1 unchanged sentence
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
+Added: This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties.
+Added: Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the "Risk Factors" section of this Annual Report on Form 10-K.
+Added: See “Forward-Looking Statements” preceding Part I of this Annual Report on Form 10-K.
LegalZoom is a leading online platform for legal and compliance solutions in the United States, or U.S.
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Our unique position at business inception allows us to become a trusted business advisor, supporting the evolving needs of a new business throughout its lifecycle.
−Removed: Along with formations, our services include ongoing compliance and tax advice and filings, trademark filings, and estate plans.
+Added: Along with formations, our services include ongoing compliance and tax advice and filings, virtual mailbox solutions, trademark filings, and estate plans.
Additionally, we have unique insights into our customers and leverage our product as a channel to introduce small businesses to leading brands in our partner ecosystem, solving even more of their business needs.
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Initial Public Offering
−Removed: The registration statement related to our IPO was declared effective on June 29, 2021, and our common stock began trading on the Nasdaq Global Select Market on June 30, 2021.
−Removed: On July 2, 2021, we completed our IPO for the sale of 19,121,000 shares of our common stock, $0.001 par value per share at an offering price of $28.00 per share, for proceeds of $505.9 million, net of underwriting discounts and commissions pursuant to our Prospectus.
+Added: The registration statement related to our initial public offering, or IPO, was declared effective on June 29, 2021, and our common stock began trading on the Nasdaq Global Select Market on June 30, 2021.
+Added: On July 2, 2021, we completed our IPO for the sale of 19,121,000 shares of our common stock at an offering price of $28.00 per share, for proceeds of $505.9 million, net of underwriting discounts and commissions.
In addition, we sold 2,868,150 shares of our common stock for net proceeds of $75.9 million pursuant to the full exercise of the underwriter’s option to purchase additional shares in connection with the IPO.
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Following the completion of the IPO, we have one class of authorized and outstanding common stock.
−Removed: Immediately upon the completion of our IPO, we filed an Amended and Restated Certificate of Incorporation, which authorized a total of 1,000,000,000 shares of common stock, $0.001 par value per share and 100,000,000 shares of preferred stock, par value $0.001 per share.
Our Business Model and Growth Strategy
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Transaction products include legal documents, business filings, and related services for small business owners and their families, such as business formations, annual compliance filings, intellectual property, estate planning documents, forms, and agreements.
−Removed: Subscription products include compliance solutions and credentialed professional subscription services, including legal and tax advisory services as well as additional owned services such as virtual mail.
−Removed: We also introduce our customers to a variety of third-party partners, giving them access to critical services they need to start and run their businesses, such as business license services, bookkeeping services, banking services, productivity tools, and business insurance, among others.
+Added: Subscription products include compliance solutions and credentialed professional subscription services, including legal and tax advisory and preparation services as well as additional owned services such as virtual mail.
+Added: We also introduce our customers to a variety of third-party partners, giving them access to critical services they need to start and run their businesses, such as business license services, credit card and banking services, website development, productivity tools, and business insurance, among others.
Our strategy is to scale our existing business and gain market share by investing in core products and sales and marketing;
−Removed: expand our addressable market, attract additional customers and increase conversion through the introduction of more competitively priced products and services;
−Removed: integrate our independent attorney network and tax professionals into our core product set;
−Removed: and grow average revenue per subscription unit, or ARPU, and partnership revenue through building in-house adjacencies and expanding our partner ecosystem to provide new recurring revenue streams.
+Added: integrating our independent attorney network and tax professionals into our core product set;
+Added: expanding our addressable market;
+Added: and attracting additional customers and increasing conversion through the introduction of lower-priced products and services.
+Added: We are innovating our product lineup to target more price-sensitive customer segments and have made certain of our business formation services available at a low cost or without charge in certain geographies on a test-basis.
+Added: We expect this new lineup, with a free formation product as a foundational element, will be rolled out to 100% of traffic by the end of the first quarter.
+Added: We expect to continue to test new products and price points going forward as we seek to optimize our product offerings across our lineup.
+Added: We also aim to grow average revenue per subscription unit, or ARPU, and partnership revenue through building in-house adjacencies and expanding our partner ecosystem to provide new recurring revenue streams.
+Added: For additional information regarding our business and strategy, see Part I, Item 1, Business of this Annual Report on Form 10-K.
Key Business Metrics
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Number of business formations
−Removed: We define the number of business formations in a given period as the number of global LLC, incorporation, not-for-profit and other formation orders placed on our platform in such period.
−Removed: We consider the number of business formations to be an important metric considering that it is typically the first product or service small business customers purchase on our platform, creating the foundation for additional products and subsequent subscription and partner revenue as they adopt additional products and services throughout their business lifecycles.
+Added: We define the number of business formations in a given period as the number of limited liability company, or LLC, incorporation, not-for-profit and doing business as, or DBA orders placed on our platform in such period, excluding such orders from our operations in the U.K.
+Added: We consider the number of business formations to be an important metric considering that it is typically the first product or service small business customers purchase on our platform, creating the foundation for additional products and subsequent subscription and partner revenue as customers adopt additional products and services throughout the lifecycle of their business.
+Added: We believe that including customers filing DBAs on our platform provides a more accurate representation of the number of newly formed businesses we serve.
+Added: These transactions are most often completed by sole proprietors who represent potential future transaction and subscription cross-sell opportunities as their businesses mature.
+Added: Furthermore, we believe our definition of the number of business formations is most closely aligned with U.S.
+Added: Census reporting of new applications for Employer Identification Numbers, or EINs, which we believe to be the most relevant source of publicly available U.S.
The below table sets forth the number of business formations for the years ended December 31, 2022 and 2021:
−Removed: Ended December 31,
−Removed: 2021 2020 2019
+Added: Year Ended December 31,
(in thousands)
Number of business formations
−Removed: We experienced an 18% increase from the year ended December 31, 2020 compared to the year ended December 31, 2021 and a 29% increase from the year ended December 31, 2019 compared to the year ended December 31, 2020, respectively.
−Removed: The increase in the number of business formations on our platform during the year ended December 31, 2021, reflected year-over-year growth in overall U.S.
−Removed: business formations in 2021 as well as the increase in business generated from our higher sales and marketing investments.
+Added: We experienced a 2% decrease in business formation transactions during the year ended December 31, 2022 compared to the year ended December 31, 2021.
+Added: While year-over-year growth in the number of business formations on our platform accelerated in the second half of 2022 due to higher volumes in our partner integration channel and further testing of our lower-priced business formation offerings, the decline for the full year was primarily due to a decline in overall U.S.
+Added: business formations during this period based on a review of U.S.
+Added: Census data revealing new applications for EINs.
+Added: We expect the decline in overall U.S.
+Added: business formations to continue in 2023.
Number of transactions
−Removed: We define the number of transactions in a given period as gross transaction order volume, prior to refunds, on our platform during such period, excluding transactions from our subsidiary, Beaumont ABS Limited, or Beaumont, which was divested in April 2020.
+Added: We define the number of transactions in a given period as gross transaction order volume, prior to refunds, on our platform during such period.
Transactions may include one or more services purchased at the same time.
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The below table sets forth the number of transactions for the years ended December 31, 2022 and 2021 :
−Removed: Ended December 31,
−Removed: 2021 2020 2019
+Added: Year Ended December 31,
(in thousands)
Number of transactions
−Removed: We experienced a 10% increase from the year ended December 31, 2020 compared to the year ended December 31, 2021 and a 29% increase from the year ended December 31, 2019 compared to the year ended December 31, 2020.
−Removed: The increase in the number of transactions during the year ended December 31, 2021 primarily resulted from year-over-year growth in overall U.S.
−Removed: business formations in 2021.
−Removed: Our estate planning and other consumer transactions declined as a percentage of total transactions in the year ended December 31, 2021, and we expect the proportion of consumer transactions to continue to decrease over time as we focus more of our investment in small business formations, which have a significantly higher average order value.
−Removed: Estate planning transactions benefited from tailwinds driven by the COVID-19 pandemic in the year ended December 31, 2020 as individuals turned to our online services given the relative inaccessibility of offline alternatives.
−Removed: We expect to continue to grow transactions;
+Added: We experienced a 5% decrease in the number of transactions during the year ended December 31, 2022 compared to the year ended December 31, 2021.
+Added: The decrease in the number of transactions during the year ended December 31, 2022 resulted from a reduction in estate planning and other consumer transactions, lower volumes in our intellectual property business largely due to the discontinuation of our do-it-yourself trademark product in favor of our attorney-assisted solution and, to a lesser extent, the decrease in business formations during this same period.
+Added: Our estate planning and other consumer transactions declined as a percentage of total transactions in the year ended December 31, 2022.
+Added: We expect the proportion of estate planning and other consumer transactions to continue to decrease over time as we focus more of our investment in small business formations.
+Added: Over the long-term, we expect to continue to grow transactions;
however, the growth may fluctuate period-over-period based on the variability of overall business formations and estate planning transactions.
Average order value
−Removed: We define average order value for a given period as total transaction revenue divided by total number of transactions in such period, excluding revenue and related transactions from our Beaumont subsidiary.
+Added: We define average order value for a given period as total transaction revenue divided by total number of transactions in such period.
We consider average order value to be an important metric given it indicates how much customers are spending on our platform per transaction.
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The below table sets forth the average order value for the years ended December 31, 2022 and 2021:
−Removed: Ended December 31,
−Removed: 2021 2020 2019
+Added: Year Ended December 31,
Average order value
−Removed: $ 264 $ 236 $ 230
−Removed: Average order value increased by 12% from the year ended December 31, 2020 compared to the year ended December 31, 2021 and increased by 3% from the year ended December 31, 2019 compared to the year ended December 31, 2020, respectively.
−Removed: Growth in average order value for the year ended December 31, 2021 was primarily driven by an increase in the proportion of business formations and other small business transactions, which have a significantly higher order value compared to other transactions relative to total transactions, the timing of transaction revenue recognition and increased customer adoption of our attorney-led trademark product.
−Removed: Transaction revenue recognized in the year ended December 31, 2020 was negatively impacted by capacity constraints related to the COVID-19 pandemic, including delays at various secretaries of state, which pushed fulfillment of some transaction orders placed during the year to the year ended December 31, 2021.
−Removed: We further increased fulfillment rates, and therefore our recognized revenue, in the year ended December 31, 2021 by increasing automation and expanding production capacity to improve our customer experience.
−Removed: Growth may fluctuate period-over-period based on the mix of business formations relative to estate planning transactions, the timing of transaction revenue recognition, and our ability to introduce and sell new products.
−Removed: We expect year-over-year growth in average order value to moderate in 2022 as we introduce more competitively priced products to complement our suite of premium-priced expert-assisted solutions.
−Removed: In doing so, we may determine to make certain of our service offerings available at a low cost or without charge to attract and convert additional customers.
+Added: Average order value decreased by 2% during the year ended December 31, 2022 compared to the year ended December 31, 2021.
+Added: The reduction in average order value for the year ended December 31, 2022 was primarily driven by an increase in transactions from our wholesale-priced partner integration channel as a percentage of total transactions and testing of lower-priced business formation services partially offset by the timing of revenue recognition.
+Added: Transactions offered through our partner integration channel are generally at lower price points than our other small business products and services.
+Added: During the year ended December 31, 2022, we also made certain of our business formation services available at a low cost or without charge in certain geographies on a test-basis as we continued to innovate our product lineup to target more price-sensitive customer segments.
+Added: Finally, we were more efficient in our fulfillment in the year ended December 31, 2022, resulting in additional recognized revenue during the period.
+Added: Growth in our average order value may fluctuate period-over-period based on the mix of business formations relative to estate planning and other consumer transactions, the timing of transaction revenue recognition, and our ability to introduce and sell new products.
+Added: We expect average order value to decline year-over-year in 2023 as we introduce lower-priced products and services.
+Added: We expect to continue to test new products and price points going forward as we optimize our product offerings across our lineup.
Number of subscription units
−Removed: We define the number of subscription units in a given period as the paid subscriptions that remain active at the end of such period, including those that are not yet 60 days past their subscription order dates, excluding subscriptions from our employer group legal plan and small business concierge subscription service, for which we ceased acquiring new subscribers in October 2020.
+Added: We define the number of subscription units in a given period as the paid subscriptions at the end of such period, including those that are not yet 60 days past their subscription order dates.
Refunds, or partial refunds, may be issued under certain circumstances pursuant to the terms of our customer satisfaction guarantee.
−Removed: We consider the number of subscription units to be an important metric since subscriptions enable us to increase lifetime value through deeper, longer-term relationships with customers.
+Added: We consider the number of subscription units to be an important metric since subscriptions enable us to increase the lifetime value of a customer through deeper, longer-term relationships.
Subscriptions typically range from 30 days to one year in duration and the vast majority of our new subscriptions originate from business formation orders and have an annual term.
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For example, a popular combination for a new small business owner is attorney advice and registered agent subscriptions.
−Removed: Our registered agent offering comprised approximately 65% of our subscription units for the year ended December 31, 2021, 64% for the year ended December 31, 2020 and 63% for the year ended December 31, 2019.
The below table sets forth the number of subscription units as of December 31, 2022 and 2021:
−Removed: 2021 2020 2019
+Added: As of December 31,
(in thousands)
Number of subscription units
−Removed: 1,329 1,085 921
−Removed: We achieved 22% growth in our number of subscription units from December 31, 2020 to December 31, 2021, reflecting strong growth from our registered agent, compliance, and tax advisory subscriptions primarily due to the year-over-year growth in business formations.
−Removed: The number of subscription units as of December 31, 2020 increased 18% from 921,000 units as of December 31, 2019.
+Added: We achieved 8% growth in our number of subscription units from December 31, 2021 to December 31, 2022, reflecting strong growth in subscriptions acquired through our partner integration channel, our registered agent, compliance, and tax products, as well as from our purchase of Earth Class Mail during the fourth quarter of 2021.
We aim to continue to grow subscription units by increasing the proportion of our small business customers that purchase a subscription service at the time of their initial formation purchase and by improving retention rates.
Average revenue per subscription unit
−Removed: We define ARPU as of a given date as subscription revenue for the 12-month period ended on such date, or LTM, divided by the average number of subscription units at the beginning and end of the LTM period, excluding revenue and subscriptions from our employer group legal plan and small business concierge subscription service, for which we ceased acquiring new subscribers in October 2020.
+Added: We define average revenue per subscription unit, or ARPU as of a given date as subscription revenue for the last twelve-month period ended on such date, or LTM, divided by the average of the number of subscription units at the beginning and end of the LTM period.
We consider ARPU to be an important metric because it helps to illustrate our ability to deepen our relationship with our existing customers as they purchase incremental and higher-value services.
−Removed: We have expanded ARPU in recent periods, and for the year ended December 31, 2021, ARPU increased 6% from the same period in 2020.
The below table sets forth ARPU as of December 31, 2022 and 2021:
−Removed: Ended December 31,
−Removed: 2021 2020 2019
+Added: Year Ended December 31,
Average revenue per subscription unit
−Removed: $ 236 $ 223 $ 221
−Removed: The increase in ARPU in the year ended December 31, 2021 was primarily due to a shift in the mix of subscription units resulting from continued growth of our registered agent service and, to a lesser extent, our tax advisory business and subscriptions acquired through our purchase of Earth Class Mail, Inc., or Earth Class Mail.
−Removed: We expect ARPU to increase over time as these businesses, which carry higher average price points than our other subscription products, comprise a greater share of total subscription units.
+Added: ARPU increased 9% as of December 31, 2022 as compared to December 31, 2021.
+Added: The increase in ARPU primarily resulted from growth of our tax service, subscriptions acquired through our purchase of Earth Class Mail and growth of our registered agent and compliance products, which carry higher average price points than our other subscription products.
+Added: ARPU also increased as a result of a price increase to our small business legal advisory plan that was implemented in the fourth quarter of 2021.
+Added: These increases were partially offset by an increase in wholesale-priced subscriptions from our partner integration channel.
+Added: We expect year-over-year ARPU growth to moderate in 2023 as we anniversaried the acquisition of Earth Class Mail in the fourth quarter of 2022.
Key Factors Affecting Our Performance
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• Product leadership .
−Removed: We have invested significantly in our user experience, which we believe is critical to attracting and converting customers and improving retention.
+Added: We have invested significantly and expect to continue to invest in our user experience, which we believe is critical to attracting and converting customers and improving retention.
These investments consist mainly of creating educational content, improving our website and application user interface, and creating and offering additional products and services, including the growing use of experts in the customer journey.
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By continuing to develop new products and subscription services such as tax advice and preparation to address such needs, we expect to see higher customer engagement and retention, which in turn would further increase our customer lifetime value.
−Removed: Additionally, we offer third-party services via our partner ecosystem, and we expect to be able to generate incremental revenue via these offerings.
+Added: Additionally, we offer third-party services via our partner ecosystem, such as our partnership with Wix, which enables our small business customers to build their online presence, and we expect to be able to generate incremental revenue via these offerings.
• Investment in marketing.
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We frequently evaluate how we price, market, and sell transaction products in order to optimize our subscription business.
−Removed: Given our customer acquisition efficiency, we intend to increase our marketing spend over the medium term.
• Investment in tax offerings.
Tax represents a natural adjacency in our mission to make legal and compliance services accessible to small businesses.
−Removed: Based on customer surveys, we estimate that approximately 70% of small business owners that sought a tax accountant did not have one at the time of their entity formation but face tax implications as a result of the entity they choose.
−Removed: To address this customer need, we have invested in launching our Tax Advisory offering.
−Removed: We incurred costs related to this investment in 2020 and 2021 and anticipate continued investment throughout 2022, as we believe that our tax offerings represent an attractive opportunity for incremental revenue growth.
+Added: To address the customer need, we launched our Tax advisory and preparation offering.
+Added: We anticipate incurring additional costs related to our tax offerings as we continue to invest in these offerings throughout 2023.
+Added: We believe that our tax offerings represent an attractive opportunity for incremental revenue growth.
• Talent acquisition and retention.
−Removed: We are focused on providing a quality employee experience as we believe the future success of our business is heavily dependent on our ability to attract and retain talented and highly productive employees, including software engineers, product designers, brand and performance marketers, and customer-facing positions.
+Added: We are focused on providing a quality employee experience as we believe the future success of our business is heavily dependent on our ability to attract and retain talented and highly productive employees.
We compete for talent within the technology industry and believe that our strong brand recognition and greater company purpose are important, positive considerations in our ability to recruit talent.
−Removed: We also are scaling an in-house team of certified public accountants (CPAs) and enrolled agents that are critical to our tax offerings.
−Removed: • COVID-19 impact .
−Removed: The ongoing impact of the COVID-19 pandemic on consumer spending patterns, the success of existing small businesses and the formation of new small businesses, as well as the impact of attempts to reopen the offline economy and lessening of restrictions on movement and travel, remains uncertain.
−Removed: For example, beginning in the second quarter of 2020, we saw tailwinds driven by the COVID-19 pandemic as individuals and small businesses turned to online services given the relative inaccessibility of offline alternatives and due to the availability of government stimulus checks.
−Removed: These tailwinds subsided in the back half of 2021 due to the easing of government stimulus supporting individuals and small businesses impacted by the pandemic.
−Removed: While we believe these shifts reflect, in part, an acceleration of existing secular trends toward greater adoption of online services, our growth rate may moderate if these trends moderate or reverse over time.
+Added: We also are scaling an in-house team of certified public accountants or CPAs, and enrolled agents that are critical to our tax offerings.
+Added: • Macroeconomic factors .
+Added: Fluctuations in general macroeconomic, political, regulatory and market conditions, such as recessionary fears, the current inflationary environment, rising interest rates and lingering effects of the COVID-19 pandemic can adversely impact consumer spending patterns, the success of existing small businesses and the formation of new small businesses.
+Added: For example, overall U.S.
+Added: business formations declined in the year ended December 31, 2022 compared to 2021 based on a review of U.S.
+Added: Census data and
+Added: we expect the this decline to continue in 2023 due, in part, to the current challenging macroeconomic environment.
+Added: While we believe that secular trends toward greater adoption of online services continue to exist, future negative or decelerating impact from sustained inflation, higher interest rates or other macroeconomic fluctuations remains uncertain.
Key Components of our Results of Operations
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Subscription revenue .
−Removed: Subscription revenue is generated primarily from subscriptions to our registered agent services, compliance packages, attorney advice, legal forms services, tax advisory services, and virtual mail services in addition to software-as-a-service, or SaaS, subscriptions in the U.K.
−Removed: In the fourth quarter of 2020, we commenced providing tax, bookkeeping and payroll subscription services.
+Added: Subscription revenue is generated primarily from subscriptions to our registered agent services, compliance packages, attorney advice, legal forms services, tax advisory and preparation services, and virtual mail services in addition to software-as-a-service, or SaaS, subscriptions in the U.K.
+Added: In the fourth quarter of 2020, we commenced providing tax and payroll subscription services.
We generally recognize revenue from our subscriptions ratably over the subscription term.
Subscription terms generally range from thirty days to one year.
−Removed: Subscription revenue includes the value allocated to bundled free trials for our subscription services and is net of promotional discounts, cancellations, sales allowances and credit reserves and payments to third-party service providers such as legal plan law firms and tax service providers.
+Added: Subscription revenue includes the transaction price allocated to bundled free trials for our subscription services and is net of promotional discounts, cancellations, sales allowances and credit reserves and payments to third-party service providers such as legal plan law firms and tax service providers.
For transaction and subscription revenue, we generally collect payments and fees at the time orders are placed and prior to services being rendered.
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We assess whether performance criteria have been met on a cost-per-click or cost-per-action basis.
−Removed: In the near term, we expect lower performance in partner revenue as we transition away from legacy partners that do not align with our new strategic direction and focus more on long-term opportunities to have strategic partnerships that build on recurring revenue models.
−Removed: See the section titled “—Critical Accounting Policies and Estimates—Revenue Recognition” for a description of the accounting policies related to revenue recognition, including arrangements that contain multiple deliverables.
+Added: We expect partner revenue will continue to decline in 2023 as we transition away from legacy partners that do not align with our new strategic direction and focus more on long-term opportunities to have strategic partnerships that build on recurring revenue models.
+Added: See the section titled “—Critical Accounting Estimates—Revenue Recognition” for a description of the accounting policies related to revenue recognition, including arrangements that contain multiple deliverables.
Cost of revenue
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costs of fulfillment, customer care and credentialed professionals, and related benefits, including stock-based compensation;
−Removed: and costs of independent contractors for document preparation;
−Removed: telecommunications and data center costs, amortization of acquired developed technology;
+Added: costs of independent contractors for document preparation;
+Added: telecommunications and data center costs;
+Added: amortization of acquired developed technology;
depreciation and amortization of network computers, equipment and internal-use software;
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Further, our acquisitions of other companies have negatively impacted our gross margin in the short term, and any such future acquisitions could have a similar effect.
−Removed: In the short term, we expect our gross profit to increase in absolute dollars but our gross margin to be impacted by our continued investment in scaling our tax advisory business, which has lower gross margins than other products in our portfolio.
+Added: In the short term, we expect our gross profit to increase in absolute dollars but our gross margin to be impacted by our continued investment in scaling our tax business, which has lower gross margins than other products in our portfolio.
However, we expect our gross margin to increase modestly over the longer term as we continue to focus on growing higher-margin subscription revenue and invest in fulfillment automation technologies.
−Removed: However, our gross margin could fluctuate from period to period due to fulfillment rates and seasonality.
+Added: In addition, our gross margin could fluctuate from period to period due to fulfillment rates and seasonality.
Operating expenses
−Removed: Our operating expenses consist primarily of sales and marketing, technology and development, general and administrative expenses, and to a lesser extent, impairments of goodwill, long-lived assets and other assets, in addition to a loss on sale of a business in 2020.
+Added: Our operating expenses consist primarily of sales and marketing, technology and development, general and administrative expenses, and to a lesser extent, impairments of goodwill, long-lived assets and other assets.
Sales and marketing
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Media production costs are expensed the first time the advertisement is aired.
−Removed: We intend to continue to make significant investments in sales and marketing to drive additional revenue, further penetrate our expanding addressable market, and build on our digital brand leadership and awareness.
−Removed: As a result, we expect our sales and marketing expenses to continue to increase and to be our largest operating expense category for the foreseeable future.
+Added: We intend to continue to invest in sales and marketing to drive additional revenue, further penetrate our expanding addressable market, and build on our digital brand leadership and awareness.
+Added: While we anticipate that sales and marketing expenses will continue to be our largest operating expense category for the foreseeable future, we expect marketing expenses to decline in the near-term as we pivot our media spend toward search engine marketing and other performance-based channels to provide additional flexibility given the uncertain macroeconomic environment.
Technology and development
Technology and development expenses consist primarily of personnel costs and related benefits, including stock-based compensation, expenses for outside consultants, an allocation of depreciation and amortization and allocated overhead.
−Removed: These expenses include costs incurred in the development and implementation of our websites, mobile applications, online legal platform, research and development and related infrastructure.
+Added: These expenses include costs incurred in the development and implementation of our products, websites, mobile applications, online legal platform, research and development and related infrastructure.
Technology and development expenses are expensed as incurred, except to the extent that such costs are associated with internal-use software costs that qualify for capitalization.
−Removed: We expect our technology and development expenses to continue to increase in absolute dollars for the foreseeable future as we invest in new products and services and in production automation technologies to enhance our customer experience.
+Added: Excluding stock-based compensation, we expect our technology and development expenses to continue to increase in absolute dollars for the foreseeable future as we invest in new products and services and in production automation technologies to enhance our customer experience.
We expect our technology and development expenses to remain relatively consistent or increase as a percentage of our revenue over the long-term, although our technology and development expenses may fluctuate as a percentage of our revenue from period-to-period due to seasonality and the timing and extent of these expenses.
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We expense legal costs for defending legal proceedings as incurred.
−Removed: We expect our general and administrative expenses to increase in absolute dollars for the foreseeable future due to additional costs associated with accounting, compliance, insurance and investor relations as we have recently become a public company.
−Removed: Over the next three years, we will incur significant stock-based compensation expense as a result of certain modifications to equity awards that occurred in connection with our IPO;
−Removed: however, we expect our general and administrative expenses to decrease as a percentage of our revenue over the longer term, although our general and administrative expenses may fluctuate as a percentage of our revenue from period-to-period due to seasonality and the timing and extent of these expenses.
+Added: Excluding stock-based compensation, we expect our general and administrative expenses to increase in absolute dollars for the foreseeable future due to additional costs associated with accounting, compliance, insurance and investor relations as we have recently become a public company.
+Added: Over the next year, we will continue to incur stock-based compensation expense as a result of certain modifications to equity awards that occurred in connection with our IPO;
+Added: however, we expect our general and administrative expenses to decrease as a percentage of our revenue over the longer term.
+Added: Our general and administrative expenses may fluctuate as a percentage of our revenue from period-to-period due to seasonality and the timing and extent of these expenses.
Interest expense, net
−Removed: Interest expense, net, consists primarily of interest expense on our 2018 Credit Facility, hedging instruments, capital lease obligations and amortization of debt issuance costs.
−Removed: Interest expense, net, decreased in 2020 primarily due to a decrease in London Interbank Offered Rate, or LIBOR, on our 2018 Term Loan.
−Removed: We expect interest expense, net, to decrease significantly in the near term as a result of the full repayment of our outstanding indebtedness under our 2018 Term Loan in July 2021 after the completion of our IPO and the extinguishment of hedging instruments.
+Added: Interest income (expense), net, consists primarily of interest income generated from our investment in money market fund offset by amortization of debt issuance costs related to our Amended and Restated Credit and Guaranty Agreement, or 2021 Revolving Facility.
+Added: Prior year interest income (expense), net, consisted of interest expense on our prior credit facility, hedging instruments and amortization of debt issuance costs, which were extinguished after our IPO in July 2021.
+Added: We expect interest income (expense), net, to remain insignificant in the near term as we have no outstanding indebtedness.
+Added: However, we would incur interest expense in the longer term should we draw down on our 2021 Revolving Facility or incur other indebtedness.
Our provision for income taxes consists of current and deferred federal, state and foreign income taxes.
4 unchanged sentences
This limitation has been accounted for in calculating our available NOL carryforwards.
−Removed: We may experience an ownership change in the future or subsequent changes in our stock ownership, some of which changes are outside our control.
−Removed: If we undergo another ownership change, such potential ownership changes may affect our ability to utilize our deferred tax assets.
−Removed: In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or increase our state taxes we owe.
Results of Operations
2 unchanged sentences
Year Ended December 31,
−Removed: 2021 2020 2019
(in thousands)
10 unchanged sentences
116,057 106,584
−Removed: Impairment of goodwill, long-lived and other assets 924 1,105 14,321
−Removed: Loss on sale of business — 1,764 —
+Added: Impairment of long-lived and other assets 248 924
Total operating expenses 450,623 470,792
−Removed: (Loss) income from operations (85,076) 48,934 46,265
−Removed: Interest expense, net (27,984) (35,504) (38,559)
−Removed: Other income, net 1,193 3,713 2,577
+Added: Loss from operations (41,739) (85,076)
+Added: Interest income (expense), net 1,543 (27,984)
+Added: Other (expense) income, net (4,477) 1,193
+Added: Impairment of other equity security (3,000) —
Loss on debt extinguishment — (7,748)
−Removed: Impairment of available-for-sale debt securities — (4,818) —
−Removed: (Loss) income before income taxes and income from equity method investments
−Removed: (119,615) 12,325 10,283
−Removed: (Benefit from) provision for income taxes
−Removed: (10,951) 2,429 3,161
−Removed: (Loss) income before income from equity method investments
−Removed: (108,664) 9,896 7,122
−Removed: Income from equity method investment — — 321
−Removed: Net (loss) income $ (108,664) $ 9,896 $ 7,443
+Added: Loss before income taxes (47,673) (119,615)
+Added: Provision for (benefit from) income taxes 1,060 (10,951)
+Added: Net loss $ (48,733) $ (108,664)
(1) Includes stock-based compensation expense as follows:
Year Ended December 31,
−Removed: 2021 2020 2019
(in thousands)
9 unchanged sentences
$ 80,469 $ 112,832
−Removed: Stock-based compensation expense increased significantly for the year ended December 31, 2021 due to the modification of certain equity awards in connection with our IPO.
−Removed: Refer to Note 14 of our consolidated financial statements included in this Annual Report on Form 10-K.
+Added: Stock-based compensation expense decreased significantly for the year ended December 31, 2022 compared to the year ended December 31, 2021 due to the modification of certain equity awards in connection with our IPO.
+Added: Refer to Note 16 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
(2) Includes depreciation and amortization expense for our property and equipment, including capitalized internal-use software and intangible assets as follows:
Year Ended December 31,
−Removed: 2021 2020 2019
(in thousands)
2 unchanged sentences
Sales and marketing
−Removed: 6,017 6,913 6,469
Technology and development
−Removed: 2,361 2,800 1,055
General and administrative
−Removed: 1,878 2,060 2,093
Total depreciation and amortization expense
10 unchanged sentences
$ 619,979 $ 575,080 $ 44,899 8 %
−Removed: Total revenue for the year ended December 31, 2021 increased $104.4 million, or 22%, to $575.1 million compared to the year ended December 31, 2020.
−Removed: The increase was primarily driven by increases in subscription revenue and transaction revenue.
−Removed: Subscription revenue was 50% and 49% of total revenue for the years ended December 31, 2021 and 2020, respectively, and transaction revenue was 45% of total revenue for the years ended December 31, 2021 and 2020, respectively.
−Removed: Subscription revenue for the year ended December 31, 2021 increased $59.1 million, or 26%, compared to the year ended December 31, 2020.
−Removed: The increase was primarily due to a 22% increase in the number of subscription units and a 6% improvement in ARPU.
−Removed: The increase in subscription units was primarily driven by increased business formations and improved retention .
−Removed: Strong performance from our registered agent subscription services drove the largest contribution of growth in the number of subscription units.
−Removed: The increase in ARPU was primarily due to a shift in the mix of subscription units resulting from continued growth of our registered agent service and, to a lesser extent, our tax advisory business and subscriptions acquired through our purchase of Earth Class Mail.
−Removed: Transaction revenue for the year ended December 31, 2021 increased $46.0 million, or 22%, compared to the year ended December 31, 2020, driven by a 10% increase in the number of transactions and a 12% improvement in average order value.
−Removed: Partner revenue for the year ended December 31, 2021 decreased $0.7 million, or 2%, compared to the year ended December 31, 2020.
−Removed: The decrease resulted from our transition away from certain legacy partner relationships that no longer align with our strategic direction.
+Added: The increase in total revenue was primarily driven by an increase in subscription revenue.
+Added: Subscription revenue was 58% and 50% of total revenue for the year ended December 31, 2022 and 2021, respectively, and transaction revenue was 39% and 45% of total revenue for the year ended December 31, 2022 and 2021, respectively.
+Added: Subscription revenue for the year ended December 31, 2022 increased primarily due to a 15% increase in the average number of subscription units and a 9% improvement in ARPU compared to the year ended December 31, 2021.
+Added: The increase in average subscription units was primarily driven by strong growth in subscriptions acquired through our partner integration channel, our registered agent, compliance, and tax products, as well as from our purchase of Earth Class Mail during the fourth quarter of 2021.
+Added: The increase in ARPU was primarily due to a change in mix, as our tax services, subscriptions from Earth Class Mail, compliance and registered agent products, which carry higher average price points than our other subscription services, increased as a percentage of total subscription units.
+Added: ARPU also increased as a result of a price increase to our small business legal advisory plan that was implemented in the fourth quarter of 2021.
+Added: These increases were partially offset by an increase in wholesale-priced subscriptions from our partner integration channel.
+Added: Transaction revenue for the year ended December 31, 2022 decreased due to a 5% decrease in the number of transactions and a 2% reduction in average order value compared to the year ended December 31, 2021.
+Added: The decrease in the number of transactions resulted from a reduction in estate planning and other consumer transactions, lower volumes in our intellectual property business largely due to the discontinuation of our do-it-yourself trademark product in favor of our attorney-assisted solution and, to a lesser extent, the decrease in business formations during this same period.
+Added: The reduction in average order value for the year ended December 31, 2022 was primarily driven by an increase in transactions from our wholesale-priced partner integration channel as a percentage of total transactions and testing of lower-priced business formation services partially offset by the timing of revenue recognition.
+Added: Partner revenue for the year ended December 31, 2022 decreased due to lower formation volumes and our transition away from certain legacy partner relationships that no longer align with our strategic direction.
Cost of revenue
4 unchanged sentences
$ 211,095 $ 189,364 $ 21,731 11 %
−Removed: Cost of revenue for the year ended December 31, 2021 increased $34.8 million, or 23%, compared to the year ended December 31, 2020.
−Removed: The increase was primarily due to higher filing fees, fulfillment costs, and other variable cost of revenue related to the increased transaction volumes and increased production capacity to improve our customer experience.
+Added: Cost of revenue for the year ended December 31, 2022 increased mainly due to higher fulfillment costs, partially offset by a reduction in filing fees and other variable costs related to the decline in transaction revenue.
+Added: Fulfillment costs increased by $23.4 million compared to the year ended December 31, 2021, including an $8.3 million increase resulting from our acquisition of Earth Class Mail, an $8.0 million increase related to expanded headcount in our tax business for the 2022 tax filing season and to support future growth as well as a $5.1 million increase in our core business due to higher depreciation expense and investment in additional production capacity to enhance our customer experience.
Year Ended December 31,
2 unchanged sentences
$ 408,884 $ 385,716 $ 23,168 6 %
−Removed: Gross profit for the year ended December 31, 2021 increased $69.6 million, or 22%.
−Removed: The increase was driven by increased revenue partially offset by higher filing fees, fulfillment costs, and other variable cost of revenue.
+Added: The increase in gross profit was driven by a $44.9 million increase in revenue partially offset by a $21.7 million increase in cost of revenue.
Sales and marketing
4 unchanged sentences
$ 263,884 $ 279,281 $ (15,397) (6 %)
−Removed: Sales and marketing expenses for the year ended December 31, 2021 increased $107.9 million, or 63%, compared to the year ended December 31, 2020.
−Removed: The increase was primarily due to an increase in customer acquisition marketing spend of $76.2 million, an increase in stock-based compensation of $14.6 million, mainly in connection with our IPO, increased payroll and related costs in our sales organization of $10.2 million due to increased headcount to support higher revenue, and an increase in media production spend of $3.9 million.
−Removed: Customer acquisition marketing spend was $195.4 million and $119.2 million for the year ended December 31, 2021 and December 31, 2020, respectively, as we invested to expand our customer base and build our digital brand leadership and awareness.
+Added: Sales and marketing expenses for the year ended December 31, 2022 decreased primarily due to a $20.7 million reduction in customer acquisition marketing spend and a $5.6 million decrease in stock-based compensation, mainly in connection with award modifications from our IPO in July 2021, partially offset by a $6.4 million increase in payroll and related costs due to higher average headcount and a $3.8 million increase in media production and other non-programmatic spend.
+Added: Customer acquisition marketing spend was $174.6 million and $195.4 million for the year ended December 31, 2022 and 2021, respectively, as we reduced our marketing spend in response to the year-over-year decline in overall U.S.
+Added: business formations and the uncertain macroeconomic environment.
Technology and development
4 unchanged sentences
$ 70,434 $ 84,003 $ (13,569) (16 %)
−Removed: Technology and development expenses for the year ended December 31, 2021 increased $42.1 million, or 101%, compared to the year ended December 31, 2020.
−Removed: The increase was primarily due to an increase in stock-based compensation of $36.1 million, mainly in connection with our IPO, and an increase in payroll and related benefits of $4.2 million, mainly due to increased headcount as we added staff to support our investment in new products and services.
+Added: Technology and development expenses for the year ended December 31, 2022 decreased primarily due to a decrease in stock-based compensation of $22.2 million, mainly in connection with award modifications from our IPO in July 2021.
+Added: This decrease was partially offset by a $3.8 million increase in professional services expense, including contingent staff costs related to our purchase of Earth Class Mail, an increase in other payroll and related benefits of $2.7 million resulting from higher headcount as we added staff to support our investment in new products and services, and a $1.6 million increase in software licensing costs.
General and administrative
4 unchanged sentences
$ 116,057 $ 106,584 $ 9,473 9 %
−Removed: General and administrative expenses for the year ended December 31, 2021 increased $55.6 million, or 109%, compared to the year ended December 31, 2020.
−Removed: The increase was primarily due to a $46.8 million increase in stock-based compensation, mainly in connection with our IPO, an increase in professional service costs of $6.4 million due in part to the acquisition of Earth Class Mail, recruiting costs for new hires, as well as accounting, legal, compliance and insurance costs associated with becoming a public company, and a $5.4 million increase in payroll and related benefits, mainly due to increased headcount.
−Removed: These increases were partially offset by a $2.4 million reduction in restructuring costs incurred in the prior year related to the reduction in headcount of our U.S.
+Added: General and administrative expenses for the year ended December 31, 2022 increased primarily due to a $9.0 million increase in payroll and related benefits, largely due to increased headcount, $1.4 million of additional insurance expense as a public company and a $1.9 million increase in restructuring costs, partially offset by a $5.7 million reduction in stock-based compensation, mainly in connection with award modifications from our IPO in July 2021 and a $1.2 million decrease in professional services expense.
Impairment of long-lived and other assets
4 unchanged sentences
$ 248 $ 924 $ (676) (73 %)
−Removed: In 2021 and 2020, we recorded non-cash charges related to the impairment of internal-use software projects that were no longer aligned with our go-forward strategy.
−Removed: Loss on sale of business
−Removed: Year Ended December 31,
−Removed: 2021 2020 $ change % change
−Removed: (in thousands, except percentages)
−Removed: Loss on sale of business
−Removed: $ — $ 1,764 $ (1,764) 100 %
−Removed: In April 2020, in connection with our sale of our Beaumont subsidiary, we incurred a loss of $1.8 million.
−Removed: No comparable losses were incurred in 2021.
−Removed: Interest expense, net
+Added: In 2022, we recorded non-cash charges related to the impairment of certain customer relationship assets and in 2021 we recorded non-cash charges related to the impairment of internal-use software projects that were no longer aligned with our go-forward strategy.
+Added: Interest (income) expense, net
Year Ended December 31,
1 unchanged sentence
(in thousands, except percentages)
−Removed: Interest expense, net
+Added: Interest (income) expense, net
$ (1,543) $ 27,984 $ (29,527) (106 %)
−Removed: Interest expense, net, decreased by $7.5 million to $28.0 million for the year ended 2021.
−Removed: The decrease was primarily due to the repayment of the 2018 Term Loan in July 2021.
−Removed: Other income, net
+Added: The change in interest (income) expense, net, was primarily due to the repayment of the 2018 term loan in July 2021 in connection with our IPO.
+Added: Other (expense) income, net
Year Ended December 31,
1 unchanged sentence
(in thousands, except percentages)
−Removed: Other income, net
+Added: Other (expense) income, net
$ (4,477) $ 1,193 $ (5,670) (475 %)
−Removed: The change in other income, net between 2021 and 2020 was primarily due to changes in foreign currency movements related to our intercompany loans which were denominated in British Pound Sterling, or GBP.
+Added: The change in other (expense) income, net, between 2022 and 2021 was primarily due to changes in foreign currency movements related to our intercompany loans which were denominated in British Pound Sterling, or GBP.
Loss on debt extinguishment
4 unchanged sentences
$ — $ 7,748 $ (7,748) (100 %)
−Removed: Loss on debt extinguishment for the year ended December 31, 2021 was $7.7 million due to the write down of unamortized debt issuance costs associated with the full repayment of our 2018 Term Loan in July 2021.
−Removed: Impairment of available-for-sale debt securities
+Added: Loss on debt extinguishment for the year ended December 31, 2021 of $7.7 million was due to the write down of unamortized debt issuance costs associated with the full repayment of our 2018 term loan in July 2021.
+Added: Impairment of other equity security
Year Ended December 31,
1 unchanged sentence
(in thousands, except percentages)
−Removed: Impairment of available-for-share debt securities
+Added: Impairment of other equity security
$ (3,000) $ — $ (3,000) 100 %
−Removed: In 2020, we fully impaired our investment in firma.de Firmenbaukasten AG, a German limited liability company.
−Removed: We incurred a loss of $4.8 million as the present value of cash flows expected to be collected was less than the amortized cost basis of the investment.
−Removed: (Benefit from) provision for income taxes
+Added: Impairment of other equity security for the year ended December 31, 2022 was due to the impairment of our investment in Mylo, LLC.
+Added: Provision for (benefit from) income taxes
Year Ended December 31,
1 unchanged sentence
(in thousands, except percentages)
−Removed: (Benefit from) provision for income taxes
+Added: Provision for (benefit from) income taxes
$ 1,060 $ (10,951) $ 12,011 (110 %)
Effective tax rate
−Removed: The benefit from income taxes for the year ended December 31, 2021 resulted from a $13.4 million favorable change in our income taxes as compared to the year ended December 31, 2020.
−Removed: The change was primarily due to the tax impact from the decrease in our U.S.
−Removed: income in the year ended December 31, 2021 compared to the year ended December 31, 2020 as well as the increased benefits from the exercise of non-qualified stock options and settlements of restricted stock units, or RSUs, in 2021 as compared to 2020.
+Added: The provision for income taxes for the year ended December 31, 2022 resulted from a $12.0 million unfavorable change in our income taxes as compared to the year ended December 31, 2021.
+Added: The change was primarily due to changes in pre-tax book income, utilization of net operating losses and capitalization of research expenditures for the year ended December 31, 2022 compared to the year ended December 31, 2021.
Comparison of the Years Ended December 31, 2021 and 2020
−Removed: Year Ended December 31,
−Removed: 2020 2019 $ change % change
−Removed: (in thousands, except percentages)
−Removed: Revenue by type
−Removed: $ 212,114 $ 168,305 $ 43,809 26.0 %
−Removed: 229,840 206,447 23,393 11.3
−Removed: 28,682 33,628 (4,946) (14.7)
−Removed: Total revenue
−Removed: $ 470,636 $ 408,380 $ 62,256 15.2 %
−Removed: Total revenue increased $62.3 million, or 15.2%, to $470.6 million in 2020.
−Removed: The increase was primarily driven by increases in transaction revenue and subscription revenue.
−Removed: Transaction revenue was 41.2% and 45.1% of total
−Removed: revenue in 2019 and 2020, respectively, and subscription revenue was 50.6% and 48.8% of total revenue in 2019 and 2020, respectively.
−Removed: Transaction revenue increased $43.8 million, or 26.0%, to $212.1 million in 2020 driven by a 29.1% increase in the number of transactions.
−Removed: Subscription revenue increased $23.4 million, or 11.3%, to $229.8 million in 2020.
−Removed: The increase was primarily driven by a 17.8% increase in the number of subscription units coupled with a 0.9% increase in ARPU.
−Removed: Strong performance from our registered agent subscription services drove the largest contribution of growth to both the number of subscription units and ARPU.
−Removed: Partner revenue decreased $4.9 million, or 14.7%, to $28.7 million in 2020.
−Removed: The decrease was primarily due to cessation of certain partnership arrangements that were not aligned with our go-forward strategy.
−Removed: Cost of revenue
−Removed: Year Ended December 31,
−Removed: 2020 2019 $ change % change
−Removed: (in thousands, except percentages)
−Removed: Cost of revenue
−Removed: $ 154,563 $ 136,915 $ 17,648 12.9 %
−Removed: Cost of revenue increased $17.6 million, or 12.9%, to $154.6 million in 2020.
−Removed: The increase was primarily due to higher filing fees and costs associated with customer care as a result of the increase in transaction volume.
−Removed: Year Ended December 31,
−Removed: 2020 2019 $ change % change
−Removed: (in thousands, except percentages)
−Removed: $ 316,073 $ 271,465 $ 44,608 16 %
−Removed: Gross profit for the year ended December 31, 2020 increased $44.6 million, or 16%.
−Removed: The increase was driven by increased revenue partially offset by higher filing fees and costs associated with customer care as a result of the increase in transaction volume.
−Removed: Sales and marketing
−Removed: Year Ended December 31,
−Removed: 2020 2019 $ change % change
−Removed: (in thousands, except percentages)
−Removed: Sales and marketing
−Removed: $ 171,390 $ 115,913 $ 55,477 47.9 %
−Removed: Sales and marketing expenses increased $55.5 million, or 47.9%, to $171.4 million in 2020.
−Removed: The increase was primarily due to our strategy to increase customer acquisition marketing costs by $52.0 million, predominantly in the search engine marketing channel, as we invested to expand our customer base and build on our digital brand leadership and awareness.
−Removed: We increased our customer acquisition marketing costs beginning in the second quarter of 2020 in anticipation of growing demand.
−Removed: Customer acquisition marketing spend was $119.2 million and $67.2 million for 2020 and 2019, respectively.
−Removed: Technology and development
−Removed: Year Ended December 31,
−Removed: 2020 2019 $ change % change
−Removed: (in thousands, except percentages)
−Removed: Technology and development
−Removed: $ 41,863 $ 37,204 $ 4,659 12.5 %
−Removed: Technology and development expenses increased $4.7 million, or 12.5%, to $41.9 million in 2020.
−Removed: The increase was primarily due to lower capitalization of personnel costs for internal-use software development.
−Removed: General and administrative
−Removed: Year Ended December 31,
−Removed: 2020 2019 $ change % change
−Removed: (in thousands, except percentages)
−Removed: General and administrative
−Removed: $ 51,017 $ 57,762 $ (6,745) (11.7) %
−Removed: General and administrative expenses decreased $6.7 million, or 11.7%, to $51.0 million in 2020.
−Removed: The decrease was primarily due to lower business strategy consulting and outside legal expenses coupled with lower travel and entertainment spend due to the impact of COVID-19 in 2020.
−Removed: Impairment of goodwill, long-lived and other assets
−Removed: Year Ended December 31,
−Removed: 2020 2019 $ change % change
−Removed: (in thousands, except percentages)
−Removed: Impairment of goodwill, long-lived and other assets
−Removed: $ 1,105 $ 14,321 $ (13,216) (92.3) %
−Removed: In 2019, we recorded a goodwill impairment charge of $10.6 million related to our U.K.
−Removed: reporting unit.
−Removed: In 2020 and 2019, we impaired $1.1 million and $3.7 million, respectively, related to internal-use software projects that were no longer considered part of our strategic business plans.
−Removed: Loss on sale of business
−Removed: Year Ended December 31,
−Removed: 2020 2019 $ change % change
−Removed: (in thousands, except percentages)
−Removed: Loss on sale of business
−Removed: $ 1,764 $ — $ 1,764 100.0 %
−Removed: In April 2020, in connection with our sale of our Beaumont subsidiary, we incurred a loss of $1.8 million.
−Removed: No comparable losses were incurred in 2019.
−Removed: Interest expense, net
−Removed: Year Ended December 31,
−Removed: 2020 2019 $ change % change
−Removed: (in thousands, except percentages)
−Removed: Interest expense, net
−Removed: $ 35,504 $ 38,559 $ (3,055) (7.9) %
−Removed: Interest expense, net, decreased by $3.1 million to $35.5 million in 2020.
−Removed: The decrease was primarily a result of a decrease in LIBOR on our 2018 Term Loan partially offset by costs related to our interest rate swaps and amortization of debt issuance costs.
−Removed: Other income, net
−Removed: Year Ended December 31,
−Removed: 2020 2019 $ change % change
−Removed: (in thousands, except percentages)
−Removed: Other income, net
−Removed: $ 3,713 $ 2,577 $ 1,136 44.1 %
−Removed: The change in other income, net between 2019 and 2020 was primarily due to a gain from the change in the fair value of our financial guarantee of $1.8 million, partially offset by changes in foreign currency movements related to our intercompany loans which are denominated in GBP.
−Removed: Impairment of available-for-sale debt securities
−Removed: Year Ended December 31,
−Removed: 2020 2019 $ change % change
−Removed: (in thousands, except percentages)
−Removed: Impairment of available-for-sale debt securities
−Removed: $ 4,818 $ — $ 4,818 100.0 %
−Removed: In 2020, we fully impaired our investment in Firma.de Firmenbaukasten AG, a German limited liability company, and we incurred a loss of $4.8 million as the present value of cash flows expected to be collected was less than the amortized cost basis of the investment.
−Removed: No comparable losses were incurred in 2019.
−Removed: Provision for income taxes
−Removed: Year Ended December 31,
−Removed: 2020 2019 $ change % change
−Removed: (in thousands, except percentages)
−Removed: Provision for income taxes
−Removed: $ 2,429 $ 3,161 $ (732) (23.2) %
−Removed: Effective tax rate 20 % 20 %
−Removed: Provision for income taxes decreased $0.7 million, or 23.2%, to $2.4 million in 2020.
−Removed: The decrease was primarily due to increased benefits from the exercise of non-qualified stock options in 2020 compared to 2019, increased interest deductions under Section 163(j) due to the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, and reduced nondeductible expenses in 2020 compared to 2019.
+Added: For a discussion related to the results of operations and changes in financial condition for the year ended December 31, 2021 compared to the year ended December 31, 2020, refer to Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the Securities and Exchange Commission, or SEC, on March 24, 2022.
Liquidity and Capital Resources
−Removed: Since inception, we have funded our operations and capital expenditures primarily from private sales of equity securities, cash flows provided by operating activities and equity and debt financing arrangements, including the proceeds of our IPO.
+Added: Since inception, we have funded our operations and capital expenditures primarily from public and private sales of equity securities, cash flows provided by operating activities and equity and debt financing arrangements, including the proceeds of our IPO.
Our primary requirements for liquidity and capital are to finance working capital, capital expenditures and general corporate purposes.
−Removed: At December 31, 2021, our principal sources of liquidity were cash and cash equivalents of $239.3 million, which consisted of cash on deposit with banks and money market funds, of which $1.0 million related to our foreign subsidiaries.
−Removed: Our cash and cash equivalents increased by $124.8 million from December 31, 2020 to December 31, 2021, primarily from raising $666.9 million from our IPO, net of underwriting discounts and commissions, and after repayment in full of the outstanding principal from our 2018 Term Loan in July 2021 of $521.6 million, the acquisition of Earth Class Mail in November 2021 for $61.5 million, and the lapse of restrictions on $25.0 million in a cash equivalent upon the release of collateral related to a personal loan by a former executive in June 2021.
−Removed: We currently anticipate that our available cash, cash equivalents and cash provided by operating activities will be sufficient to meet our operational cash needs for at least the next twelve months.
−Removed: We have the ability to supplement our liquidity needs with borrowings under our Amended and Restated Credit and Guaranty Agreement, or 2021 Revolving Facility,.
+Added: At December 31, 2022, our principal sources of liquidity were cash and cash equivalents of $189.1 million, which consisted of cash on deposit with banks and a money market fund, of which approximately $1.1 million related to our foreign subsidiaries.
+Added: Our cash and cash equivalents decreased by $50.2 million from December 31, 2021 to December 31, 2022, primarily from the stock repurchases during the period.
+Added: We currently anticipate that our available cash, cash equivalents and cash provided by operating activities will be sufficient to meet our operational cash needs for at least the next year.
+Added: We have the ability to supplement our liquidity needs over the longer term with borrowings under our 2021 Revolving Facility.
+Added: In addition, we previously announced our intention to sell our operating headquarters in Austin, Texas, which is discussed in more detail in Note 4 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
We have historically considered the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested, and accordingly no taxes have been provided on such earnings.
−Removed: We continue to evaluate our plans for reinvestment or repatriation of unremitting foreign earnings and have not changed our previous indefinite reinvestment determination following the enactment of the Tax Act.
+Added: We continue to evaluate our plans for reinvestment or repatriation of unremitting foreign earnings and have not changed our previous indefinite reinvestment determination following the enactment of the 2017 Tax Cuts and Jobs Act.
We have not repatriated funds to the U.S.
2 unchanged sentences
state income taxes.
+Added: Furthermore, our board of directors has authorized our management to repurchase up to $150.0 million of shares of our common stock from time to time.
+Added: As of the date of this filing, we have repurchased $95.1 million of our common stock under our stock repurchase program.
+Added: For additional information regarding our stock repurchase program, refer to Note 15 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
2021 Revolving Facility
2 unchanged sentences
The 2021 Revolving Facility provides for the issuance of up to $20.0 million of letters of credit as well as borrowings on same-day notice, referred to as swingline loans, in an amount of up to $10.0 million.
−Removed: We have $150.0 million available for use under our 2021 Revolving Facility.
−Removed: Subject to the satisfaction of certain criteria, we will be able to increase the facility by an amount equal to the sum of (i) the greater of $90.0 million and 75% of consolidated last twelve months Cash EBITDA, which is defined in
−Removed: the 2018 Credit Facility, or LTM Cash EBITDA, plus (ii) unused amounts under the general debt basket (i.e., an amount equal to the greater of $50.0 million and an equivalent percentage of consolidated LTM Cash EBITDA), plus (iii) an unlimited amount so long as the borrower is in pro forma compliance with the Financial Covenant (as defined below), in each case, with the consent of the lenders participating in the increase.
+Added: We have no amounts outstanding and $150.0 million available for use under our 2021 Revolving Facility.
+Added: Subject to the satisfaction of certain criteria, we will be able to increase the facility by an amount equal to the sum of (i) the greater of $90.0 million and 75% of consolidated last year cash earnings before interest expense, tax, depreciation and amortization, or Cash EBITDA, which is defined in the 2018 Credit Facility, or LTM Cash EBITDA, plus (ii) unused amounts under the general debt basket (i.e., an amount equal to the greater of $50.0 million and an equivalent percentage of consolidated LTM Cash EBITDA), plus (iii) an unlimited amount so long as the borrower is in pro forma compliance with the Financial Covenant (as defined below), in each case, with the consent of the lenders participating in the increase.
We are required to pay a commitment fee in respect of unutilized commitments under the 2021 Revolving Facility.
The commitment fee is, initially, 0.35% per annum.
−Removed: The commitment fee is subject to one reduction of 0.10% if the total net first lien leverage ratio does not exceed 3.50 to 1.00.
+Added: The commitment fee is subject to a reduction of 0.10% if the total net first lien leverage ratio does not exceed 3.50 to 1.00.
We are also required to pay customary letter of credit fees and agency fees.
1 unchanged sentence
(ii) the federal funds effective rate plus 1/2 of 1.0% and (iii) one month LIBOR (subject to a 1.00% floor), plus 1.00% or LIBOR (subject to a 0.00% floor) plus 2.00%.
−Removed: The interest rate margins under the 2021 Revolving Facility are subject to one reduction of 0.25% and a further reduction of 0.25% if the total net first lien leverage ratio does not exceed 3.50 to 1.00 and 2.50 to 1.00, respectively.
+Added: The interest rate margins under the 2021 Revolving Facility are subject to a reduction of 0.25% and a further reduction of 0.25% if the total net first lien leverage ratio does not exceed 3.50 to 1.00 and 2.50 to 1.00, respectively.
We have the option to voluntarily repay outstanding loans at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans.
2 unchanged sentences
Obligations under the 2021 Revolving Facility are guaranteed by our existing and future direct and indirect material wholly-owned domestic subsidiaries, subject to certain exceptions.
−Removed: The 2021 Revolving Facility is secured by a first-priority security interest in substantially all of the assets of the borrower and the guarantors, subject to certain exceptions.
+Added: The 2021 Revolving Facility is secured by a first-priority security interest in substantially all of our assets, subject to certain exceptions.
The 2021 Revolving Facility contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability and the ability of our restricted subsidiaries to incur additional indebtedness and guarantee indebtedness;
12 unchanged sentences
Year Ended December 31,
−Removed: 2021 2020 2019
(in thousands)
1 unchanged sentence
Net cash used in investing activities (30,622) (77,673)
−Removed: Net cash provided by (used in) financing activities 123,359 (15,089) (12,852)
+Added: Net cash (used in) provided by financing activities (93,343) 123,359
Effect of exchange rate changes on cash, cash equivalents and restricted cash equivalent (87) (11)
−Removed: Net increase in cash, cash equivalents and restricted cash equivalent $ 99,827 $ 65,290 $ 18,631
+Added: Net (decrease) increase in cash, cash equivalents and restricted cash equivalent $ (50,215) $ 99,827
+Added: For a discussion related to our cash flows for the year ended December 31, 2020, refer to Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in our Annual Report on Form
+Added: 10-K for the year ended December 31, 2021, which was filed with the Securities and Exchange Commission on March 24, 2022.
Net cash provided by operating activities
1 unchanged sentence
Our primary uses of cash in operating activities are for our fulfillment, production and customer care costs, employee salaries and benefits, sales and marketing expenses and third-party consulting expenses.
−Removed: Net cash provided by operating activities is impacted by our net (loss) income adjusted for certain non-cash items, including depreciation and amortization expense, stock-based compensation and impairments of long-lived assets, as well as the effect of changes in operating assets and liabilities.
+Added: Net cash provided by operating activities is impacted by our net loss adjusted for certain non-cash items, including depreciation and amortization expense, stock-based compensation and impairments of long-lived assets, as well as the effect of changes in operating assets and liabilities.
In 2022, cash provided by operating activities was $73.8 million resulting from a net loss of $48.7 million, adjusted for stock-based compensation and other non-cash expenses of $110.5 million and net cash flows provided by changes in operating assets and liabilities of $12.0 million.
−Removed: The $23.7 million of net cash flows provided from changes in our operating assets and liabilities included a $17.9 million increase in deferred revenue resulting from growth of our subscription units, which are predominantly billed in advance of our revenue recognition, a
−Removed: $16.1 million increase in accounts payable, accrued expenses and other current liabilities due to the timing of our payments, partially offset by a $10.1 million increase in accounts receivable, prepaid expenses and other current assets.
−Removed: In 2020, cash provided by operating activities was $93.0 million resulting from net income of $9.9 million, adjusted for non-cash expenses of $44.8 million and net cash flow provided by changes in operating assets and liabilities of $38.4 million.
−Removed: The $38.4 million of net cash flows provided from changes in our operating assets and liabilities included a $23.2 million increase in deferred revenue primarily as a result of the growth of our subscription units, which are predominantly billed in advance of our revenue recognition, and a $13.8 million increase in accounts payable, accrued expenses and other current liabilities, due to the timing of our payments.
−Removed: In 2019, cash provided by operating activities was $52.7 million resulting from net income of $7.4 million, adjusted for non-cash expenses of $38.4 million and net cash flow provided by changes in operating assets and liabilities of $6.9 million.
−Removed: The $6.9 million of net cash flows provided from changes in our operating assets and liabilities included a $5.6 million increase in deferred revenue primarily as a result of the growth of our subscription units, and a $3.9 million increase in accounts payable, partially offset by a $1.6 million decrease in accrued expenses and other liabilities due to the timing of our payments.
+Added: The $12.0 million of net cash flows provided from changes in our operating assets and liabilities included a $17.1 million increase in deferred revenue largely due to growth of our subscription units, which are predominantly billed in advance of our revenue recognition, partially offset by a net $2.2 million reduction in accounts payable, accrued expenses, operating lease liability and other liabilities due to the timing of our payments and a $2.8 million net increase in accounts receivable, prepaid expenses and other assets.
+Added: In 2021, cash provided by operating activities was $54.2 million resulting from a net loss of $108.7 million, adjusted for stock-based compensation and other non-cash expenses of $139.1 million and net cash flows provided by changes in operating assets and liabilities of $23.7 million.
+Added: The $23.7 million of net cash flows provided from changes in our operating assets and liabilities included a $17.9 million increase in deferred revenue resulting from growth of our subscription units, which are predominantly billed in advance of our revenue recognition, a $16.0 million increase in accounts payable, accrued expenses and other liabilities due to the timing of our payments, partially offset by a $10.1 million increase in accounts receivable, prepaid expenses and other assets.
Net cash used in investing activities
1 unchanged sentence
As our business grows, we expect our capital expenditures to continue to increase.
+Added: In 2022, net cash used in investing activities was $30.6 million, resulting primarily from $22.1 million paid for property and equipment, including capitalized internal-use software and payments for the acquisition of UA Services of $2.5 million and $6.3 million primarily for developed technology acquired from Revvsales Inc.
In 2021, net cash used in investing activities was $77.7 million, resulting primarily from the acquisition of Earth Class Mail, Inc.
−Removed: in November 2021 for $61.5 million, $11.7 million paid for property and equipment, including capitalized internal-use software and a $3.3 million charge for the extinguishment of interest rate swaps in the third quarter.
−Removed: In 2020, net cash used in investing activities was $12.7 million resulting primarily from $10.6 million in purchases of property and equipment, including capitalized internal-use software.
−Removed: In 2019, net cash used in investing activities was $20.7 million resulting primarily from $18.3 million in purchases of property and equipment, including capitalized internal-use software, and $2.7 million in investments in available-for-sale debt securities and other equity securities.
+Added: in November 2021 for $61.5 million, net of cash acquired, $11.7 million paid for property and equipment, including capitalized internal-use software and a $3.3 million payment on the extinguishment of interest rate swaps in the third quarter.
Net cash provided by (used in) financing activities
−Removed: Our primary uses of cash in financing activities are for our servicing and refinancing of our long-term debt, repurchases of common stock and settlements of stock options and RSUs.
+Added: Our primary uses of cash in financing activities are for repurchases of common stock.
Net cash provided by financing activities is primarily impacted by exercises of stock options by our employees and issuance of common stock.
+Added: In 2022, net cash used in financing activities was $93.3 million, primarily for the repurchase of common stock under our stock repurchase program.
In 2021, net cash provided by financing activities was $123.4 million, primarily from issuance of common stock for net proceeds of $666.9 million, offset by full repayment of our 2018 Term Loan and hybrid debt totaling $525.6 million and payment of offering costs of $5.6 million.
−Removed: In 2020, net cash used in financing activities was $15.1 million resulting primarily from repayments on our 2018 Term Loan totaling $5.4 million, repurchases of common stock of $4.8 million and repurchases of common stock for tax withholding obligations of $3.6 million.
−Removed: In March 2020, we drew down the full $40.0 million available from our 2018 Revolving Facility in response to macroeconomic concerns with regards to COVID-19.
−Removed: The 2018 Revolving Facility was paid in full by May 2020.
−Removed: In 2019, net cash used in financing activities was $12.9 million resulting primarily from repayments on our 2018 Term Loan totaling $5.4 million, repurchases of common stock for tax withholding obligations of $3.8 million and the repurchase of common stock of $1.5 million.
−Removed: Contractual obligations and commitments
−Removed: We have contractual commitments for our 2021 Revolving Facility, operating leases, marketing and technology expenditures.
−Removed: For additional information, see Note 10 and Note 12 to our consolidated financial statements included elsewhere in this Form 10-K.
−Removed: We believe our current cash and cash equivalents, as well as cash expected to be generated by future operating activities, will be sufficient to meet our contractual obligations for the next twelve months.
−Removed: Off-balance sheet arrangements
−Removed: We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
+Added: Material Cash Requirements
+Added: We believe our current cash and cash equivalents, as well as cash expected to be generated by future operating activities, will be sufficient to meet our material cash requirements for the next twelve months.
+Added: Our material cash requirements include the below contractual and other obligations:
+Added: Advertising, Media and Other Commitments
+Added: We use a variety of media to advertise our services, including search engine marketing, television and radio.
+Added: At December 31, 2022, we had non-cancelable minimum advertising and media commitments for future advertising spots of $8.1 million, substantially all of which will be paid over a two year period.
+Added: We also have non-cancelable agreements with various vendors, which require us to pay $67.9 million over a five year period, of which $51.1 million remains to be paid as of December 31, 2022.
+Added: Lease Obligations
+Added: At December 31, 2022, we had various non-cancelable operating leases for office space and equipment, which expire between December 31, 2022 and November 30, 2029.
+Added: As of December 31, 2022, we had total minimum operating lease maturities of $12.8 million, $2.8 million of which mature within twelve months.
+Added: See Note 9 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information regarding our future operating lease payments.
Non-GAAP Financial Measures
5 unchanged sentences
Adjusted EBITDA and Adjusted EBITDA Margin
−Removed: We define Adjusted EBITDA as net (loss) income adjusted to exclude interest expense, net, (benefit from) provision for income taxes, depreciation and amortization, other income, net, non-cash stock-based compensation, loss on debt extinguishment, impairment of goodwill, long-lived and other assets, losses from impairment of available-for-sale debt securities, restructuring expenses, legal expenses, acquisition related expenses, IPO-related costs and other transaction-related expenses and certain other non-recurring expenses.
+Added: We define Adjusted EBITDA as Net (loss) income adjusted to exclude interest expense, net, provision for (benefit from) income taxes, depreciation and amortization, other (income) expense, net, stock-based compensation, impairment of other equity security, loss on debt extinguishment, impairment of goodwill, long-lived and other assets, losses from impairment of available-for-sale debt securities, restructuring expenses, IPO-related costs and other transaction-related expenses and certain other non-recurring expenses.
Our Adjusted EBITDA financial measure differs from GAAP in that it excludes certain items of income and expense.
12 unchanged sentences
• excludes stock-based compensation expense, which has been, and will continue to be, a significant recurring expense for our business and an important part of our compensation strategy;
−Removed: • excludes losses from impairments of goodwill, long-lived and other assets and available-for-sale debt securities;
−Removed: • excludes legal expenses, which reduce cash available to us;
−Removed: • excludes acquisition related expenses, which reduce cash available to us;
+Added: • excludes impairments of other equity securities;
+Added: • excludes losses from impairments of long-lived and other assets;
• excludes restructuring expenses, which reduce cash available to us;
• excludes IPO-related costs and other transaction-related expenses that are not considered representative of our underlying performance, which reduce cash available to us;
−Removed: • excludes debt extinguishment charges that represent accelerated amortization of debt issuance costs related to the early extinguishment of our long-term debt, which adjustments are not expected to recur and do not reflect expected ongoing operating results;
• does not reflect certain other non-recurring expenses that are not considered representative of our underlying performance, which reduce cash available to us.
1 unchanged sentence
Year Ended December 31,
−Removed: 2021 2020 2019
(in thousands)
−Removed: Reconciliation of Net (loss) income to Adjusted EBITDA
−Removed: Net (loss) income $ (108,664) $ 9,896 $ 7,443
−Removed: Interest expense, net 27,984 35,504 38,559
−Removed: (Benefit from) provision for income taxes (10,951) 2,429 3,161
+Added: Reconciliation of Net income (loss) to Adjusted EBITDA
+Added: Net loss $ (48,733) $ (108,664)
+Added: Interest (income) expense, net (1,543) 27,984
+Added: Provision for (benefit from) income taxes 1,060 (10,951)
Depreciation and amortization 21,745 16,686
−Removed: Other income, net (1,193) (3,713) (2,577)
+Added: Other (income) expense, net 4,477 (1,193)
Stock-based compensation 80,469 112,596
−Removed: Loss on debt extinguishment 7,748 — —
−Removed: Impairment of goodwill, long-lived and other assets 924 1,105 14,321
−Removed: Impairment of available-for-sale debt securities — 4,818 —
−Removed: Restructuring expenses — 2,524 1,600
−Removed: Legal expenses (1)
+Added: Impairment of other equity security 3,000 —
+Added: Impairment of long-lived and other assets 237 924
Acquisition related expenses 758 1,356
+Added: Restructuring costs (1)
+Added: Loss on debt extinguishment — 7,748
IPO-related costs and other transaction related expenses (2)
Certain other non-recurring expenses (3)
−Removed: 369 1,764 6,911
Adjusted EBITDA $ 63,705 $ 47,707
−Removed: Net (loss) income margin (19) % 2 % 1.8 %
+Added: Net income (loss) margin (8 %) (19 %)
Adjusted EBITDA margin 10 % 8 %
−Removed: ______________
−Removed: (1) Legal expenses include costs accrued or paid for potential litigation settlements, and are net of insurance recoveries, if any.
−Removed: (2) IPO-related costs and other transaction-related expenses include certain non-recurring expenses incurred in connection with our IPO.
+Added: (1) Restructuring expenses related to a phased severance event to reduce the U.S.
+Added: Restructuring expenses include severance for the impacted employees and are included in general and administrative expenses in the accompanying consolidated statements of operations.
+Added: (2) IPO-related costs and other transaction related expenses includes certain non-recurring expenses, which occurred in connection with our IPO in 2021.
+Added: (3) For 2022, certain other non-recurring expenses includes severance costs incurred related to the departure of a member of management.
In 2021, we incurred expenses related to early termination of our U.K.
lease agreement.
−Removed: In 2020, we incurred a loss on sale from the disposal of Beaumont, our conveyancing business in the U.K., of $1.8 million.
−Removed: In 2019, we incurred certain expenses for strategic transactions that were not consummated, including $4.6 million of costs associated with our filing of a registration statement, $1.9 million of compensation expense recorded in general and administrative expenses related the establishment of a financial guarantee for a former executive officer, and $0.4 million for other transaction related expenses.
−Removed: Adjusted EBITDA decreased from $88.0 million for the year ended December 31, 2020 to $47.7 million for the year ended December 31, 2021.
−Removed: The decrease of $40.3 million reflects an increase in revenue of $104.4 million offset by increases in cost of revenue of $35.1 million, customer acquisition media spend of $76.2 million and other operating expenses of $33.4 million, excluding non-cash and non-recurring items.
+Added: The increase in Adjusted EBITDA of $16.0 million for the year ended December 31, 2022 reflects an increase in revenue of $44.9 million offset by increases in cost of revenue of $18.3 million and other operating expenses of $10.6 million, excluding non-cash and non-recurring items.
We expect our Adjusted EBITDA to increase in absolute dollars in the longer term, although the rate at which our Adjusted EBITDA may grow could vary based upon the interplay of the foregoing factors.
−Removed: Adjusted EBITDA decreased from $97.2 million in 2019 to $88.0 million in 2020.
−Removed: The decrease of $9.2 million primarily reflects an investment in customer acquisition media spend, which increased by $52.0 million in 2020 as we invested to expand our customer base and build on our digital brand leadership and awareness, as well as an increase in cost of revenue of $17.7 million driven by increases in customer care and fulfillment costs, partially offset by an increase in revenue of $62.2 million.
Free cash flow
6 unchanged sentences
Year Ended December 31,
−Removed: 2021 2020 2019
(in thousands)
6 unchanged sentences
$ 51,739 $ 42,412
−Removed: We experienced a decrease in our free cash flow from $82.5 million for the year ended December 31, 2020 to $42.4 million for the year ended December 31, 2021, primarily due to a $38.9 million reduction in net cash provided by operating activities.
−Removed: The decline in net cash provided by operating activities resulted from a $24.2 million reduction in net income after adjusting for stock-based compensation and other non-cash items, and a $14.7 million unfavorable change in our operating assets and liabilities.
+Added: We experienced an increase in our free cash flow from $42.4 million for the year ended December 31, 2021 to $51.7 million for the year ended December 31, 2022, primarily due to a $19.7 million increase in net cash provided by operating activities.
+Added: The increase in net cash provided by operating activities resulted from a $31.3 million increase in net income after adjusting for stock-based compensation and other non-cash items, offset by an $11.6 million unfavorable change in our operating assets and liabilities primarily due to the timing of our accounts payable payments and accrued expenses partially offset by a favorable change in prepaid expenses and other assets.
Free cash flow was also impacted by higher capital expenditures for the purchase of property and equipment, including capitalization of internal-use software.
We expect our free cash flow to increase in absolute dollars over the longer term, although the rate at which our free cash flow may grow could vary based upon the interplay of the factors discussed above.
−Removed: We experienced an increase in our free cash flow from 2019 to 2020 as a result of an increase in net cash provided by operating activities, which was primarily due to an increase of $17.6 million in deferred revenue driven by an increase in subscription units as well as an $8.5 million increase in accounts payable due to the timing of our payments.
−Removed: Additionally, in the year ended 2020 as compared to 2019, we recorded a decrease in purchase of property and equipment related to less capitalization of internal-use software projects.
−Removed: For the years ended December 31, 2021, 2020 and 2019, our free cash flow included cash payments for interest related to our 2018 Credit Facility of $12.3 million, $27.9 million and $37.3 million, respectively.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for further information on certain accounting standards adopted in 2022 and recent accounting announcements that have not yet been required to be implemented and may be applicable to our future operations.
−Removed: Critical Accounting Policies and Estimates
+Added: Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes.
−Removed: Estimates are used for, however not limited to, revenue recognition, sales allowances and credit reserves, available-for-sale debt securities, valuation of long-lived assets and goodwill, income taxes, commitments and contingencies, valuation of assets and liabilities acquired in business combinations, fair value of derivative instruments and stock-based compensation.
+Added: Estimates are used for, however not limited to, revenue recognition, sales allowances and credit reserves, available-for-sale debt securities, recoverability of long-lived assets and goodwill, income taxes, commitments and contingencies, valuation of assets and liabilities acquired in business combinations, valuation of assets in asset acquisitions, fair value of derivative instruments and stock-based compensation.
Actual results could differ materially from those estimates.
4 unchanged sentences
Transaction revenue —Transaction revenue is primarily generated from our customized legal document services upon fulfillment of these services.
−Removed: Transaction revenue includes filing fees and is net of cancellations, promotional discounts and sales allowances.
−Removed: Until April 2020, when we ceased providing such services, we also generated transaction revenue from our residential and commercial conveyancing business in the U.K.
−Removed: Revenue for these services was recognized when delivered to the customer.
−Removed: In addition, until July 2019, when we ceased providing such services, we generated revenue from litigation services in the U.K., and we recognized this revenue based on the time incurred by the attorneys at their market billing rates.
−Removed: In 2020, we commenced providing tax advice and filing services in the U.S., which are recognized at the point in time when the customer’s tax return is filed and accepted by the applicable government authority.
−Removed: Subscription revenue —Subscription revenue is generated primarily from subscriptions to our registered agent services, compliance packages, attorney advice, and legal forms services, in addition to SaaS subscriptions in the U.K.
−Removed: In the fourth quarter of 2020, we commenced providing tax, bookkeeping and payroll subscription services.
−Removed: We recognize revenue from our subscriptions ratably over the subscription term.
+Added: Transaction revenue includes filing fees and is net of cancellations, promotional discounts, sales allowances and credit reserves.
+Added: Tax preparation services are recognized at the point in time when the customer’s tax return is filed and accepted by the applicable government authority.
+Added: Subscription revenue —Subscription revenue is generated primarily from subscriptions to our registered agent services, compliance packages, attorney advice, legal forms services, tax advisory and preparation services, and virtual mail services in addition to software-as-a-service, or SaaS, subscriptions in the U.K.
+Added: We generally recognize revenue from our subscriptions ratably over the subscription term.
Subscription terms generally range from thirty days to one year.
−Removed: Subscription revenue includes the value allocated to bundled free-trials for our subscription services and is net of promotional discounts, cancellations, sales allowances and credit reserves and payments to third-party service providers such as legal plan law firms and tax service providers.
−Removed: Partner revenue —Partner revenue consists primarily of one-time or recurring referral fees earned from third-party providers from leads generated to such providers through our online legal platform.
−Removed: Revenue is recognized when the related performance-based criteria have been met.
+Added: Subscription revenue includes the transaction price allocated to bundled free trials for our subscription services and is net of promotional discounts, cancellations, sales allowances and credit reserves and payments to third-party service providers such as legal plan law firms and tax service providers.
+Added: For transaction and subscription revenue, we generally collect payments and fees at the time orders are placed and prior to services being rendered.
+Added: We record amounts collected for services that have not been performed as deferred revenue on our consolidated balance sheet.
+Added: The transaction price that we record is generally based on the contractual amounts and is reduced for estimated sales allowances for price concessions, charge-backs, sales credits and refunds, which are accounted for as variable consideration when estimating the amount of revenue to recognize.
+Added: Partner revenue —Partner revenue consists primarily of one-time or recurring fees earned from third-party providers from leads generated to such providers through our online legal platform.
+Added: Revenue is recognized when the
+Added: related performance-based criteria have been met.
We assess whether performance criteria have been met on a cost-per-click or cost-per-action basis.
5 unchanged sentences
and recognition of revenue when or as the performance obligations are satisfied.
−Removed: Our customers generally pay for transactions in advance by credit or debit card except for certain services provided under installment plans where we allow customers to pay for their order in two or three equal payments.
+Added: Our customers generally pay for transactions in advance by credit or debit card except for certain services provided under installment plans where we allow customers to pay for their order in either two, three or twelve equal payments.
The first installment due under the installment plans is charged to the customer’s debit or credit card on the date the order is placed, and the remaining installments are generally charged on a monthly basis thereafter.
We recognize revenue for the amount we expect to be entitled to for providing the services to our customers.
−Removed: The total fees collected by us for our services include, as applicable, expedited services fees, government filing fees, shipping fees and sales tax.
+Added: The total fees collected by us for our services include, as applicable, expedited services fees, government filing fees and shipping fees.
Subscription services are generally paid monthly or annually in advance of the subscription period except for SaaS services in the U.K., which are invoiced monthly in arrears.
13 unchanged sentences
We estimate sales allowances using the expected value method.
+Added: We recognize a liability or a reduction of accounts receivable, and a reduction to revenue based on the estimated amount of sales allowances.
+Added: We record sales allowances as a reduction of accounts receivable where we expect not to collect the full amount of the outstanding accounts receivable and we record sales allowances as a liability for estimated refunds or credits where we have collected the amounts due from the customer.
We have established a sufficient history of estimating sales allowances given the large number of homogeneous transactions.
−Removed: The majority of our allowances and reserves are known within
−Removed: a relatively short period of time following our balance sheet date.
+Added: The majority of our allowances and reserves are known within a relatively short period of time following our balance sheet date.
The estimated provision for sales allowances has varied from actual results within ranges consistent with management’s expectations.
8 unchanged sentences
For our transaction-based services, we generally recognize revenue at a point-in-time when the services are delivered to the customer.
−Removed: For our subscription-based services we recognize revenue on a straight-line basis over the subscription term.
+Added: For our subscription-based services we generally recognize revenue on a straight-line basis over the subscription term.
For our partner-based services, we recognize revenue at a point-in-time when the related performance-based criteria have been met.
9 unchanged sentences
In arrangements in which we are the principal, we record as revenue the amounts we have billed to our customer, net of sales allowance, and we record the fee payable to the third-party as cost of revenue.
−Removed: We are the principal in most of our legal document preparation and registered agent services, including legal entity formations and similar arrangements and formation, and formerly, conveyancing services, in the U.K.
+Added: We are the principal in most of our legal document preparation and registered agent services, including legal entity formations and similar arrangements and formation, and formerly, conveyancing services, in the U.K and since December 2021, tax advisory and preparation services through our fulfilled tax subscription, LZ Tax.
For these services, revenue includes filing and similar fees.
+Added: Our alternative business structures, or ABS, offer legal advisory services that are marketed through our websites.
+Added: Our ABSs provide independent legal advice to our customers and are directly responsible for, and control the fulfillment of, the legal services.
+Added: Accordingly, for services provided by our ABSs, we recognize revenue as the principal.
In arrangements in which we are not the principal, we record revenue on a net basis, which is equal to the amount billed to our customer, net of sales allowances and the fee payable to the third-party or partner that is primarily responsible for performing the services for the customer.
−Removed: We are not a law firm in the U.S.
+Added: Except for our Arizona ABS, we are not a law firm in the U.S.
and cannot provide legal advice through our U.S.
−Removed: entities, therefore the participating independent law firms in our legal plans control the service to the customer and have the primary service obligation to provide attorney consultations to our customers, for which we pay the law firms a monthly fee.
+Added: Therefore, the participating independent law firms in our legal plans control the service to the customer and have the primary service obligation to provide attorney consultations to our customers, for which we pay the law firms a monthly fee.
For these arrangements, we recognize revenue on a net basis as an agent.
−Removed: Since 2016, our Alternative Business Structure, or ABS, subsidiary in the U.K.
−Removed: began offering legal advisory services that were marketed through our website.
−Removed: Our ABS provides independent legal advice to our customers and is directly responsible for, and controls the fulfillment of, the legal services.
−Removed: Accordingly, for services provided by our ABS, we recognize revenue as the principal.
For other services provided by third-parties, including deed transfer, accounting, tax, credit monitoring, business data protection and logo design services, revenue is recognized net of fees payable to third-parties.
−Removed: For partner revenue, we receive a fee for the referral of our customer to the partner or we retain a portion of the fee paid by the customer and share the remainder with partner.
+Added: For partner revenue, we receive a fee for the referral of our customer to the partner or we retain a portion of the fee paid by the customer and share the remainder with the partner.
Our partner controls the service to the customer and the partner is responsible for fulfilling the referred service to the customer;
3 unchanged sentences
The results of businesses acquired in a business combination are included in our consolidated financial statements from the date of the acquisition.
−Removed: Purchase accounting results in assets and liabilities of an acquired
−Removed: business being recorded at their estimated fair values on the acquisition date.
+Added: Purchase accounting results in assets and liabilities of an acquired business being recorded at their estimated fair values on the acquisition date.
Any excess purchase consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill.
11 unchanged sentences
The quantitative analysis compares the estimated fair value of the reporting unit with its respective carrying amount, including goodwill.
−Removed: If the estimated fair value of the reporting unit exceeds its carrying amount including goodwill, goodwill is considered not to be impaired.
+Added: If the estimated fair value of the reporting unit exceeds its
+Added: carrying amount including goodwill, goodwill is considered not to be impaired.
If the fair value is less than the carrying amount including goodwill, then a goodwill impairment charge is recorded by the amount that the carrying value exceeds the fair value, up to the carrying amount of goodwill.
For our goodwill impairment test performed in the fourth quarter of 2022 and 2021, the fair value of our consolidated reporting unit significantly exceeded our carrying value.
−Removed: In 2019, we had two reporting units, the U.S.
−Removed: reporting unit and the U.K.
−Removed: reporting unit.
−Removed: reporting unit’s performance was below expectations and further deteriorated in 2019.
−Removed: Our quantitative goodwill assessment in 2019 concluded that the carrying value of the U.K.
−Removed: reporting unit exceeded its fair value, and accordingly, we impaired all the goodwill attributable to the U.K.
−Removed: reporting unit of $10.6 million.
Loss contingencies
21 unchanged sentences
We use the Black-Scholes option pricing model for estimating the fair value of options granted under our stock option plans that vest based on service and performance conditions.
−Removed: The fair value of RSUs, that vest based on service and performance conditions is determined based on the value of the underlying common stock at the date of grant.
+Added: The fair value of restricted stock units, or RSUs, that vest based on service and performance conditions is determined based on the value of the underlying common stock at the date of grant.
For awards that contain market conditions, we estimate the fair value using a Monte Carlo simulation model.
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The Black-Scholes option pricing model and the Monte Carlo simulation model requires us to make certain assumptions including the fair value of our underlying common stock, the expected term, the expected stock price volatility, the risk-free interest rates and the expected dividend yield of our common stock.
−Removed: These assumptions used in the Black-Scholes option pricing model and the Monte Carlo simulation model, other than the fair value of our common stock (see the section titled “—Common Stock Valuations” below), are estimated as follows:
+Added: These assumptions
+Added: used in the Black-Scholes option pricing model, other than the fair value of our common stock (see the section titled “Common Stock Valuations” below), are estimated as follows:
• Expected term .
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The dividend yield assumption is based on our history and expectation of dividend payouts.
−Removed: Other than the special dividends paid in 2015, 2017 and 2018 which resulted in corresponding reductions in the exercise price of the stock options, we have not declared or paid any cash dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.
+Added: Other than the special dividends declared in 2015, 2017 and 2018 which resulted in corresponding reductions in the exercise price of the stock options, we have not declared any cash dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.
Stock-based compensation expense is recognized based on awards that are ultimately expected to vest.
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The determination of stock-based compensation is inherently uncertain and subjective and involves the application of valuation models and assumptions requiring the use of judgment.
−Removed: If we had made different assumptions, our stock-based compensation expense, and our net (loss) income for 2021, 2020 and 2019, may have been materially different.
+Added: If we had made different assumptions, our stock-based compensation expense, and our net loss for 2022, 2021 and 2020, may have been materially different.
The weighted-average assumptions that were used to calculate the grant-date fair-value of our stock option grants were as follows:
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Expected dividend yield
−Removed: In 2021, we granted 970,970 stock options at a weighted-average grant-date fair value of $11.78.
−Removed: We have options that vest upon the satisfaction of service-based vesting conditions, which is typically over a four-year period.
−Removed: For these options we recognize stock-based compensation expense on a straight-line basis over the vesting period of 4 years net of forfeitures.
−Removed: We previously had various performance options that vested upon our IPO.
−Removed: These performance options will continue to vest over their remaining service period.
Restricted stock units .
−Removed: We have granted restricted stock awards as follows:
RSUs that vest upon the satisfaction of service-based vesting conditions, which is typically over a four-year period.
For these RSUs we recognize stock-based compensation expense on a straight-line basis over the vesting period of 4 years.
+Added: RSUs with performance or market conditions are recognized using graded vesting.
Common stock valuations .
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Subsequent to our IPO, we utilized our common stock values as traded in the public market as an input into our valuation models.
−Removed: Option modifications in connection with our IPO.
−Removed: For retention purposes, in connection with our IPO, we amended the vesting conditions of 4,477,218 outstanding performance options of certain executive officers and employees so that the performance options would not fully vest immediately upon an IPO.
−Removed: Instead, subject to and contingent upon the effective date of an IPO, the modified performance options for executive officers will vest monthly over a four-year period from their original vesting commencement dates and the modified performance options of certain employees will vest 25% on the first anniversary from the vesting commencement date, and then vest monthly over the remaining service period, subject to continued employment through the applicable vesting dates.
−Removed: As the modified awards contain a performance condition that is satisfied upon an IPO, we remeasured the fair value of the performance options on the date of modification.
−Removed: This new fair value of approximately $76.6 million was recognized as stock-based compensation expense using the graded vesting method, with an immediate stock-based compensation expense recognized on the effective date of our IPO for the modified performance options for which the service vesting condition was satisfied through the effective date of the IPO, and all remaining compensation will be recognized thereafter over the remaining service period.
−Removed: No compensation expense was recognized for these modified performance options until our IPO was declared effective.
−Removed: In addition, in connection with our IPO, we amended the vesting conditions of 3,627,936 outstanding performance options of an executive officer so that in the event of an IPO the modified 2019 performance option would vest monthly over a four-year period from the vesting commencement date in 2019, subject to continued employment of the executive officer, rather than vesting upon the fourth anniversary of the original date of grant based on achieving certain stock price thresholds.
−Removed: Incremental stock-based compensation expense as a result of the modification was approximately $11.4 million and was measured using a Monte Carlo simulation immediately prior to the modification date and a Black-Scholes option pricing model immediately after the modification date.
−Removed: Upon IPO, we recognized stock-based compensation expense for the modified 2019 performance option for which the service vesting condition was satisfied through the effective date of the IPO and all remaining compensation will be recognized thereafter over the remaining service period using the graded vesting method.
−Removed: In addition, we modified the vesting conditions of 111,902 outstanding performance RSUs of certain employees so that the modified performance RSUs do not vest immediately upon an IPO.
−Removed: Instead, subject to and contingent upon the effective date of an IPO, the modified performance RSUs will vest 25% on the first anniversary from the original vesting commencement dates, then vest monthly over the remaining service period, subject to the continued employment through the applicable vesting dates.
−Removed: As the modified RSUs contain a performance condition that is
−Removed: satisfied upon an IPO, we remeasured the fair value of the performance RSUs on the date of modification.
−Removed: This new fair value of approximately $2.9 million will be recognized as stock-based compensation expense using the graded vesting method, with an immediate stock-based compensation expense recognized on the effective date of our IPO for the performance RSUs for which the service vesting condition was satisfied through the effective date of the IPO, and all remaining compensation will be recognized thereafter over the remaining service period.
−Removed: No compensation expense was recognized for these modified performance RSUs until our IPO is declared effective.
−Removed: In addition, we modified the vesting conditions of 1,725,942 outstanding liquidity event RSUs, or LERSUs, and 1,706,888 outstanding time-based options of certain executive officers to amend the severance vesting acceleration benefit applicable for the LERSUs and remove the change in control vesting acceleration benefit for the time-based options.
−Removed: There was no incremental stock-based compensation associated with the modification of the time-based options.
−Removed: We remeasured the fair value of the LERSUs on the date of modification and this new fair value of approximately $43.3 million will be recognized using the graded vesting method, with an immediate stock-based compensation expense recognized on the effective date of our IPO for the modified LERSUs that have satisfied the service-vesting condition through the effective date, and all remaining compensation will be recognized thereafter over the remaining service period.
−Removed: No compensation expense was recognized for these modified LERSUs until our IPO is declared effective.
−Removed: The fair value of the modified performance options, 2019 performance option, performance RSUs and LERSUs were remeasured using the fair value of our common stock, as approved by the Pricing Committee of our board of directors, which was $25.50 per share, the midpoint of the price range set forth for the IPO.
−Removed: In June 2021, we granted RSUs to our executive officers that were contingent on the effectiveness of a registration statement, or IPO RSU Grants.
−Removed: The IPO RSU Grants had a grant-date fair value of approximately $10.9 million and the number of shares underlying the IPO RSU Grants was based on the IPO price to the public.
−Removed: In addition, we granted options to purchase shares of common stock, or IPO Options, with an exercise price that was equal to the IPO price to the public for the number of shares equal to 2.5 times the number of shares subject to the IPO RSU.
−Removed: Because the number of shares and exercise price of the IPO Options was based on the IPO price, the grant date for accounting purposes was not established until the effective date of our IPO.
−Removed: As the IPO is a performance condition, no stock-based compensation expense was recognized until our IPO was declared effective and then stock-based compensation was recognized over a weighted-average requisite service period of approximately 4.0 years.
−Removed: The actual amount of stock-based compensation cost for the IPO options was dependent upon the IPO price to the public.
−Removed: JOBS Act Accounting Election
−Removed: We are an “emerging growth company,” as defined in the Jumpstart our Business Startups Act , or JOBS Act.
−Removed: Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.
−Removed: We have elected to avail ourselves of delayed adoption of new or revised accounting standards and, therefore, we will not be subject to the same requirements to adopt new or revised accounting standards as other public companies that are not emerging growth companies.
−Removed: To the extent that we no longer qualify as an emerging growth company we will be required to adopt certain accounting pronouncements earlier than the adoption dates disclosed below which are for non-public business entities.
−Removed: In addition, we intend to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act.
−Removed: Subject to certain conditions set forth in the JOBS Act, if as an “emerging growth company” we intend to rely on such exemptions, we are not required to, among other things, (1) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 , (2) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act , (3) the requirement of the Public Company Accounting Oversight Board regarding the communication of critical audit matters in the auditor’s report on the financial statements and (4) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation.
−Removed: These exemptions will apply until the last day of the 2026 fiscal year or until we no longer meet the requirements of being an emerging growth company, whichever is earlier.
+Added: Award issuances and modifications in connection with our IPO.
+Added: For retention purposes, in connection with our IPO, we amended certain vesting conditions of existing options and RSUs, and granted additional options and RSUs to our executive officers.
+Added: See Note 16 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.
+Added: Emerging Growth Company Status
+Added: Upon completion of our IPO, we elected to be an Emerging Growth Company, or EGC, as defined in the Jumpstart Our Business Startups Act.
+Added: Effective December 31, 2022, we lost our EGC status due to becoming a “large accelerated filer”.
+Added: As a result, we must comply with all financial disclosure and governance requirements applicable to a “large accelerated filer”.
+Added: For further information, see Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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.