii) more efficient use of data storage and elimination of legacy storage architecture.

This increase was primarily due to revenue growth and a decrease in stock-based compensation expense.

Selling and Marketing

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Selling and marketing expenses for the year ended December 31, 2024 increased by $9.8 million or 2.5%, to $404.2 million compared to $394.4 million for the year ended December 31, 2023.

This increase was primarily due to an increase of approximately $107.0 million of stock-based compensation mainly due to the vesting of Double-Trigger RSUs upon and subsequent to the IPO, $30.9 million in amortization of prepaid marketing expense driven by the Shopify Warrants issued in connection with the Shopify partnership, $26.5 million in salaries and personnel expenses as a result of increases in headcount and the implementation of a company-wide sabbatical program, $14.1 million in partnership-related expenses across our ecosystem, $6.1 million in marketing expenses associated with our advertising campaigns across multiple channels of media, and $1.5 million due to restructuring expenses incurred in the first quarter of 2023.

The increase was offset by a decrease of approximately $5.7 million due to a reduction in marketing professional services.

This increase was primarily due to an increase of approximately $51.7 million in salaries and personnel expenses as a result of increases in headcount and the introduction of a company-wide bonus program, $12.7 million in marketing related services, $10.2 million in partnership-related expenses across our ecosystem, and $3.7 million in technology expenses.

The increase was offset by a decrease of approximately $67.0 million in stock-based compensation expense related to the vesting of RSUs in connection with our IPO in September 2023 and $2.1 million in restructuring expenses.

Research and Development

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Research and development $ 238,459 $ 262,177 $ (23,718) (9.0) %

Research and development costs for the year ended December 31, 2023 increased by $158.1 million or 151.9%, to $262.2 million compared to $104.1 million for the year ended December 31, 2022.

This increase was primarily due to an increase of approximately $119.0 million of stock-based compensation mainly due to the vesting of Double-Trigger RSUs upon and subsequent to the IPO, $34.2 million in salaries and related personnel expenses as a result of increases in headcount and the implementation of a company-wide sabbatical program, $3.0 million in technology expenses, and $2.5 million due to restructuring expenses incurred in the first quarter of 2023.

Research and development costs for the year ended December 31, 2024 decreased by $23.7 million or 9.0%, to $238.5 million compared to $262.2 million for the year ended December 31, 2023.

This decrease was primarily due to a decrease of approximately $69.5 million in stock-based compensation expense related to the vesting of RSUs in connection with our IPO in September 2023 and $2.6 million in restructuring expenses.

The decrease was offset by an increase of approximately $42.2 million in salaries and related personnel expenses as a result of increases in headcount and the introduction of a company-wide bonus program, $4.5 million in technology expenses, and $1.2 million in professional services.

General and Administrative

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General and administrative $ 157,569 $ 194,287 $ (36,718) (18.9) %

General and administrative expenses for the year ended December 31, 2023 increased by $112.5 million or 137.4%, to $194.3 million compared to $81.8 million for the year ended December 31, 2022.

This increase was primarily due to an increase of approximately $81.7 million of stock-based compensation mainly due to the vesting of Double-Trigger RSUs upon and subsequent to the IPO, $15.5 million in salaries and personnel expenses as a result of increases in headcount and the implementation of a company-wide sabbatical program, $6.4 million in payment processing fees, $5.1 million in professional expenses, primarily attributed to the IPO and public company readiness efforts, and $2.7 million in technology expenses, primarily attributed to an increase in licenses as a result of the aforementioned increases in headcount.

General and administrative expenses for the year ended December 31, 2024 decreased by $36.7 million or 18.9%, to $157.6 million compared to $194.3 million for the year ended December 31, 2023.

This decrease was primarily due to a decrease of approximately $53.0 million in stock-based compensation expense related to the vesting of RSUs in connection with our IPO in September 2023 and a $6.1 million release in reserves due to tax filings in international jurisdictions.

The decrease was offset by an increase of approximately $10.4 million in salaries and personnel expenses as a result of increases in headcount and the introduction of a company-wide bonus program, $6.6 million in payment processing fees, $3.6 million in professional expenses, primarily attributed to expenses incurred to operate as a public company, and $2.2 million in technology expenses, primarily attributed to an increase in licenses as a result of the aforementioned increases in headcount.

Year Ended December 31,

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Other income (expense), net $ 816 $ (470) $ 1,286 (273.6) %

Other income for the year ended December 31, 2023 decreased by $0.9 million or 221.1%, to $(0.5) million compared to $0.4 million for the year ended December 31, 2022.

This decrease was primarily due to unfavorable foreign exchange fluctuations.

Other income for the year ended December 31, 2024 increased by $1.3 million or 273.6%, to $0.8 million compared to $(0.5) million for the year ended December 31, 2023.

This increase was primarily due to favorable foreign exchange fluctuations.

Interest Income

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Interest income for the year ended December 31, 2024 increased by $15.5 million or 64.6%, to $39.6 million compared to $24.1 million for the year ended December 31, 2023.

This increase was primarily due to an increase in interest rates, greater cash balances due to the IPO, and the volume of newly opened interest-bearing accounts, including money market funds, as part of our diversified cash management strategy.

This increase was primarily due to an increase in interest rates, greater cash balances due to our IPO, and the volume of newly opened interest-bearing accounts, including money market funds, as part of our diversified cash management strategy.

Provision for Income Taxes

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($ in thousands)

Provision for income taxes $ 1,192 $ 83 $ 1,109 NM

______________

NM - Not meaningful

Income tax expense for the year ended December 31, 2023 increased by $1.1 million to $1.2 million compared to $0.1 million for the year ended December 31, 2022.

This increase was primarily due to an increase in profits before taxes in our international entities.

Provision for income taxes $ 2,462 $ 1,192 $ 1,270 106.5 %

Income tax expense for the year ended December 31, 2024 increased by $1.3 million or 106.5% to $2.5 million compared to $1.2 million for the year ended December 31, 2023.

The increase was primarily due to the increase in profits before taxes in our international entities and an increase in our U.S.

taxable income.

Liquidity and Capital Resources

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______________

(1) Restricted cash related to our required collateral to fund payroll and credit card obligations in the Australia entity.

(1) Restricted cash related to our required collateral to fund payroll and credit card obligations in our Australia entity.

Working capital consists of current assets (including cash, current portion of restricted cash, accounts receivable, current deferred contract acquisition costs, current prepaid expenses and other current assets), less current liabilities (including accounts payable, accrued expenses, current lease liabilities, and deferred revenue, all of which is current).

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(5,799) 242,728

Net increase (decrease) in cash and restricted cash

Net increase in cash, cash equivalents, and restricted cash

$ 142,930 $ 352,741

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Non-cash charges primarily consisted of $135.2 million of stock-based compensation expense, $52.9 million of prepaid marketing expense amortization, $19.8 million of deferred contract acquisition cost amortization, $17.7 million of depreciation and amortization expense, and $12.7 million of operating lease costs.

Net cash outflows from changes in operating assets and liabilities primarily

consisted of a $26.9 million increase in deferred contract acquisition costs related to increase in sales commissions resulting from our increase in revenues, a $15.2 million decrease in operating lease liabilities due to payments related to our operating lease obligations, and a $12.9 million increase in accounts receivable due to an increase in customer billings.

The cash outflow was offset by cash inflows primarily from a $15.0 million increase in deferred revenue resulting from increased billings for subscriptions and a $31.2 million net increase in accrued expenses and accounts payable due to timing of vendor payments and the implementation of a company-wide sabbatical program.

Net cash used in operating activities of $23.6 million for the year ended December 31, 2022 was primarily attributable to a net loss of $49.2 million adjusted for non-cash charges of $61.1 million and net cash outflows of $35.5 million from changes in operating assets and liabilities.

Non-cash charges primarily consisted of $22.0 million of prepaid marketing expense amortization, $9.0 million of depreciation and amortization expense, $10.6 million of deferred contract acquisition cost amortization expense, $6.8 million of stock-based compensation expense, and $11.8 million of operating lease costs.

Net cash outflows from changes in operating assets and liabilities primarily consisted of $20.2 million increase in deferred contract acquisition costs related to increase in sales commissions resulting from our increase in revenues, $9.3 million decrease in operating lease liabilities due to payments related to our operating lease obligations, $5.2 million increase in accounts receivable due to an increase in customer billings, $5.2 million increase in prepaid expenses due to prepayments for cloud infrastructure and hosting costs, and a $5.7 million net decrease in accrued expenses and accounts payable due to timing of vendor payments.

The cash outflow was offset by cash inflows primarily from a $10.0 million increase in deferred revenue resulting from increased billings for subscriptions.

Net cash outflows from changes in operating assets and liabilities primarily consisted of a $34.4 million increase in deferred contract acquisition costs related to increase in

sales commissions resulting from our increase in revenues, a $20.8 million increase in accounts receivable due to an increase in customer billings, a $17.3 million increase in prepaid expenses and other noncurrent assets, and a $16.7 million decrease in operating lease liabilities due to payments related to our operating lease obligations.

The cash outflow was offset by cash inflows primarily from a $36.3 million net increase in accrued expenses and accounts payable due to timing of vendor payments and introduction of the company-wide bonus program and a $24.4 million increase in deferred revenue resulting from increased billings for subscriptions.

Net cash provided by operating activities of $119.4 million for the year ended December 31, 2023 was primarily attributable to a net loss of $308.2 million adjusted for non-cash charges of $433.5 million and net cash outflows of $5.9 million from changes in operating assets and liabilities.

Non-cash charges primarily consisted of $340.8 million of stock-based compensation expense, $52.9 million of prepaid marketing expense amortization, $15.8 million of deferred contract acquisition cost amortization, $13.7 million of depreciation and amortization expense, and $13.0 million of operating lease costs.

Net cash outflows from changes in operating assets and liabilities primarily consisted of a $26.9 million increase in deferred contract acquisition costs related to increase in sales commissions resulting from our increase in revenues, a $15.2 million decrease in operating lease liabilities due to payments related to our operating lease obligations, and a $12.9 million increase in accounts receivable due to an increase in customer billings.

The cash outflow was offset by cash inflows primarily from a $31.2 million net increase in accrued expenses and accounts payable due to timing of vendor payments and the implementation of a company-wide sabbatical program and a $15.0 million increase in deferred revenue resulting from increased billings for subscriptions.

Investing Activities

Net cash used in investing activities of $9.4 million for the year ended December 31, 2023 consisted of $3.7 million purchases of property and equipment and $5.7 million of capitalized software costs.

Net cash used in investing activities of $18.7 million for the year ended December 31, 2022 consisted of $15.8 million purchases of property and equipment, $2.4 million of capitalized software costs, and $0.5 million cash paid for an acquisition.

Net cash used in investing activities of $17.2 million for the year ended December 31, 2024 consisted of $11.3 million of capitalized software costs and $5.9 million purchases of property and equipment.

Net cash used in investing activities of $9.4 million for the year ended December 31, 2023 consisted of $5.7 million of capitalized software costs and $3.7 million purchases of property and equipment.

Financing Activities

Net cash provided by financing activities of $242.7 million for the year ended December 31, 2023 primarily consisted of approximately $320.1 million of IPO proceeds net of issuance costs and $4.2 million of proceeds from the exercise of stock options offset by $81.6 million used for the payment of employee tax obligations related to the net share settlement of stock-based compensation awards.

Net cash provided by financing activities of $101.3 million for the year ended December 31, 2022 primarily consisted of approximately $99.6 million of proceeds from the issuance of common stock net of issuance costs and $1.7 million of proceeds from the exercise of common stock options.

Net cash used in financing activities of $5.8 million for the year ended December 31, 2024 primarily consisted of approximately $23.7 million used for the payment of employee tax obligations related to the vesting of stock-based compensation awards offset by $9.7 million of proceeds from the exercise of stock options and $8.1 million of proceeds from the employee stock purchase plan.

Net cash provided by financing activities of $242.7 million for the year ended December 31, 2023 primarily consisted of approximately $320.1 million of our IPO proceeds net of issuance costs and $4.2 million of proceeds from the exercise of common stock options offset by $81.6 million used for the payment of employee tax obligations related to the net share settlement of stock-based compensation awards.

Cash Management

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Subscription fees are generated from customers accessing our hosted platform services and our subscription agreements do not provide our customers with the right to take possession of our software.

Contractual subscriptions for customers generally auto-renew on a monthly basis and customers may elect not to renew by providing five days’ advance notice.

Contractual subscriptions for customers generally auto-renew on either a monthly, quarterly, or annual basis, and customers may elect not to renew by providing at least five days’ advance notice for contracts on a monthly billing cycle and thirty days’ advance notice for contracts with any other billing cycles.

Subscription pricing is determined based on a customer’s profile count and monthly messaging quantities based on a tiered pricing structure and is considered fixed.

Variable consideration in our contracts is not material but represents the overage charges incurred by customers who exceed their allotments.

Variable consideration

in our contracts is not material but represents the overage charges incurred by customers who exceed their allotments.

We recognize revenue under the core principle to depict the transfer of control to our customers in an amount reflecting the consideration to which we expect to be entitled.

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We capitalize incremental costs of obtaining revenue contracts, which primarily consist of sales commissions.

We amortize these commissions on a systematic basis, consistent with the pattern of transfer of the expected benefit period or services to which the contract relates, generally up to five years.

Contract costs are amortized on a straight-line basis over a period of up to five years, which reflects the expected period of benefit of the performance obligation and may be longer than the initial contract period.

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The key assumptions used to value the Shopify Warrants include the fair value of the common stock, a dividend yield of zero, contractual term of 10 years, volatility of 55.00%, and a risk-free rate of 2.85%.

The determination of the fair value of the common stock is further discussed below.

We estimate the volatility based upon an average historical volatility of several peer public companies over a period equivalent to the term of the Shopify Warrants.

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We recognize a prepaid marketing expense asset associated with the Shopify Warrants over a straight-line five-year vesting period.

Pursuant to the common stock warrant agreement, upon the Company’s IPO, 25% of the total number of warrants were accelerated, and the remaining unvested portion vests quarterly over the remaining vesting term.

Pursuant to the common stock warrant agreement, upon our IPO, 25% of the total number of warrants were accelerated, and the remaining unvested portion vests quarterly over the remaining vesting term.

The prepaid marketing expense asset is amortized into selling and marketing expense on a straight-line basis over the expected benefit period, which we determine to be the seven-year term of the collaboration agreement as the core activities and deliverables of the collaboration agreement will remain in place for seven years and Shopify does not have the right to terminate the collaboration agreement for convenience.

Under the stock purchase agreement, we issued and sold shares of common stock to Shopify Strategic Holdings 3 LLC (“Shopify Strategic”) and provided an Investment Option which allows Shopify Strategic to purchase additional shares of common stock at a fixed price, exercisable at any time at Shopify Strategic’s option until July 28, 2030.

We determined that the purchase price equals the fair market value of the instruments issued as Shopify Strategic was an outside investor at the time we entered into the stock purchase agreement and the purchase represented an arms-length transaction.

Under the stock purchase agreement, we issued and sold shares of common stock to Shopify and provided an investment option which allows Shopify to purchase additional shares of common stock at a fixed price, exercisable

at any time at Shopify’s option until July 28, 2030.

We determined that the purchase price equals the fair market value of the instruments issued as Shopify was an outside investor at the time we entered into the stock purchase agreement and the purchase represented an arms-length transaction.

Further, the fair value of the instruments was substantiated through a probability weighted expected return method analysis as part of common stock valuations performed at the time the agreement was entered into.

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Pursuant to our 2015 Plan, we have issued stock options, RSUs, and restricted stock awards (“RSAs”);

however, all equity grants issued subsequent to the Company’s IPO will be made pursuant to the 2023 Plan, which was approved by our Board effective as of September 19, 2023.

During the year ended December 31, 2023, stock-based compensation awards issued were in the form of RSUs subject to both service-based and performance-based vesting conditions under the 2015 Plan and RSUs subject to only service-based vesting conditions under the 2023 Plan.

During the year ended December 31, 2022, all of the stock-based compensation awards issued were in the form of RSUs subject to both service-based and performance-based vesting conditions.

however, all equity grants issued subsequent to our IPO are made pursuant to our 2023 Stock Option and Incentive Plan (“2023 Plan”), which was approved by our board of directors effective as of September 19, 2023.

During the year ended December 31, 2024, stock-based compensation awards issued were in the form of RSUs subject to only service-based vesting conditions under our 2023 Plan.

During the year ended December 31, 2023, stock-based compensation awards issued were in the form of RSUs subject to both service-based and performance-based vesting conditions under our 2015 Plan and RSUs subject to only service-based vesting conditions under our 2023 Plan.

Stock-based compensation awards that contain only service-based vesting conditions are recognized as expense, on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award.

In addition to service requirements, RSUs granted under the 2015 Plan prior to the Company’s IPO are subject to a liquidity-based vesting condition, which we have concluded represents a performance condition.

In addition to service requirements, RSUs granted under our 2015 Plan prior to our IPO are subject to a performance-based vesting condition, which we have concluded represents a performance condition.

Fair value of such awards is measured on the grant date and recognized over the vesting term when the performance condition is considered probable of being achieved.

This performance condition was achieved when the Company’s registration statement on Form S-1 filed with the SEC in connection with the IPO became effective on September 19, 2023.

Compensation expense for these awards with both a service and performance condition are expensed under the accelerated attribution method which includes a cumulative catch up recorded upon the IPO for services that had been completed as of the IPO.

This performance condition was achieved when our registration statement on Form S-1 filed with the SEC in connection with our IPO became effective on September 19, 2023.

Compensation expense for these awards with both service-based and performance-based vesting conditions is expensed under the accelerated attribution method, which includes a cumulative catch up recorded upon the satisfaction of the performance-based vesting condition for services that had been completed as of the satisfaction of the performance-based vesting condition.

The remaining expense for these awards is being recognized using the accelerated attribution method over the remaining service period.

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The grant date fair value of RSUs and RSAs is estimated based on fair value of the underlying common stock.

Additional information regarding such estimates is provided below.

Common Stock and Redeemable Common Stock Valuations

Since September 20, 2023, our first day of trading on the New York Stock Exchange in connection with our IPO, there has been an active market for our Series A common stock.

Accordingly, subsequent to our IPO, the fair value of our Series A common stock is determined by using the closing price of our Series A common stock as listed on the New York Stock Exchange on the date of grant.

As our Series B common stock has identical rights to our Series A common stock, except with respect to voting and conversion rights, the active market for our Series A common stock is utilized to measure the fair value of the Company’s underlying Series B common stock.

redeemable common stock was converted to our Series B common stock upon our IPO, no separate valuations were required for the underlying shares.

Until our IPO, in the absence of a public trading market, the fair value of our common stock and redeemable common stock was determined by our board of directors, the members of which we believe have extensive business, finance, and venture capital experience, with input from management, taking into account our most recent valuations from an independent third-party valuation specialist.

The Company and the board of directors utilized various valuation methodologies in accordance with the framework of the American Institute of Certified Public Accountants’ (the “AICPA”) Technical Practice Aid, Valuation of Privately Held Company Equity Securities Issued as Compensation , to estimate the fair value of its common stock.

Each valuation methodology includes estimates and assumptions that required our judgment.

These estimates and assumptions include a number of objective and subjective factors in determining the value of our common stock at each grant date, including the following factors:

• prices paid for our common stock, which we have sold to outside investors in arms-length transactions and employees and investors have sold in secondary market transactions;

• valuations performed by an independent valuation specialist;

• our stage of development and revenue growth;

• the market performance of comparable publicly traded companies;

• adjustments necessary to recognize a lack of marketability;

• the likelihood of achieving a liquidity event, such as an IPO or sale of the Company, given prevailing market conditions;

and global economic and capital market conditions and outlook.

Our board of directors determined the value of our common stock by probability-weighting different valuation approaches and methodologies, primarily based on the subject company transaction method under the market approach.

The market approach considers prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities, or a group of assets and liabilities.

Within the market approach, given that we had recent arms-length transactions in our common stock (including secondary market transactions as well as common stock sold in connection with the Shopify Collaboration Agreement), the subject company transaction method was used, which consists of examining prior transactions in our equity securities to determine an implied total enterprise value.

The subject company transaction method takes into account the total consideration paid in such transactions as well as the rights and preferences of the stockholders of the various classes of equity outstanding.

According to AICPA guidelines, under this method, recent securities transactions in our equity securities should be considered as a relevant input for computing the enterprise valuation.

Other variations of the market approach were considered, including the guideline public company and transaction methods.

These methods estimate value by applying a representative revenue multiple from a peer group of companies in similar lines of business to our forecasted revenue.

Our peer group of companies was selected based on operational and economic similarities to us and factors considered included but were not limited to industry, business model, growth rates, customer base, capitalization, size, profitability and stage of development.

From time to time, we updated the set of comparable companies as new or more relevant information became available.

This approach also involves the identification of relevant transactions and determining relevant multiples to apply to our revenue.

The equity values implied by the various methodologies within the market approach reasonably approximated each other as of each valuation date.

Once we determined an equity value, we used a combination of approaches to allocate the equity value to each class of our stock.

We used the option pricing method (“OPM”).

The OPM allocates values to each equity class by creating a series of call options on our equity value, with exercise prices based on the liquidation preferences, participation rights, and exercise prices of the equity instruments.

Where relevant, we also considered an appropriate discount adjustment to recognize the lack of marketability and liquidity due to the fact that stockholders of private companies do not have access to trading markets similar to those enjoyed by stockholders of public companies.

The discount for marketability was determined using various quantitative methods and assessed for reasonableness using relevant qualitative information, including review comparable marketability discounts provided in court case rulings, restricted stock studies and IPO studies.

For the portion of the fiscal year ended December 31, 2023 prior to our IPO, and for the fiscal year ended December 31, 2022, the Company calculated the allocable fair value of the Company’s underlying security by probability-weighting different valuation approaches and methodologies, primarily based on the subject company transaction method under the market approach, the Company utilized revenue multiples, which were determined by comparing the Company to guideline public companies based upon comparable revenue, operating margins, and products and services provided, along with the following assumptions:

Portion of Fiscal Year Ended December 31, 2023

Fiscal Year Ended December 31, 2022

Risk-free rate 3.87 % 2.85 %

Expected term 1.6 years 2.0 years

Volatility 63.3 % 55.0 %

Discount rate 13.3 % 13.5 %

• The risk-free rate was based upon the U.S.

Treasury rate as of the valuation date;

• The expected term was calculated based on time until the liquidity event (i.e., time to exit);

• Volatility was derived from an analysis of the volatility of comparable industry companies and the Company’s capital structure and risk profile as compared to the peer group;

• The discount rate employed to convert future cash flows to their present value equivalent is the rate of return expected by an investor for taking on the perceived risks of an investment.

The OPM used the following significant assumptions to allocate the fair value to the redeemable common stock (in thousands):

Portion of Fiscal Year Ended December 31, 2023

Fiscal Year Ended December 31, 2022

Underlying security $ 8,326,667 $ 8,070,000

Risk-free rate 4.55 % 4.51 %

Expected term 1.56 years 1.66 years

Volatility 63.3 % 65.0 %

Discount for lack of marketability 13.3 % 15.0 %

Expected dividend yield 0.0 % 0.0 %

• The risk-free rate was based on the U.S.

Treasury yield curve with terms approximately equal to the redeemable common stocks’ expected term;

• The expected term was calculated based on the term by which the redeemable stock will be exercised within the expected liquidity windows;

• Volatility was derived from the observed comparable public companies’ historical equity volatility over the period matching the term;

• The discount for lack of marketability was quantified through restricted stock studies, pre-IPO studies, and the put option pricing model to estimate the loss in value due to the security holders’ lack of access to an active market;

• Expected dividend yield is zero as the Company has not paid and does not anticipate paying dividends on its redeemable common stock in the foreseeable future.

Application of these valuation approaches involves the use of estimates, judgment, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, discount rates, market multiples, the selection of comparable companies, and the probability of possible future events.

Recent Accounting Pronouncements

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

What changed 10-K

Item 7. Management’s Discussion and Analysis