LEGALZOOM.COM, INC. 10-K

Item 8. Financial Statements and Supplementary Data LEGALZOOM.COM, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 54 Audited Consolidated Financial Statements: Consolidated Balance Sheets 57 Consolidated Statements of Operations 58 Consolidated Statements of Comprehensive (Loss) Income 59 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit ) 60 Consolidated Statements of Cash Flows 61 Notes to Consolidated Financial Statements 63 53 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of LegalZoom.com, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of LegalZoom.com, Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, of comprehensive (loss) income, of redeemable convertible preferred stock and stockholders' equity (deficit) and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because material weaknesses in internal control over financial reporting existed as of that date related to the Company (i) not maintaining an effective control environment, specifically insufficient accounting resources commensurate with the Company’s structure and reporting requirements; (ii) not designing and maintaining effective controls to address the initial application of complex accounting standards and accounting of non-routine, unusual or complex events and transactions; and (iii) not designing and maintaining effective controls over the financial statement close process, specifically ineffective controls over the income tax provision and certain account analyses and account reconciliations. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the December 31, 2022 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2022. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance 54 with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition As described in Note 2 to the consolidated financial statements, the Company’s consolidated revenue was $620 million for the year ended December 31, 2022. The Company recognizes revenue when the performance obligation is satisfied by transferring the promised good or service to the customer. For transaction-based services, revenue is generally recognized at a point-in-time when the services are delivered to the customer. For subscription-based services, revenue is generally recognized on a straight-line basis over the subscription term. For partner-based services, revenue is recognized at a point-in-time when the related performance-based criteria have been met. Services can generally either be purchased on a stand-alone basis or bundled together as part of a package of services. Accordingly, a significant number of arrangements include multiple performance obligations. The transaction price is based on the contractual amounts and is allocated to each separate performance obligation based on the amount of consideration which the Company expects to be entitled in exchange for the services. The principal considerations for our determination that performing procedures relating to revenue recognition is a critical audit matter is the high degree of auditor effort in performing procedures related to revenue recognized. As described in the “Opinions on the Financial Statements and Internal Control over Financial Reporting” section, material weaknesses were identified related to this matter. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process. These procedures also included, among others, evaluating the revenue recognized on a sample basis by obtaining and inspecting source documents, including invoices, customer contracts, proof of delivery, and cash receipts from customers, where applicable. Deferred Tax Assets and Related Valuation Allowance As described in Notes 2 and 20 to the consolidated financial statements, the Company’s consolidated deferred tax asset balance was $63 million and related valuation allowance was $15 million as of December 31, 2022. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events and are measured using enacted tax rates anticipated to be in effect when the tax assets and liabilities are expected to be realized or settled. Management makes judgments in evaluating whether deferred tax assets will be recovered from future taxable income. A valuation allowance is established if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Management considers all available evidence, both positive and negative, including historical levels of income, expectations and risk associated with estimates of future taxable income in assessing the need for a valuation allowance. The principal considerations for our determination that performing procedures relating to deferred tax assets and the related valuation allowance is a critical audit matter are (i) the significant judgment by management when evaluating if it is more likely than not that some or all of the deferred tax assets will not be realized; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating available evidence, both positive and negative, including historical levels of income and estimates of future taxable income in assessing the need for a valuation allowance; and (iii) as described in the “Opinions on the Financial Statements and Internal Control over Financial Reporting” section, material weaknesses were identified related to this matter. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others (i) testing 55 management’s process for assessing the realizability of deferred tax assets on a jurisdictional basis; (ii) testing the completeness and accuracy of the underlying data used in management’s assessment; (iii) testing the appropriateness of the enacted tax rates anticipated to be in effect when the deferred tax assets and liabilities are expected to be realized or settled; and (iv) evaluating available evidence, both positive and negative, including historical levels of income and estimates of future taxable income in assessing the need for a valuation allowance. /s/ PricewaterhouseCoopers LLP Los Angeles, California March 1, 2023 We have served as the Company’s auditor since 2006. 56 LegalZoom.com, Inc. Consolidated Balance Sheets (In thousands, except par values) December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 189,082 $ 239,297 Accounts receivable, net of allowance for credit losses of $ 4,730 and $ 4,060 13,177 10,635 Prepaid expenses and other current assets 16,699 16,589 Current assets held for sale 22,722 — Total current assets 241,680 266,521 Property and equipment, net 30,823 47,013 Goodwill 63,229 59,910 Intangible assets, net 18,900 16,031 Operating lease right-of-use assets 11,148 — Deferred income taxes 29,380 27,653 Available-for-sale debt securities (amortized cost of $ 812 and $ 792 ) 995 1,122 Other assets 9,240 12,765 Total assets $ 405,395 $ 431,015 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 25,312 $ 31,788 Accrued expenses and other current liabilities 57,373 50,817 Deferred revenue 164,200 146,364 Operating lease liabilities 2,317 — Total current liabilities 249,202 228,969 Operating lease liabilities, non-current 8,958 — Deferred revenue 892 1,554 Other liabilities 3,968 2,941 Total liabilities 263,020 233,464 Commitments and contingencies (Note 14) Stockholders’ equity: Preferred stock, $ 0.001 par value 100,000 shares authorized at December 31, 2022 and 2021, none issued or outstanding at December 31, 2022 and 2021 — — Common stock, $ 0.001 par value; 1,000,000 and 1,000,000 shares authorized; 190,822 and 198,084 shares issued and outstanding at December 31, 2022 and 2021, respectively 190 198 Additional paid-in capital 1,032,550 947,160 Accumulated deficit ( 891,862 ) ( 748,012 ) Accumulated other comprehensive income (loss) 1,497 ( 1,795 ) Total stockholders’ equity 142,375 197,551 Total liabilities and stockholders’ equity $ 405,395 $ 431,015 The accompanying notes are an integral part of these consolidated financial statements 57 LegalZoom.com, Inc. Consolidated Statements of Operations (In thousands, except per share amounts) Year Ended December 31, 2022 2021 2020 Revenue $ 619,979 $ 575,080 $ 470,636 Cost of revenue 211,095 189,364 154,563 Gross profit 408,884 385,716 316,073 Operating expenses: Sales and marketing 263,884 279,281 171,390 Technology and development 70,434 84,003 41,863 General and administrative 116,057 106,584 51,017 Impairment of long-lived and other assets 248 924 1,105 Loss on sale of business — — 1,764 Total operating expenses 450,623 470,792 267,139 (Loss) income from operations ( 41,739 ) ( 85,076 ) 48,934 Interest income (expense), net 1,543 ( 27,984 ) ( 35,504 ) Other (expense) income, net ( 4,477 ) 1,193 3,713 Impairment of other equity security ( 3,000 ) — — Loss on debt extinguishment — ( 7,748 ) — Impairment of available-for-sale debt securities of $ 4,912 , net of $ 94 loss recognized in other comprehensive loss — — ( 4,818 ) (Loss) income before income taxes ( 47,673 ) ( 119,615 ) 12,325 Provision for (benefit from) income taxes 1,060 ( 10,951 ) 2,429 Net (loss) income $ ( 48,733 ) $ ( 108,664 ) $ 9,896 Net (loss) income attributable to common stockholders—basic $ ( 48,733 ) $ ( 108,664 ) $ 7,223 Net (loss) income attributable to common stockholders—diluted $ ( 48,733 ) $ ( 108,664 ) $ 7,262 Net (loss) income per share attributable to common stockholders: Basic $ ( 0.25 ) $ ( 0.67 ) $ 0.06 Diluted $ ( 0.25 ) $ ( 0.67 ) $ 0.06 Weighted-average shares used to compute net (loss) income per share attributable to common stockholders: Basic 195,829 161,424 124,709 Diluted 195,829 161,424 127,259 The accompanying notes are an integral part of these consolidated financial statements 58 LegalZoom.com, Inc. Consolidated Statements of Comprehensive (Loss) Income (In thousands) Year Ended December 31, 2022 2021 2020 Net (loss) income $ ( 48,733 ) $ ( 108,664 ) $ 9,896 Other comprehensive income (loss), net of tax: Change in foreign currency translation adjustments 3,436 936 ( 1,296 ) Change in available-for-sale debt securities: Unrealized (losses) gains, net ( 144 ) 38 108 Reclassifications of losses to net income — — ( 94 ) Total change in available-for-sale debt securities ( 144 ) 38 14 Change in unrealized gain (loss) on cash flow hedges: Unrealized gain (loss) on interest rate cap and swaps — 1,448 ( 9,578 ) Reclassification of prior hedge effectiveness and losses from interest rate cap to net (loss) income — 2,315 2,760 Reclassification to net (loss) income upon discontinuance of interest rate swaps and prior hedge effectiveness — 7,295 — Total net changes in cash flow hedges — 11,058 ( 6,818 ) Total other comprehensive income (loss) 3,292 12,032 ( 8,100 ) Total comprehensive (loss) income $ ( 45,441 ) $ ( 96,632 ) $ 1,796 The accompanying notes are an integral part of these consolidated financial statements 59 LegalZoom.com, Inc. Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) (In thousands) Series A Redeemable Convertible Preferred Stock Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive (loss) Income Total Stockholders’ Equity (Deficit) Shares Amount Shares Amount Balance at December 31, 2019 23,081 $ 70,906 124,382 $ 125 $ 92,916 $ ( 644,305 ) $ ( 5,727 ) $ ( 556,991 ) Issuance of common stock upon exercise of stock options — — 1,270 1 599 — — 600 Issuance of common stock upon vesting of restricted stock awards — — 245 — — — — — Shares surrendered for settlement of minimum statutory tax withholdings — — ( 371 ) — ( 3,825 ) — — ( 3,825 ) Stock-based compensation — — — — 12,940 — — 12,940 Net issuance and repayments of full recourse notes receivable — — — — ( 8 ) — — ( 8 ) Repurchase and retirement of common stock — — ( 489 ) — — ( 4,939 ) — ( 4,939 ) Special dividends — — — — ( 205 ) — — ( 205 ) Other comprehensive loss — — — — — — ( 8,100 ) ( 8,100 ) Net income — — — — — 9,896 — 9,896 Balance at December 31, 2020 23,081 $ 70,906 125,037 $ 126 $ 102,417 $ ( 639,348 ) $ ( 13,827 ) $ ( 550,632 ) Issuance of common stock upon exercise of stock options — — 831 — 534 — — 534 Issuance of common stock upon vesting of restricted stock awards and ESPP — — 938 1 1,244 — — 1,245 Shares surrendered for settlement of minimum statutory tax withholdings — — ( 87 ) — ( 2,342 ) — — ( 2,342 ) Stock-based compensation — — — — 113,270 — — 113,270 Conversion of redeemable convertible preferred stock to common stock in connection with initial public offering ( 23,081 ) ( 70,906 ) 46,162 46 70,860 — — 70,906 Issuance of common stock in connection with initial public offering, net of underwriting discounts and commissions — — 21,989 22 581,811 — — 581,833 Private placement of common stock, net of underwriting discounts and commissions — — 3,214 3 85,047 — — 85,050 Stock issuance costs — — ( 5,636 ) — — ( 5,636 ) Net issuance and repayments of full recourse notes receivable — — — — 43 — — 43 Special dividends — — — — ( 88 ) — — ( 88 ) Other comprehensive income — — — — — — 12,032 12,032 Net loss — — — — — ( 108,664 ) — ( 108,664 ) Balance at December 31, 2021 — $ — 198,084 $ 198 $ 947,160 $ ( 748,012 ) $ ( 1,795 ) $ 197,551 Issuance of common stock upon exercise of stock options and ESPP — — 540 — 2,436 — — 2,436 Issuance of common stock upon vesting of restricted stock unit awards — — 1,458 1 — — — 1 Shares surrendered for settlement of minimum statutory tax withholdings — — ( 4 ) — ( 41 ) — — ( 41 ) Stock-based compensation — — — — 82,995 — — 82,995 Repurchase and retirement of common stock — — ( 9,256 ) ( 9 ) — ( 95,117 ) — ( 95,126 ) Other comprehensive income — — — — — — 3,292 3,292 Net loss — — — — — ( 48,733 ) — ( 48,733 ) Balance at December 31, 2022 — $ — 190,822 $ 190 $ 1,032,550 $ ( 891,862 ) $ 1,497 $ 142,375 The accompanying notes are an integral part of these consolidated financial statements 60 LegalZoom.com, Inc. Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2022 2021 2020 Cash flows from operating activities Net (loss) income $ ( 48,733 ) $ ( 108,664 ) $ 9,896 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 21,745 16,686 20,097 Amortization of debt issuance costs 227 1,392 2,591 Amortization of prior hedge effectiveness — 3,095 3,481 Amortization of right-of-use assets 2,049 — — Stock-based compensation 80,469 112,596 12,894 Impairment of long-lived assets 248 924 1,105 Impairment of other equity security 3,000 — — Impairment of available for sale debt security — — 4,818 Loss on debt extinguishment — 7,955 — Discontinuance of interest rate swaps and write-off of prior hedge effectiveness — 8,688 — Loss on sale of business — — 1,764 Deferred income taxes ( 793 ) ( 11,595 ) 1,325 Change in fair value of contingent consideration ( 150 ) — — Change in fair value of financial guarantee — ( 150 ) ( 1,750 ) Change in fair value of derivative instruments — 392 205 Change in fair value of other equity security — ( 1,812 ) — Unrealized foreign exchange loss (gain) 3,558 943 ( 1,755 ) Other 168 4 22 Changes in operating assets and liabilities, net of effects of business combinations, asset acquisition and disposal of business: Accounts receivable ( 2,505 ) ( 1,511 ) 954 Prepaid expenses and other current assets ( 523 ) ( 4,965 ) ( 799 ) Other assets 179 ( 3,648 ) 1,153 Accounts payable ( 6,609 ) 2,360 12,416 Accrued expenses and other liabilities 6,535 13,781 1,418 Operating lease liabilities ( 2,135 ) — — Income tax payable 28 ( 185 ) 10 Deferred revenue 17,079 17,866 23,204 Net cash provided by operating activities 73,837 54,152 93,049 Cash flows from investing activities Acquisitions, net of cash acquired ( 2,532 ) ( 61,523 ) ( 934 ) Asset acquisition, net of cash acquired ( 6,299 ) — — Proceeds from acquisition working capital adjustment 307 — — Purchase of property and equipment ( 22,098 ) ( 11,740 ) ( 10,587 ) Payment upon extinguishment of interest rate swaps — ( 3,283 ) — Purchase of other equity security — ( 1,127 ) — The accompanying notes are an integral part of these consolidated financial statements 61 LegalZoom.com, Inc. Consolidated Statements of Cash Flows (continued) (In thousands) Year Ended December 31, 2022 2021 2020 Sale of business, net of cash sold — — ( 1,206 ) Net cash used in investing activities ( 30,622 ) ( 77,673 ) ( 12,727 ) Cash flows from financing activities Repayment of finance and capital lease obligations ( 14 ) ( 31 ) ( 31 ) Payment of debt issuance costs — ( 767 ) — Repayment of 2018 Term Loan — ( 524,300 ) ( 5,350 ) Proceeds from 2018 Revolving Facility — — 40,000 Repayment of 2018 Revolving Facility — — ( 40,000 ) Repayment of hybrid debt — ( 1,332 ) ( 1,249 ) Payment upon extinguishment of hybrid debt — ( 9,774 ) — Payment of contingent consideration ( 600 ) ( 1,049 ) — Repurchase and retirement of common stock ( 95,126 ) — ( 4,805 ) Tender offer costs — — ( 145 ) Payment of special dividends — ( 112 ) ( 284 ) Proceeds from issuance of common stock in initial public offering, net of underwriting discounts and commissions — 581,833 — Proceeds from private placement, net of underwriting discounts and commissions — 85,050 — Payment of stock issuance costs — ( 5,636 ) — Repurchase and retirement of common stock for tax withholding obligations ( 41 ) ( 2,342 ) ( 3,606 ) Proceeds from issuance of stock under employee stock plans 2,438 1,819 381 Net cash (used in) provided by financing activities ( 93,343 ) 123,359 ( 15,089 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash equivalent ( 87 ) ( 11 ) 57 Net (decrease) increase in cash, cash equivalents and restricted cash equivalent ( 50,215 ) 99,827 65,290 Cash, cash equivalents and restricted cash equivalent, at beginning of the period 239,297 139,470 74,180 Cash, cash equivalents and restricted cash equivalent, at end of the period $ 189,082 $ 239,297 $ 139,470 Supplemental cash flow data Cash paid during the year for: Interest $ — $ 12,284 $ 27,864 Income taxes 741 1,459 1,485 Reconciliation of cash, cash equivalents, and restricted cash equivalent reported in the consolidated balance sheets Cash and cash equivalents $ 189,082 $ 239,297 $ 114,470 Restricted cash equivalent — — 25,000 Total cash, cash equivalents, and restricted cash equivalent shown in the consolidated statements of cash flows $ 189,082 $ 239,297 $ 139,470 Non-cash investing and financing activities Right of use assets obtained in exchange for new operating lease liabilities $ 7,528 $ — $ — Capitalized stock-based compensation 2,526 674 46 Purchase of property and equipment included in accounts payable and accrued expenses and other current liabilities 646 676 717 Conversion of Series A redeemable convertible preferred stock into common stock in connection with initial public offering — 70,906 — Change in fair value of hedged interest rate swaps and interest rate cap — ( 5,817 ) 412 Transfer of interest rate swaps derivative liability to hybrid debt — — 12,345 Contingent consideration for business acquired — — 1,250 The accompanying notes are an integral part of these consolidated financial statements 62 LegalZoom.com, Inc. Notes to Consolidated Financial Statements Note 1. Description of the Business LegalZoom.com, Inc., was initially formed as a California corporation in 1999 and reincorporated as a Delaware corporation in 2007. LegalZoom.com, Inc., and its wholly owned subsidiaries, are referred to herein as “we,” “us,” or “our,”. We are a provider of services that meet the legal needs of small businesses and consumers. Our position at business inception allows us to become a trusted business advisor, supporting the evolving needs of a new business across its lifecycle. Along with business formation, our offerings include ongoing compliance and tax advice and filings, virtual mailbox solutions, trademark filings, and estate plans. Additionally, we have insights into our customers and leverage our offerings as a channel to introduce small businesses to leading brands in our partner ecosystem, solving even more of their business needs. Initial Public Offering 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. 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. 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. In addition, on July 2, 2021, we sold 3,214,285 shares of our common stock in a private placement with an existing related party stockholder for proceeds of $ 85.0 million, net of underwriting discounts and commissions. We raised aggregate proceeds of $ 666.9 million from our IPO and private placement after deducting underwriting discounts and commissions. We incurred stock issuance costs of $ 5.6 million. Proceeds raised from our IPO were used to repay the full outstanding balance of $ 521.6 million on our 2018 Term Loan. Upon the completion of our IPO, 23,081,080 outstanding shares of redeemable convertible preferred stock with a carrying value of $ 70.9 million converted into 46,162,160 shares of common stock. Following the completion of the IPO, we have one class of authorized and outstanding common stock. Note 2. Summary of Significant Accounting Policies A summary of the significant accounting policies we follow in the preparation of the accompanying consolidated financial statements is set forth below. Basis of Presentation and Consolidation The accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America, or GAAP. All intercompany balances and transactions have been eliminated in consolidation. On occasion, we enter into relationships or investments with other entities that may be a variable interest entity, or VIE. We analyze our interests, including agreements, loans, guarantees, and equity investments on a periodic basis to determine if such interests are variable interests. If variable interests are identified, then the related entity is assessed to determine if it is a VIE. If we determine that the entity is a VIE, we then assess if we must consolidate the VIE as the primary beneficiary. Our determination of whether we are the primary beneficiary is based upon qualitative and quantitative analyses, which assess the purpose and design of the VIE, the nature of the VIE’s risks and the risks that we absorb, the power to direct activities that most significantly impact the economic performance of the VIE, and the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. Use of 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. Estimates are used for, however not limited to, revenue recognition, sales allowances and expected credit loss allowances, available-for-sale debt securities, other equity 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. On an ongoing basis, we evaluate the estimates compared to historical experience and other factors including the current economic and regulatory environment, which form the basis for our judgments about the carrying value of assets and liabilities. 63 Business Combinations The results of businesses acquired in a business combination are included in our consolidated financial statements from the date of the acquisition. 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. We perform valuations of assets acquired and liabilities assumed for an acquisition and allocate the purchase price to their respective net tangible and intangible assets. Determining the fair value of assets acquired and liabilities assumed requires management to use judgment and estimates including the selection of valuation methodologies, estimates of cash flows, discount rates and selection of comparable companies. We generally engage the assistance of a third-party valuation firm in determining fair values of assets acquired and liabilities assumed and contingent consideration, if any, in a business combination. Transaction costs associated with business combinations are expensed as incurred and are included in general and administrative expenses in the accompanying consolidated statements of operations. Asset Acquisitions We evaluate acquisitions to determine whether the acquisition should be classified as either a business combination or an asset acquisition. Acquisitions for which substantially all of the fair value of the gross assets acquired are concentrated in a single identifiable asset or a group of similar identifiable assets are accounted for as an asset acquisition. If the gross assets are not concentrated in a single asset or group of similar assets, we then determine if the set of assets acquired represents a business. A business is an integrated set of activities and assets capable of being conducted and managed for the purpose of providing a return. Depending on the nature of the acquisition, judgment may be required to determine if the set of assets acquired is a business combination or not. We allocate the purchase price on a relative fair value basis and capitalize direct acquisition related costs as part of the purchase price. In making estimates of fair values for purposes of allocating the purchase price, we utilize an independent third-party to value the net tangible and identified intangible assets in connection with the acquisition. Segment and Geographic Information Our Chief Executive Officer, as the Chief Operating Decision Maker organizes our company, manages resource allocations, and measures performance on the basis of one operating segment. Revenue outside of the U.S., based on the location of the customer, represented less than 1 % of our revenue for the years ended December 31, 2022, 2021 and 2020. Our property and equipment located outside of the U.S. was less than 1 % of our consolidated property and equipment as of December 31, 2022 and 2021. Foreign Currency The British Pound Sterling is the functional currency for our foreign subsidiaries in U.K.. The financial statements of these foreign subsidiaries in U.K. are translated to U.S. Dollars using period-end rates of exchange for assets and liabilities, historical rates of exchange for equity, and average rates of exchange for the period for revenue and expenses. Translation gains and losses are recorded in accumulated other comprehensive income (loss) as a component of our consolidated statements of redeemable convertible preferred stock and stockholders’ equity (deficit). We recognized foreign currency transaction losses in the accompanying consolidated statement of operations of $ 3.6 million and $ 0.9 million for 2022, 2021, and gain of $ 1.8 million for 2020, respectively. Fair Value Measurements Fair value is defined as the price that would be received from selling an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows: Level 1 — Quoted prices in active markets for identical assets and liabilities. Level 2 — Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly. Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. At December 31, 2022 and 2021, our financial assets and liabilities recorded at fair value on a recurring basis consist of a cash equivalent and available-for-sale debt securities and contingent consideration from acquisitions. The cash equivalent consists of a money market fund valued using quoted prices in active markets, which represents Level 1 inputs in the fair value hierarchy. The available-for-sale debt securities are valued using a Monte Carlo simulation, which include inputs that represent Level 3 inputs in the fair value hierarchy. Contingent consideration is valued using 64 the present value and probability of the estimated future cash outflow, which include inputs that represent Level 3 inputs in the fair value hierarchy. The carrying amounts of accounts receivable, accounts payable and accrued expenses and other current liabilities approximate fair values because of the short-term nature of these items. Concentrations of Credit Risk We maintain accounts in U.S. and U.K. banks with funds insured by the Federal Deposit Insurance Corporation, or FDIC, and the Financial Services Compensation Scheme, or FSCS, respectively. Our bank accounts may, at times, exceed the FDIC and FSCS insured limits. Financial instruments that potentially subject us to credit risk consist principally of cash and cash equivalents. Management believes that we are not exposed to any significant credit risk related to our cash or cash equivalents and have not experienced any losses in such accounts. Due to a large and diverse customer base, no individual customer represented more than 1% of total revenue in December 31, 2022, 2021 and 2020, respectively. At December 31, 2022 and 2021, there were no customers with an outstanding balance of 10% or more of our accounts receivable balance. Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid investments with original maturities of ninety days or less from the date of purchase. At December 31, 2022 and 2021, our cash consisted of bank account deposits and our cash equivalent consisted of $ 130.2 million and $ 30.2 million invested in a money market fund, respectively. Restricted Cash Equivalent Our restricted cash equivalent balance of $ 25.0 million as of December 31, 2020 represented cash required to be held as collateral by a financial institution to guarantee up to half of a $$ 50.0 million personal loan provided by the financial institution to a former executive officer. At December 31, 2020, our restricted cash equivalent of $ 25.0 million was invested in a money market fund with the same financial institution. In June 2021, our financial guarantee of the personal loan of a former executive officer was terminated. The associated restricted cash equivalent of $ 25.0 million became unrestricted and was reclassified to cash and cash equivalents. Accounts Receivable and Allowance for Credit Losses Our accounts receivable balances, which are not collateralized and do not bear interest, primarily consist of amounts receivable from our credit and debit card merchant processors, customer receivables, and fees due from third-parties for services purchased by our customers from such third-parties. We reduce our accounts receivable for sales allowances and a reserve for potentially uncollectible receivables. We determine the amount of the allowances based on various factors including historical collection experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect our ability to collect from customers. Account balances are charged off against the allowance when we determine that it is not probable we will collect the receivable. As of December 31, 2022 and 2021, the allowance for credit losses was not material. Property and Equipment Property and equipment are stated at cost, less accumulated depreciation. Repairs and maintenance are expensed as incurred whereas significant renewals and enhancements are capitalized. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation are removed from the respective accounts and any resulting gain or loss is reflected in our results of operations. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets as follows: Useful Life (Years) Purchased and internally developed internal-use software 3 Building and building improvements 5 – 30 Land improvements 7 Furniture and office equipment 5 Computer hardware 3 Land Indefinite Leasehold improvements Shorter of lease term or useful life 65 Internal-use Software and Cloud Computing Arrangements Software development costs include costs to develop software to be used to meet internal needs and applications used to deliver our services. We capitalize development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended. We amortize internal-use software costs on a straight-line basis over their estimated useful life of three years commencing when the internal-use software is substantially complete and ready for its intended purpose. Costs related to development of internal-use software are included in the accompanying consolidated balance sheets in property and equipment, net. Costs related to implementation of cloud computing arrangements that do not include a software license are included in the accompanying consolidated balance sheets in prepaid and other current assets and non-current assets and are amortized over the contractual term of the underlying service arrangement. Intangible Assets and Other Long-Lived Assets Intangible assets are stated at cost, net of accumulated amortization. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives, which approximates the pattern in which the economic benefits are consumed. We amortize our intangible assets over an estimated useful life of two to six years . We assess the impairment of long-lived assets, which consist primarily of property and equipment, right of use assets, acquired intangible assets, and capitalized internal-use software costs, whenever events or changes in circumstances indicate that such assets might be impaired and the carrying value may not be recoverable. Impairment testing is performed at an asset level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, or an asset group. If an asset group is considered impaired, an impairment loss equal to the excess of the asset group’s carrying value over their fair value is recorded. Fair value is determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risk involved, quoted market prices, or appraised values, depending on the nature of the assets. Goodwill Goodwill represents the excess of the aggregate fair value of the consideration transferred in a business combination over the fair value of the assets acquired, net of liabilities assumed. Goodwill is not amortized, however, it is subject to impairment testing at the reporting unit level annually during the fourth quarter of our fiscal year or more frequently if events or changes in circumstances indicate that goodwill may be impaired. In assessing impairment, we have the option to first assess qualitative factors to determine whether or not a reporting unit is impaired. Alternatively, we may perform a quantitative impairment assessment, or if the qualitative assessment indicates that it is more-likely-than-not that the reporting unit’s fair value is less than its carrying amount, a quantitative analysis is required. The quantitative analysis compares the estimated fair value of the reporting unit with its respective carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its 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. Derivative Financial Instruments Derivative financial instruments, which include interest rate swaps, an interest rate cap, and a financial guarantee relating to a former executive officer, are recorded at fair value. For derivatives that qualify for hedge accounting, specifically as cash flow hedges, the change in fair value of the derivatives is recorded as an unrealized gain (loss), net of taxes, in the accompanying consolidated statements of comprehensive (loss) income. For derivatives that do not qualify for hedge accounting, the change in the fair value of our derivatives related to our long-term debt are recorded in interest expense, net, and the change in the fair value of our financial guarantee is recorded in other income, net, in the accompanying consolidated statements of operations. In 2021, our derivative positions were extinguished in connection with our IPO and full repayment of our long-term debt. Available-for-sale Debt Securities At December 31, 2022 and 2021, we held long-term investments of certain privately held companies through the purchase of convertible promissory notes. These investments are classified as available-for-sale debt securities. For available-for-sale debt securities that have the estimated fair values below their amortized cost basis, we evaluate our intent to sell the security or whether we will more likely than not be required to sell the security before recovery of its amortized cost basis. If either of these criteria are met, the security’s amortized cost basis is written down to its fair value through earnings. If these criteria are not met, we evaluate whether the decline in fair value has resulted from credit loss or other factors. If the assessment indicates a credit loss exists, the credit-related portion of the loss is recorded as allowance for credit loss with a corresponding credit loss expense, included in the consolidated statement of operations. If the assessment indicates a credit loss does not exist, impairment is recognized in other comprehensive income (loss), net of applicable taxes. 66 Investments in Other Equity Securities We hold investments in equity securities of certain privately held companies, which do not have readily determinable fair values. We have elected to measure these non-marketable investments at cost, with remeasurements to fair value only upon the occurrence of observable price changes in orderly transactions for identical or similar securities of the same issuer, or in the event of any impairment. This election is reassessed each reporting period to determine whether a non-marketable equity security has a readily determinable fair value, in which case they would no longer be eligible for this election. We evaluate our non-marketable equity securities for impairment at each reporting period based on a qualitative assessment that considers various potential impairment indicators. If an impairment exists, a loss is recognized in the consolidated statements of operations for the amount by which the carrying value exceeds the fair value of the investment. We include investments in equity securities within other assets in the accompanying consolidated balance sheets. Held for Sale We classify long-lived assets or asset groups we plan to sell as held for sale on our consolidated balance sheets only after certain criteria have been met including: management has the authority and commits to a plan to sell the asset, the asset is available for immediate sale in its present condition, an active program to locate a buyer and the plan to sell the asset have been initiated, the sale of the asset is probable within twelve months, the asset is being actively marketed at a reasonable sales price relative to its current fair value, and it is unlikely that the plan to sell will be withdrawn or that significant changes to the plan will be made. We record assets or asset groups held for sale at the lower of their carrying value or fair value less costs to sell. Once classified as held for sale, depreciation and amortization is not recorded for any long-lived assets. Leases On January 1, 2022, we adopted Accounting Standards Update, or ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02 and related amendments, using the modified retrospective method. Financial information related to periods prior to adoption will be as originally reported under Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, No. 840, Leases . On January 1, 2022, we recorded operating lease right-of-use, or ROU, assets of $ 5.7 million and operating lease liabilities of $ 5.9 million. The difference between the leased assets and lease liabilities represents the existing deferred rent liabilities balance at adoption, resulting from historical straight-line recognition of operating leases, which was reclassified upon adoption to reduce the measurement of the leased assets. The adoption of the standard did not have a material impact on our stockholders’ equity, results of operations, or cash flows. The new standard provides several optional practical expedients in transition. We elected the package of practical expedients permitted under the transition guidance, which eliminates the requirement to reassess whether a contract contains a lease and lease classification. We have also made accounting policy elections, including a short-term lease exception policy, permitting us to not apply the recognition requirements of this standard to short-term leases, which are leases with expected terms of twelve months or less, and an accounting policy to account for lease and certain non-lease components as a single component for certain classes of assets. Additionally, we used the portfolio approach when applying the discount rate selected based on the dollar amount and term of the obligation. We determined whether an arrangement is a lease, or contains a lease, at inception if we are able to identify an asset and can conclude we have the right to control the identified asset for a period of time. Leases are included in operating lease ROU assets and operating lease liabilities in the accompanying consolidated balance sheets. Leases with an initial term of twelve months or less are not recorded in our accompanying consolidated balance sheet. ROU assets represent our right to control an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit rate, we use the incremental borrowing rate based on the information available at commencement date in determining the discount rate used to present value lease payments. We used the incremental borrowing rate on January 1, 2022 for operating leases that commenced on or prior to that date. The incremental borrowing rate used is estimated based on what we would be required to pay for a collateralized loan over a similar term. Our leases typically do not include any residual value guarantees, bargain purchase options, or asset retirement obligations. Our lease terms are only for periods in which we have enforceable rights. A lease is no longer enforceable when both the lessee and the lessor each have the right to terminate the lease without permission from the other party with no more than an insignificant penalty. Our lease terms are impacted by options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We generally use the base, non-cancelable lease term when determining the lease assets and liabilities. Our agreements may contain variable lease payments. We include variable lease payments that depend on an index or a rate and exclude those which depend on facts or circumstances occurring after the commencement date, other than the passage of time. 67 Financial information related to periods prior to adoption will be as originally reported under ASC 840, Leases . Debt Issuance Costs Debt issuance costs associated with our term loans are deducted from the carrying value of current and long-term debt in the accompanying consolidated balance sheets and are amortized over the term of the loan using the effective interest method. Debt issuance costs associated with revolving facilities are classified as other assets in the accompanying consolidated balance sheets and are amortized over the term of the respective facility on a straight-line basis over the term of the revolving facilities. Debt issuance costs are amortized to interest expense, net in the accompanying consolidated statements of operations. In 2021, upon the full repayment of our long-term debt in connection with our IPO, we recorded a loss on debt extinguishment of $ 7.7 million, which mainly consisted of unamortized debt issuance costs. Deferred Offering Costs We record certain legal, accounting, and other third-party fees in other assets that are directly associated with in-process equity financings until such financings are consummated. After consummation, these costs are recorded in stockholders’ equity (deficit) as a reduction from the proceeds of the offering. Should the equity financing no longer be considered probable of being consummated, the deferred offering costs are expensed in the consolidated statements of operations within income from operations. In 2021, we incurred $ 5.6 million related to our IPO, which is included in additional-paid in capital in the accompanying consolidated statements of redeemable convertible preferred stock and stockholders equity (deficit). There were no deferred stock issuance costs recognized in other assets as of December 31, 2022 or 2021. Revenue Recognition We derive our revenue from the following sources: Transaction revenue —Transaction revenue is primarily generated from our customized legal document services upon fulfillment of these services. Transaction revenue includes filing fees and is net of cancellations, promotional discounts, sales allowances and credit reserves. 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. Subscription revenue —Subscription revenue is generated primarily from subscriptions to our registered agent services, compliance packages, attorney advice, legal forms services, tax services, and virtual mail services in addition to software-as-a-service, or SaaS, subscriptions in the U.K. We generally recognize revenue from our subscriptions ratably over the subscription term. Subscription terms generally range from thirty days to one year. 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. We record amounts collected for services that have not been performed as deferred revenue on our consolidated balance sheet. 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. 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. Revenue is recognized when the 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. Revenue from our transaction, subscription and partner revenue is as follows (in thousands): Year Ended December 31, 2022 2021 2020 Transaction $ 239,799 $ 258,122 $ 212,114 Subscription 358,023 288,941 229,840 Partner 22,157 28,017 28,682 Total revenue $ 619,979 $ 575,080 $ 470,636 We determine revenue recognition through the following five steps: identification of a contract with a customer; identification of the performance obligations in the contract; determination of the transaction price; allocation of the transaction price to the performance obligations in the contract; and recognition of revenue when or as the performance obligations are satisfied. 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 three equal payments. The first 68 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. 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. Amounts collected in advance of revenue recognition are recorded in deferred revenue. Customers may pay for services, however, may not provide the necessary information to complete a transaction. We attempt to contact the customer to complete the abandoned order. We recognize revenue on abandoned services, or breakage, when it is likely to occur and the amount can be recognized without significant risk of reversal. We recognize breakage in proportion to the pattern of rights exercised by the customer. Judgment is required to determine the amount of breakage and when breakage is likely to occur, which we estimate based on historical data of breakage for similar services. Services we offer can generally either be purchased on a stand-alone basis or bundled together as part of a package of services. Accordingly, a significant number of our arrangements include multiple performance obligations, such as the preparation of legal documents combined with related document revision, registered agent services, and free trial periods of our legal plans. At contract inception, we assess the services promised in our contracts with customers and identify performance obligations for each promise to transfer to the customer a service or bundle of services that is distinct. The identification of distinct performance obligations within our packages may require significant judgment. The transaction price allocated to each separate performance obligation represents the amount of consideration to which we expect to be entitled in exchange for the services we provide. The transaction price is based on the contractual amounts in our contracts 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. We only include variable consideration in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. We estimate sales allowances using the expected value method. We recognize a liability or a reduction of accounts receivable, and a reduction to revenue based on the estimated amount of sales allowances. 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. 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. The transaction price excludes sales taxes. Contracts with our customers may include options to purchase additional future services, and in the case of subscription services, options to auto-renew the subscription service. Additional consideration attributable to either the option to purchase additional future services or the option to renew are excluded from the transaction price until such time that the option is exercised, unless these options provide a material right to the customer. For arrangements that contain multiple performance obligations, such as our bundled arrangements, we allocate the transaction price to each performance obligation based on estimates of the standalone selling price of each performance obligation within the bundle. For the services we sell on a standalone basis, we use the sales price of these services in the allocation of the transaction price in bundled arrangements. Where we do not sell the service on a standalone basis, we estimate the standalone selling price based on the adjusted market assessment approach or the expected cost plus a margin approach when market information is not observable. In these cases, the determination of the standalone selling price may require significant judgment. We recognize revenue when we satisfy the performance obligation by transferring the promised good or service to the customer. For our transaction-based services, we generally recognize revenue at a point-in-time when the services are delivered to the customer. 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. We do not have significant financing components in arrangements with our customers. Principal Agent Considerations In certain of our arrangements, another party may be involved in providing services to our customer. We evaluate whether we can recognize revenue gross as a principal or net as an agent. We record revenue on a gross basis when we are the principal in the arrangement. To determine whether we are a principal or an agent, we identify the specified good or service to be provided to the customer and assess whether we control the specified good or service before that good or service is transferred to the customer. We evaluate a number of indicators of whether we control the good or service before it is transferred to the customer, including whether we have primary fulfillment responsibility and obligation to perform the services being sold to the customer; we have latitude in establishing the sales price; and we have inventory risk. 69 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. 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. Our alternative business structures, or ABS, offer legal advisory services that are marketed through our websites. Our ABSs provide independent legal advice to our customers and are directly responsible for, and control the fulfillment of, the legal services. 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. Except for our Arizona ABS, we are not a law firm in the U.S. and cannot provide legal advice through our U.S. 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. For these arrangements, we recognize revenue on a net basis as an agent. 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. 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; accordingly, we recognize revenue for these arrangements on a net basis. Revenue includes shipping and handling fees charged to customers. Cost of Revenue Cost of revenue includes all costs of providing and fulfilling our services. Cost of revenue primarily includes government filing fees; costs of fulfillment, customer care, including the cost of credentialed professionals for tax, and payroll services, and related benefits, including stock-based compensation, and costs of independent contractors for document preparation; telecommunications and data center costs, amortization of acquired developed technology, depreciation and amortization of network computers, equipment and internal-use software; printing, shipping and handling charges; credit and debit card fees; allocated overhead; legal document kit expenses; and sales and use taxes. We defer direct and incremental costs primarily related to government filing fees incurred prior to the associated service meeting the criteria for revenue recognition. These contract assets are recognized as cost of revenue in the same period the related revenue is recognized. At December 31, 2022 and 2021, there was $ 1.9 million and $ 1.8 million, respectively, in deferred cost of revenue included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. Filing fees of $ 74.1 million, $ 79.8 million and $ 64.5 million were recorded in cost of revenue in the accompanying consolidated statements of operations for years ended December 31, 2022, 2021, and 2020, respectively. Sales and Marketing Expenses Sales and marketing expenses consist of customer acquisition media costs; compensation and related benefits, including stock-based compensation for marketing and sales personnel; media production; public relations and other promotional activities; general business development activities; an allocation of depreciation and amortization and allocated overhead. Customer acquisition media costs consist primarily of search engine marketing, television and radio costs. Marketing and advertising costs to promote our services are expensed in the period incurred. Media production costs are expensed the first time the advertisement is aired. Advertising expenses, consisting of customer acquisition media costs, were $ 174.6 million, $ 195.4 million and $ 119.2 million for the years ended December 31, 2022, 2021, and 2020, respectively. Technology and Development Expenses 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. 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 as previously described under Internal-use Software and Cloud Computing Arrangements . General and Administrative Expenses Our general and administrative expenses relate primarily to compensation and related benefits, including stock-based compensation, for executive and corporate personnel, professional and consulting fees, an allocation of depreciation and amortization, allocated overhead and legal costs. 70 Stock-based Compensation We estimate the fair value of employee stock-based payment awards on the grant-date and recognize the resulting fair value, net of estimated forfeitures, over the requisite service period. 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. 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. We record expense for awards that contain performance conditions only to the extent that we determine it is probable that the performance condition will be achieved. Expense for awards containing market conditions is not reversed even if the market condition is not achieved. We have elected to treat stock-based payment awards with graded vesting schedules and time-based service conditions as a single award and recognize stock-based compensation on a straight-line basis, net of estimated forfeitures, over the requisite service period. Awards with performance or market conditions are recognized using graded vesting. The Black-Scholes option pricing model and the Monte Carlo simulation model requires us to make certain assumptions including the fair value of the underlying common stock, the expected term, the expected volatility, the risk-free interest rate and the dividend yield. The fair value of the shares of common stock underlying stock options and RSUs is based upon our publicly listed share price on the date of grant. Prior to our IPO, the fair value of the shares of common stock was determined by the board of directors. Because there was no public market for our common stock, the board of directors determined the fair value of the common stock at the time of the grant of options and RSUs by considering a number of objective and subjective factors including valuation of comparable companies, sales of common stock to unrelated third-parties, operating and financial performance and general and industry-specific economic outlook, amongst other factors. The fair value was determined in accordance with applicable elements of the practice aid issued by the American Institute of Certified Public Accountants titled Valuation of Privately Held Company Equity Securities Issued as Compensation . The expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding. The expected term of options granted is estimated based upon actual historical exercise and post-vesting cancellations, adjusted for expected future exercise behavior. Because our common stock has limited publicly traded history, we estimate the expected volatility from the historical volatility of selected public companies with comparable characteristics to us, including similarity in size, lines of business, market capitalization and revenue and financial leverage. We determine the expected volatility assumption using the frequency of daily historical prices of comparable public company’s common stock for a period equal to the expected term of the options. We periodically assess the comparable companies and other relevant factors used to measure expected volatility for future stock option grants. The risk-free interest rate assumption is based upon observed interest rates on the U.S. government securities appropriate for the expected term of our stock options. The dividend yield assumption is based on our history and expectation of dividend payouts. Other than the special dividends declared in 2021 and 2020, 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. Stock-based compensation expense is recognized based on awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on our historical experience and future expectations. 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. If we had made different assumptions, our stock-based compensation expense, and our net (loss) income for the years ended December 31, 2022, 2021, and 2020 may have been materially different. Loss Contingencies On occasion we are involved in legal proceedings, claims, and regulatory, indirect tax examinations or government inquiries and investigations that may arise in the ordinary course of business. We record loss contingencies in our consolidated financial statements in the period when they are probable and reasonably estimable. If the amount is probable and we are able to reasonably estimate a range of loss, we accrue the amount that is the best estimate within that range, and if no amount is better than any other in the range, we record the amount at the low end in the range. We disclose those contingencies that we believe are at least reasonably possible but not probable regardless of whether they are reasonably estimable. The likelihood of a loss is determined using several factors including the nature of the matter, advice of our internal and external counsel, previous experience and historical and other relevant information available to us. The determination of the likelihood of loss or the range 71 of loss requires significant management judgment. Legal fees and other costs associated with such actions are expensed as incurred. Income Taxes We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements. Deferred income tax assets and liabilities are measured using enacted tax rates anticipated to be in effect when those tax assets and liabilities are expected to be realized or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the consolidated statements of operations in the period that includes the enactment date. We make judgments in evaluating whether deferred tax assets will be recovered from future taxable income. A valuation allowance is established if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risk associated with estimates of future taxable income in assessing the need for a valuation allowance. If our assumptions and consequently our estimates, change in the future, the valuation allowance may be increased or decreased, resulting in an increase or decrease, which may be material, to our provision for income taxes and the related impact on our net (loss) income. We recognize tax benefits from an uncertain position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits. If this threshold is met, we measure the tax benefit as the largest amount of the benefit that is greater than fifty percent likely to be realized upon ultimate settlement. We recognize penalties and interest accrued with respect to uncertain tax positions as a component of the income tax provision. At December 31, 2022 and 2021, accrued penalties and interest related to uncertain tax positions were not material. Net (Loss) Income Per Share Attributable to Common Stockholders We apply the two-class method for calculating net income per share. Under the two-class method, in periods where we generate net income, net income is allocated between common stock and other participating securities based on their participation rights. Prior to our IPO, our participating securities consist of redeemable convertible preferred stock, which participate in dividends, if declared. For periods in which we report a net loss, the participating securities are not contractually obligated to share in our losses, and accordingly, no loss is allocated to the participating securities. Basic net (loss) income per share is calculated by dividing net (loss) income attributable to common stockholders by the weighted-average number of shares of common stock outstanding, net of unvested restricted stock, if any, during the period. We compute diluted net (loss) income per share under the two-class method where income is reallocated between common stock, potential common stock and participating securities. Potential common stock includes stock options, restricted stock units, restricted stock awards and employee stock purchase plans, or ESPPs and RSUs computed using the treasury stock method. Recently Adopted Accounting Pronouncements Upon the completion of our IPO in 2021, we elected to be an Emerging Growth Company, or EGC, as defined in the Jumpstart Our Business Startups Act, which allowed us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements were made applicable to private companies. Entities that elect to be EGCs will remain an EGC until the earliest of: the last day of the first fiscal year in which annual gross revenue exceeds $1.07 billion; the date that the entity becomes a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates as of the end of the second quarter of that fiscal year; the date on which the entity has issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; or the fiscal year-end following the fifth anniversary of the completion of the entity’s IPO. Effective December 31, 2022, we lost our EGC status due to becoming a “large accelerated filer” with an aggregate worldwide market value of our common stock held by non-affiliates exceeding $700.0 million measured as of the end of the second quarter of the 2022 fiscal year. As a result, we must comply with the adoption requirements of new or revised accounting pronouncements applicable to public companies beginning in the fiscal year ended December 31, 2022. In February 2016, the FASB issued ASU 2016-02 related to leases to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We adopted this guidance effective January 1, 2022. Refer to Note 9 for further details. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit losses: Measurement of Credit Losses on Financial Instruments (Topic 326) , or ASC 326, which revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but not limited to, available-for-sale debt securities and accounts receivable. 72 Due to the loss of our EGC status as of December 31, 2022, we adopted this Update on January 1, 2022, using the modified-retrospective transition method for assets measured at amortized cost other than available-for-sale debt securities, which was adopted using a prospective transition approach. The adoption of this Update did not have a material impact on our consolidated financial statements. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) — Facilitation of the Effects of Reference Rate Reform on Financial Reporting , or Topic 848, that provides optional relief to applying reference rate reform to contracts, hedging relationships, and other transactions that reference the LIBOR, which has been discontinued as of the end of 2021. Also, in January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848) — Scope, to clarify that cash flow hedges are eligible for certain optional expedients and exceptions for the application of subsequent assessment methods to assume perfect effectiveness as previously presented in ASU 2020-04. Topic 848 is effective immediately and may be applied through December 31, 2022. We adopted the provisions of Topic 848 and the adoption did not have a material impact to our consolidated financial statements. In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity . This standard eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share computation. We adopted this Update on January 1, 2022 and the adoption of this Update did not have a material impact on our consolidated financial statements. Accounting Pronouncements Not Yet Adopted In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement—Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (Topic 820) , or Topic 820, which clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments are effective for fiscal years beginning after December 15, 2023. We are currently evaluating the impact of the adoption on our consolidated financial statements. Note 3. Other Financial Statement Information Accounts Receivable Changes in the allowance consisted of the following (in thousands): Year Ended December 31, 2022 2021 2020 Beginning balance $ 4,060 $ 5,256 $ 2,461 Add: amounts recognized as a reduction of revenue 8,193 6,610 6,493 Add (less): bad debt expense recognized in general and administrative expense 446 ( 279 ) 2,170 Less: write-offs, net of recoveries ( 7,969 ) ( 7,527 ) ( 5,868 ) Ending balance $ 4,730 $ 4,060 $ 5,256 The allowance recognized as a reduction of revenue primarily relates to our installment plan receivables for which we expect we will not be entitled to a portion of the transaction price based on our historical experience with similar transactions. The allowance recognized against general and administrative expense represents an allowance relating to receivables from partners that are no longer considered collectible. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consisted of the following (in thousands): As of December 31, 2022 2021 Prepaid expenses $ 10,624 $ 10,957 Deferred cost of revenue 1,915 1,819 Capitalized cloud computing development costs 1,407 867 Income tax receivable 760 831 Other current assets 1,993 2,115 Total prepaid expenses and other current assets $ 16,699 $ 16,589 73 Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): As December 31, 2022 2021 Accrued payroll and related expenses $ 27,822 $ 21,858 Accrued vendor payables 15,531 18,239 Accrued advertising 1,071 426 Sales allowances 4,426 4,862 Accrued sales, use and business taxes 3,838 2,678 Other 4,685 2,754 Total accrued expenses and other current liabilities $ 57,373 $ 50,817 Changes in sales allowances relating to charge-backs, sales credits and refunds consisted of the following (in thousands): Year Ended December 31, 2022 2021 2020 Beginning balance $ 4,862 $ 4,856 $ 4,651 Add: increase in sales allowances 7,217 7,998 9,976 Less: utilization of reserves ( 7,653 ) ( 7,992 ) ( 9,771 ) Ending balance $ 4,426 $ 4,862 $ 4,856 Depreciation and Amortization Depreciation and amortization expense of our property and equipment, including capitalized internal-use software, and intangible assets consisted of the following (in thousands): Year Ended December 31, 2022 2021 2020 Cost of revenue $ 8,581 $ 6,430 $ 8,324 Sales and marketing 7,014 6,017 6,913 Technology and development 2,834 2,361 2,800 General and administrative 3,316 1,878 2,060 Total depreciation and amortization expense $ 21,745 $ 16,686 $ 20,097 Deferred Revenue Deferred revenue as of December 31, 2022 and 2021 was $ 165.1 million and $ 147.9 million, respectively. Revenue recognized in 2022, 2021 and 2020 that was included in deferred revenue at the beginning of the year was $ 146.6 million, $ 127.6 million and $ 103.5 million, respectively. We expect to recognize substantially all of the deferred revenue as of December 31, 2022 as revenue in 2023. We have omitted disclosure on the transaction price allocated to remaining performance obligations and estimated timing of revenue recognition as our contracts with customers that have a duration of more than one year are immaterial. Note 4. Assets Held for Sale In September 2022, following an evaluation of our office space and business requirements, we commenced a plan to sell our operational headquarters in Austin, Texas, consisting of land, a building and building improvements, and determined that these assets met the held for sale criteria. We ceased recording depreciation on these assets 74 upon meeting the held for sale criteria. At December 31, 2022, the total carrying value of the assets held for sale remain at $ 22.7 million as follows: December 31, 2022 Land $ 6,400 Building and building improvements 16,322 Total assets held for sale $ 22,722 The estimated fair value less costs to sell the assets held for sale exceed their carrying values and hence no impairment was necessary as of December 31, 2022. Note 5. Acquisitions Revvsales, Inc. In October 2022, we completed an asset acquisition of Revvsales Inc, or Revv, consisting substantially of acquired developed technology for their self-service document automation and electronic signature platform. Revv’s proprietary technology will enhance our forms library and legal template offerings and will be used to develop modern product experiences and services for small businesses. A purchase price of $ 6.6 million, which is subject to customary adjustments, was paid at closing and funded by our available cash on hand. The acquisition was accounted for as an asset acquisition because substantially all the value of the assets acquired were concentrated in the acquired technology. Revv’s operations have been included in our consolidated financial statements commencing on the acquisition date. We allocated the accumulated cost of the acquisition to the assets acquired based on their relative fair values. The accumulated cost of the acquisition includes direct acquisition-related costs and applicable taxes. The estimated fair value of developed technology was $ 6.5 million and an assembled workforce of $ 0.1 million, which were determined by using a replacement cost approach. The replacement cost approach consists of developing an estimate of the current cost of a similar new asset having the nearest equivalent utility to the asset being valued. The developed technology rights and assembled workforce will be amortized over a weighted-average period of three years by using the straight-line method. Separate from the asset acquisition, $ 2.6 million will be paid to certain Sellers on the first and second anniversaries from asset acquisition date as compensation for maintaining an assembled workforce. United Agency Services, Corp. In August 2022, we acquired certain assets and liabilities of United Agency Services Corp, or UA Services, a company providing registered agent services and corporate compliance solutions for $ 3.5 million of which $ 2.6 million was paid in cash on the acquisition date and up to $ 1.0 million will be paid in cash within twelve months, based upon the achievement of certain earnout metrics. This amount has been excluded from the purchase consideration and will be recorded as future compensation expense. The acquisition was completed in order to build a more durable registered agency platform and has been accounted for as a business combination. The preliminary purchase price was allocated to the assets acquired and liabilities assumed. Goodwill of $ 3.3 million arising from the acquisition consisted largely of the assembled workforce and synergies expected from combining our operations. The acquired goodwill is deductible for tax purposes. Acquisition costs related to this transaction of approximately $ 0.4 million were expensed as incurred and are included in general and administrative expenses in the accompanying consolidated statements of operations. The revenue and earnings of the acquired business have been included in our results of operations since the acquisition date and are not material to the consolidated financial results. Pro forma revenues and results of operations for this acquisition have not been presented as the impact on our consolidated financial statements is immaterial. The purchase accounting for this acquisition remains incomplete with respect to acquired contingent liabilities as management continues to gather and evaluate information about circumstances that existed as of the acquisition date. Measurement period adjustments will be recognized in the reporting period in which the adjustment amounts are determined within twelve months from the acquisition date. Earth Class Mail, Inc. In November 2021, we acquired all of the outstanding equity interests in Earth Class Mail, Inc., or Earth Class Mail, a company that provides virtual mailbox solutions for small businesses, in line with our strategy to scale our existing business through building in-house adjacencies for $ 61.2 million. The purchase price decreased during the 75 year ended December 31, 2022 for a working capital adjustment of $ 0.3 million and immaterial measurement period adjustments. Amount (in thousands) Estimated useful life Goodwill $ 48,617 — Customer relationships 10,603 6 years Developed technology 5,418 5 years Trade names 179 26 months Property and equipment 267 3 - 5 years Deferred tax liability ( 3,087 ) — Other liabilities ( 787 ) — Total purchase consideration $ 61,210 Intangible assets acquired from Earth Class Mail included customer relationships of $ 10.6 million, developed technology of $ 5.4 million and trade names of $ 0.2 million, which are being amortized over their estimated useful life using the straight-line method. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill. The resulting goodwill of $ 48.6 million arising from the acquisition consisted largely of the assembled workforce and synergies expected from combining Earth Class Mail into our operations. The acquired goodwill is not expected to be deductible for tax purposes. Acquisition-related costs, including legal, regulatory, and consulting costs amounted to $ 1.4 million and were included within general and administrative expenses in our consolidated statement of operations. The revenue and earnings of the acquired business have been included in our results since the acquisition date and are not material to the our consolidated financial results. Pro forma revenues and results of operations for this acquisition have not been presented as the impact on the our consolidated financial statements would be immaterial. There were no material measurement period adjustments recorded to the fair values of assets acquired and liabilities assumed during the period and the purchase price is considered final. Purely Solutions, LLC In October 2020, we entered into a membership interest purchase agreement with Purely Solutions, LLC, or Pure, in which we acquired 100 % of the membership interest as part of our plans to offer tax services. Pure provides tax preparation, tax advisory and payroll services. The total fair value of the consideration for the acquisition was $ 2.3 million. Of the total consideration, $ 1.0 million was paid in cash on the acquisition date, with $ 0.5 million and $ 0.8 million to be paid in cash within six and eighteen months, respectively, from the acquisition date based upon certain earnout metrics being achieved including hiring targets and customer experience metrics. In 2022 and 2021, we paid out $ 0.6 million and $ 0.5 million upon the earnout metrics being partially and fully achieved, respectively. At December 31, 2021, we had classified the remaining contingent consideration in accrued expenses and other current liabilities in the accompanying consolidated balance sheet. Intangible assets acquired from Pure included customer relationships of $ 0.6 million, which are being amortized over their estimated useful life of three years using the straight-line method. The goodwill of $ 1.6 million arising from the acquisition consists largely of the assembled workforce and synergies expected from combining Pure into our operations. The acquired goodwill is not expected to be deductible for tax purposes. The purchase price allocation is final. Note 6. Disposition of Business Beaumont ABS Limited In April 2020, we sold our conveyancing business in the U.K., Beaumont ABS Limited, or Beaumont, to a third-party buyer and paid $ 1.2 million in working capital to the buyers. Our loss on sale of this business was $ 1.8 million for the year ended December 31, 2020. Note 7. Investments Available-for-sale Debt Securities In 2019, we invested in Legal Vision Pty Ltd., or Legal Vision, an Australian proprietary limited company that provides online legal services to small and medium size businesses, through the purchase of a convertible promissory 76 note for a total of Australian Dollar, or AUD $ 1.0 million ($ 0.7 million). The convertible promissory note has a maturity term of ten years , which is convertible into Legal Vision’s common stock. The underlying conversion feature is automatically exercisable upon an exit event including an IPO, merger or sale, upon a new financing round, or at our election. At December 31, 2022, we do not hold any equity interests or in-substance common stock in Legal Vision, and accordingly, we have classified the convertible promissory note as an investment in an available-for-sale debt security in the accompanying consolidated balance sheet. The fair value of the convertible promissory note is based on unobservable inputs that are categorized as Level 3 in the fair value hierarchy. We determined that the conversion option on the Legal Vision convertible promissory note will not have material value until Legal Vision executes on its business plans to drive growth, which consequently will drive the fair value of the associated conversion option in excess of the carrying value of the convertible promissory note. Accordingly, the fair value of the convertible debt approximated its carrying value as of December 31, 2022 and 2021. At December 31, 2022 and 2021, the fair value of our available-for-sale debt security in Legal Vision was AUD $ 1.5 million ($ 1.0 million) and AUD $ 1.5 million ($ 1.1 million), respectively, with the change due to fair value adjustments during the period. In 2022, key assumptions used in the Monte Carlo simulation model to determine the fair value of the convertible promissory note in Legal Vision were: expected term of 6.3 years, risk-free rate of 3.8 % and volatility of 55 %. The decline in fair value was non-credit related and therefore was recognized in other comprehensive income (loss) for the year ended December 31, 2022. Since the Legal Vision convertible promissory note has a contractual maturity date that exceeds one year and we do not intend to liquidate in the next twelve months, we have classified the convertible promissory note as a noncurrent available-for-sale debt security in the accompanying consolidated balance sheets as of December 31, 2022 and 2021, respectively. Between 2017 and 2019, we made several investments in firma.de Firmenbaukasten AG, or Firma, a German limited liability company that provides web-based business formation services to small business owners. The initial investments were made through the purchase of convertible promissory notes which are convertible into Firma’s common stock. The initial investments were consolidated into one convertible promissory note in July 2019, which has a maturity date of seven years. The underlying conversion feature is only exercisable upon Firma achieving a trailing 12-month revenue target of EUR € 5.0 million any time prior to the maturity date in June 2026. In 2020, we fully impaired our investment in Firma and 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. Therefore, we recognized an other-than-temporary impairment of EUR € 4.3 million ($ 4.8 million) in our consolidated statements of operations during the year ended December 31, 2020. Investments in Other Equity Securities We hold an equity investment in LawPath, Pty Ltd, or LawPath, an Australian proprietary limited company that provides an online legal platform to individuals and small and medium size businesses. In October 2021, we invested an additional AUD $ 1.5 million ($ 1.1 million). The change in fair value, due to an orderly transaction, in our other equity securities was $ 1.8 million for the year ended December 31, 2021, which was recognized in other income, net in our consolidated statements of operations. At December 31, 2022 and 2021 our total equity interest in LawPath was approximately 14 %. In December 2018, we purchased shares of Class C nonvoting common units in Mylo, LLC, or Mylo, a digital insurance broker that services small and medium size businesses, for $ 3.0 million, resulting in a 4 % interest in Mylo. In December 2022, we fully impaired our investment in Mylo and incurred a loss of $ 3.0 million as the fair value of our investment was determined to be zero based upon an observable sale of their common equity. Therefore, we recognized an impairment of $ 3.0 million in our consolidated statements of operations during the year ended December 31, 2022. The investment in LawPath does not have readily determinable fair values. There were no other impairments of our investments during the years ended December 31, 2022 and 2021, respectively. At December 31, 2022 and 2021, the carrying value of these investments is included in other assets in the accompanying consolidated balance sheets. 77 Note 8. Property and Equipment Property and equipment, net, consisted of the following (in thousands): As of December 31, 2022 2021 Building and building improvements $ — $ 29,856 Land — 6,456 Internal-use software 67,371 60,946 Purchased software 2,228 2,609 Furniture and office equipment 2,518 3,332 Computer hardware 14,074 13,762 Leasehold improvements 1,985 4,903 Software development in-progress 105 1,178 Total cost of property and equipment 88,281 123,042 Less: accumulated depreciation and amortization ( 57,458 ) ( 76,029 ) Property and equipment, net $ 30,823 $ 47,013 Depreciation and amortization expense related to property and equipment was $ 18.2 million, $ 15.7 million and $ 17.3 million for 2022, 2021 and 2020, respectively. At December 31, 2022, 2021 and 2020, accumulated amortization in connection with internal-use software costs was $ 41.0 million, $ 42.5 million and $ 38.7 million, respectively. In 2022, 2021 and 2020, we recorded amortization expense of $ 14.6 million, $ 11.6 million and $ 12.3 million, respectively, in connection with these costs. Software development in-progress consists primarily of internal-use software projects, which when placed in service, will provide enhancements and improvements to the operational and functional capabilities to our online platforms and our customer-facing website. In 2022 and 2021, we capitalized internal-use software development costs of $ 21.4 million and $ 9.9 million, respectively. In 2022, no software development costs were impaired. In 2021 and 2020, we impaired $ 0.9 million and $ 1.1 million, respectively, of capitalized software developments costs related primarily to internal-use software projects that no longer met our business requirements or were no longer expected to be placed in service. Note 9. Leases We conduct operations from certain leased facilities in various locations. 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, and which represent the non-cancelable periods of the leases and include extension options that we determined are reasonably certain to be exercised. We exclude extension options that are not reasonably certain to be exercised from our lease terms. Our lease payments consist primarily of fixed rental payments for the right to use the underlying leased assets over the lease terms. We often receive customary incentives from our landlords, such as reimbursements for tenant improvements and rent abatement periods, which effectively reduce the total lease payments owed for these leases. Operating lease liabilities on our consolidated balance sheets represent the present value of our remaining lease payments over the remaining lease terms. We do not allocate lease payments to non-lease components. We use our incremental borrowing rate to calculate the present value of our lease payments, as the implicit rates in our leases are not readily determinable. Leases consist of the following (in thousands): 78 Assets Classification December 31, 2022 Operating Operating lease right-of-use assets $ 11,148 Finance Property and equipment, net 62 Total leases $ 11,210 Liabilities Current Operating Operating lease liabilities $ 2,317 Finance Accrued expenses and other current liabilities 36 Non Current Operating Operating lease liabilities, non-current 8,958 Finance Other liabilities 28 Total lease liabilities $ 11,339 At December 31, 2022, the maturities of our remaining operating lease and finance lease liabilities were as follows (in thousands, except years and percentages): Year Ended December 31, 2022 Operating leases Finance leases Total leases liabilities 2023 $ 2,764 $ 38 $ 2,802 2024 2,392 27 2,419 2025 1,813 2 1,815 2026 1,728 — 1,728 2027 1,661 — 1,661 Thereafter 2,456 — 2,456 Total minimum lease payments 12,814 67 12,881 Less: Effects of discounting 1,539 3 1,542 Present value of lease liabilities $ 11,275 $ 64 $ 11,339 Less: current portion $ 2,317 $ 36 $ 2,353 Long-term lease liabilities $ 8,958 $ 28 $ 8,986 Weighted-average remaining lease term 5.6 years 1.9 years Weighted-average incremental borrowing rate 4.39 % 5.50 % The component of our lease costs included in our consolidated statements of operations for the year ended December 31, 2022, were as follows (in thousands): December 31, 2022 Lease cost Operating lease cost $ 2,384 Other variable cost 250 Finance lease cost 17 Net lease cost $ 2,651 Total future aggregate minimum lease payments calculated under ASC 840 as of December 31, 2021 were as follows (in thousands): 79 Operating Leases Years Ending December 31, 2022 $ 2,372 2023 1,101 2024 867 2025 550 2026 505 Thereafter 1,033 Total minimum lease payments $ 6,428 Note 10. Goodwill The changes in goodwill for 2022 and 2021 were as follows (in thousands): Amount Balance as of December 31, 2020 $ 11,404 Acquisition 48,515 Foreign currency translation ( 9 ) Balance as of December 31, 2021 59,910 Acquisition 3,409 Foreign currency translation ( 90 ) Balance as of December 31, 2022 $ 63,229 As discussed in Note 5, we acquired UA Services in August 2022 and Earth Class Mail in November 2021. Note 11. Intangible Assets, net Intangible assets, net, consisted of the following (in thousands): As of December 31, 2022 Remaining Weighted average useful life (in years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships 4.8 $ 17,841 $ 9,300 $ 8,541 Developed technology 3.2 16,813 6,689 10,124 Trade names 1.3 503 383 120 Assembled workforce 2.8 125 10 115 Total intangible assets $ 35,282 $ 16,382 $ 18,900 As of December 31, 2021 Remaining Weighted average useful life (in years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships 5.7 $ 19,163 $ 8,470 $ 10,693 Developed technology 4.8 10,605 5,487 5,118 Trade names 2.3 520 300 220 Total intangible assets $ 30,288 $ 14,257 $ 16,031 80 As discussed in Note 5, we acquired Revv in October 2022, UA Services in August 2022 and Earth Class Mail in November 2021. In 2022, 2021 and 2020, we recorded amortization expense of $ 3.5 million, $ 1.0 million and $ 2.8 million, respectively. At December 31, 2022, estimated future intangible assets amortization expense was as follows (in thousands): For Years Ending December 31, 2023 $ 5,165 2024 5,082 2025 4,510 2026 2,670 2027 1,473 Total future amortization expense $ 18,900 Note 12. Long-term Debt In November 2018, we entered into an amended first lien credit and guaranty agreement, or 2018 Credit Facility, which consisted of a first lien term loan facility, or 2018 Term Loan, with a principal amount of $ 535.0 million and a 2018 Revolving Facility of $ 40.0 million, or 2018 Revolving Facility. In July 2021, upon the completion of our IPO, we repaid the then outstanding principal of $ 521.6 million of our 2018 Term Loan in full. We incurred a loss on debt extinguishment of $ 7.7 million related to unamortized debt issuance costs. On July 2, 2021, we entered into an amended and restated credit and guaranty agreement, or 2021 Revolving Facility, providing for revolving borrowings of up to $ 150.0 million with an availability period of five years. Under the 2021 Revolving Facility, we can use up to $ 20.0 million in 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. Additional debt issuance costs of $ 0.8 million were allocated to the 2021 Revolving Facility. The interest rate applicable to the 2021 Revolving Facility is, at our option, at a rate equal to the greatest of (i) the administrative agent’s prime rate (ii) the federal funds effective rate plus 1/2 of 1.0% or (iii) one month LIBOR (subject to a 1.00 % floor), plus 1.00 % or LIBOR (subject to a 0.00 % floor) plus 2.00 %. The interest rate margins under the 2021 Revolving Facility are subject to one reduction of 0.25 % and a further reduction of 0.25 % upon achieving total net first lien leverage ratios of 3.50 to 1.00 and 2.50 to 1.00, respectively. 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. 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. We are also required to pay customary letter of credit fees and agency fees. We have the option to voluntarily repay outstanding loans under the 2021 Revolving Facility at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans. There is no scheduled amortization under the 2021 Revolving Facility. Any principal amount outstanding is due and payable in full at maturity, five years from the closing date of the 2021 Revolving Facility. 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. 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, subject to certain exceptions, restrict our ability and the ability of our restricted subsidiaries to incur additional indebtedness and guarantee indebtedness; create or incur liens; pay dividends and distributions or repurchase capital stock; merge, liquidate and make asset sales; change lines of business; change our fiscal year; incur restrictions on our subsidiaries’ ability to make distributions and create liens; modify our organizational documents; make investments, loans and advances; and enter into certain transactions with affiliates. The 2021 Revolving Facility requires compliance with a total net first lien leverage ratio of 4.50 to 1.00, or Financial Covenant. The Financial Covenant will be tested at quarter-end only if the total principal amount of all revolving loans, swingline loans and drawn letters of credit that have not been reimbursed exceeds 35 % of the total commitments under the 2021 Revolving Facility on the last day of such fiscal quarter. At December 31, 2022 and 2021, we had no amounts outstanding under our 2021 Revolving Facility or any outstanding letters of credit. We were in compliance with all financial covenants as of December 31, 2022 and 202 1. Note 13. Derivative Financial Instruments Interest Rate Swaps In April 2019, we entered into two interest rate swaps, or initial swaps, to manage cash flow exposure and exposure to interest rate fluctuations under our 2018 Term Loan. The initial swaps would have matured in April 2022. Under the swap agreements, we were required to pay interest at a fixed rate of 2.3 % per annum and receive interest at a variable rate indexed to one-month LIBOR. The initial notional amount of each initial swap was $ 66.0 million. 81 The initial swaps were accounted for as cash flow hedges as the transactions were executed to hedge our future interest payments. At June 30, 2021, the interest rate swap contracts had an aggregate notional amount of $ 394.2 million, which were designated as cash flow hedges. In July 2021, upon the full repayment of our 2018 Term Loan, our interest rate swaps were discontinued as cash flow hedges and were subsequently extinguished. We paid $ 13.6 million to extinguish our interest rate swaps and hybrid debt. Upon discontinuance of the interest rate swaps as cash flow hedges, the unrealized losses of $ 9.2 million for the intervening period were recognized in interest expense, net. There were no interest rate swaps outstanding as of December 31, 2022 and 2021. Financial Guarantee In September 2019, we provided a financial guarantee relating to a former executive officer upon their voluntary termination. The executive officer entered into a personal loan with a financial institution for $ 50.0 million with a three -year term. The personal loan was collateralized by personal assets, an investment portfolio and our common stock owned by the former executive officer. We provided a financial guarantee to the financial institution up to $ 25.0 million had the former executive officer defaulted or not met certain collateral requirements throughout the term of the personal loan. We deposited $ 25.0 million into a money market fund with the financial institution, or restricted cash equivalent, to evidence this financial guarantee. Had the former executive officer not met certain collateral requirements or defaulted on the personal loan, the financial institution would have had the ability to use our restricted cash equivalent for any shortfall up to $ 25.0 million. In that event, we would have had full recourse against the former executive officer to recover the amount retained by the financial institution up to $ 25.0 million. The personal loan was required to be repaid by the former executive officer prior to our making a public filing with the Securities and Exchange Commission, or SEC, for our IPO, or September 2022, whichever came first. In the event of our IPO, the former executive officer had the option to sell up to $ 25.0 million of his common stock back to us to pay off the personal loan with the financial institution. The financial guarantee was accounted for as a derivative at fair value with changes in fair value recorded in other income, net in our consolidated statements of operations. The financial guarantee had a term of three years and matured in September 2022. In June 2021, the financial guarantee was terminated and we recognized a gain of $ 0.1 million from the cancellation of our financial guarantee derivative in other income (expense), net in the accompanying consolidated statements of operations. The associated restricted cash equivalent of $ 25.0 million became unrestricted and was reclassified to cash and cash equivalents. The impact from losses from our interest rate cap, interest rate swaps, and hybrid debt in our consolidated statements of operations were as follows (in thousands): Year Ended December 31, 2021 2020 Settlement of interest rate swaps $ 1,052 $ 1,103 Amortization of prior hedge effectiveness 3,095 3,481 Fair value adjustment of interest rate swap 364 — Amortization of interest rate cap premium 28 194 Interest expense on hybrid debt 368 630 Discontinuance of interest rate swaps and prior hedge effectiveness 9,240 — Total, recorded in interest expense, net $ 14,147 $ 5,408 Note 14. Commitments and Contingencies Advertising, Media and Other Commitments We use a variety of media to advertise our services, including search engine marketing, television and radio. 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. 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. Legal Proceedings We received a demand letter dated April 20, 2020 from service partner Dun & Bradstreet alleging that Dun & Bradstreet had overpaid us for services. The letter alleges these overpayments occurred between 2015 and 2019, amounted to $ 5.6 million, and were caused by overreporting by us. The parties have continued to negotiate, and no claim has been filed. We deny and will continue to deny all of the allegations and claims asserted by Dun & Bradstreet, including, but not limited to, any allegation that Dun & Bradstreet has suffered any harm or damages. We believe we have meritorious defenses to the claims and will vigorously defend any action. While there is at least a reasonable 82 possibility that a loss may be incurred, we have not recorded any loss or accrual in the accompanying consolidated financial statements at December 31, 2022 for this matter as a loss is not probable. In July 2021, LegalInc Corporate Services Inc., our wholly owned subsidiary, or LegalInc, received a citation from the Wyoming Secretary of State regarding LegalInc’s registered agent services in Wyoming. The citation alleges that LegalInc failed to comply with Wyoming’s Registered Offices and Agents Act when carrying out its registered agent business in the state and assessed an initial $ 4.1 million penalty and revoked LegalInc’s status as a commercial registered agent in Wyoming. LegalInc requested a hearing to review the matter and engaged in negotiations with the State culminating in a settlement executed on December 28, 2022. This matter is now settled for an immaterial amount. From time to time, we may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. Other than those described above and in our Annual Report on Form 10-K, we are not currently a party to any material legal proceedings, nor are we aware of any pending or threatened litigation that could have a material adverse effect on our results of operations, cash flows, and financial condition, should such litigation be resolved unfavorably. Indemnifications Indemnification provisions in our third-party service provider agreements provide that we will indemnify, hold harmless, and reimburse the indemnified parties on a case-by-case basis for losses suffered or incurred by the indemnified parties in connection with any claim by any third-party as a result of our website, advertising, marketing, payment processing, collection or customer service activities. The maximum potential amount of future payments we could be required to make under these indemnification provisions is undeterminable. No amounts have been accrued or have been paid during any period presented as we believe the fair value of these indemnification obligations is immaterial. Note 15. Stockholders’ Equity Stock Repurchase Program On March 1, 2022, our board of directors approved a stock repurchase program authorizing us to repurchase up to $ 150.0 million of our common stock, with no fixed expiration. Stock repurchases under this program may be made through any manner, including open market transactions, accelerated stock repurchase agreements, or privately negotiated transactions with third-parties, and in such amounts as management deems appropriate. Open market repurchases will be structured to occur in accordance with applicable federal securities laws, including within the pricing and volume requirements of Rule 10b-18 under the Securities Exchange Act of 1934, as amended. We may also, from time to time, enter into Rule 10b5-1 plans to facilitate repurchases of our shares of common stock under this authorization. This program does not obligate us to acquire any particular amount of common stock and may be modified, suspended or terminated at any time at the discretion of our board of directors. During the year ended December 31, 2022, using the Rule 10b5-1 plans, we repurchased a total of 9,256,268 shares of our common stock through open market purchases at an average per share price of $ 10.28 for a total repurchase of $ 95.1 million including broker commission. The repurchases were recorded as a reduction to our accumulated deficit in the accompanying consolidated statements of stockholders’ equity. Note 16. Stock-based Compensation 2021 Equity Incentive Plan In June 2021, our board of directors adopted our 2021 Equity Incentive Plan, or 2021 Plan. All equity-based awards going forward will be granted under the 2021 Plan. An aggregate of 18,946,871 shares of our common stock are reserved for issuance under our 2021 Plan, as well as any future automatic annual increases in the number of shares of common stock reserved for issuance under our 2021 Plan. Under the terms of the 2021 Plan, both incentive and nonqualified stock options could be granted with exercise prices not less than the fair market value of our common stock on the date of grant. Options granted pursuant to the 2021 Plan will vest at the rate specified in the stock option agreement. Under the 2021 Plan, if an option holder’s service relationship with us or any of our affiliates ceases for any reason other than disability, death, or cause, the option holder may generally exercise any vested options for a period of three months following the cessation of service. If under our 2021 Plan, shares subject to stock awards expire or terminate without being exercised in full or are paid out in cash rather than in shares, such awards will not reduce the number of shares available for issuance under our 2021 Plan. Shares withheld under a stock award to satisfy the exercise, strike or purchase price of a stock award or to satisfy a tax withholding obligation will not reduce the number of shares available for issuance under our 2021 Plan. Under the 2021 Plan, RSU awards are granted under RSU award agreements adopted by the administrator. RSU awards may be granted for any form of legal consideration that may be acceptable to our board of directors and 83 permissible under applicable law. A RSU award may be settled by cash, delivery of stock, a combination of cash and stock as deemed appropriate by the administrator, or in any other form of consideration set forth in the RSU award agreement. Additionally, dividend equivalents may be credited in respect of shares covered by a RSU award. Except as otherwise provided in the applicable award agreement, or other written agreement between us and the recipient, RSU awards that have not vested will be forfeited once the participant’s continuous service ends for any reason. 2021 Employee Stock Purchase Plan In June 2021, our board of directors adopted our 2021 Employee Stock Purchase Plan, or 2021 ESPP. We authorized the issuance of 3,552,538 shares of common stock under the 2021 ESPP. Our 2021 ESPP is implemented through a series of offerings under which eligible employees are granted rights to purchase shares of our common stock on specified dates during such offerings at a discounted price per share. Under the 2021 ESPP our employees may purchase common stock through payroll deductions at a price equal to 85% of the lower of the fair market value of the stock at the beginning of the offering period or at the end of each applicable purchase period. The 2021 ESPP generally provides for offering periods of six months in duration with purchase periods ending on either May 15 or November 15. Contributions under the 2021 ESPP are limited to a maximum of 15% of an employee’s eligible compensation. ESPP purchases are settled with common stock from the ESPP’s previously-authorized and available pool of shares. The stock-based compensation expense incurred in 2022 and 2021 was $ 0.7 million and $ 0.4 million, respectively. Our policy is to issue new common stock upon the exercise of stock options. 2016 Stock Option Plan Prior to the 2021 Plan, we granted stock options under our 2016 Stock Option Plan, or 2016 Plan. Under the terms of the 2016 Plan, both incentive and nonqualified stock options were granted with exercise prices not less than the fair value of the underlying common stock on the date of grant. Options granted pursuant to the 2016 Plan vest over periods of up to five years and expire ten years from the grant date. If a 2016 Plan option expires and is not exercised, such as if an employee does not exercise vested 2016 Plan options within thirty days of termination, then these options would revert back to the 2016 Plan’s option pool. The exercise price of all options granted was based on the estimated fair market value of our common stock as determined by the board of directors at the date of grant or date of modification. Stock-based Compensation Expense We recorded stock-based compensation expense in the following categories in the accompanying consolidated statements of operations and balance sheets (in thousands): Year Ended December 31, 2022 2021 2020 Cost of revenue $ 2,931 $ 1,733 $ 177 Sales and marketing 10,144 15,746 1,122 Technology and development 16,574 38,796 2,703 General and administrative 50,820 56,557 9,719 Total stock-based compensation expense 80,469 112,832 13,721 Amount capitalized to internal-use software 2,526 674 46 Total stock-based compensation expense $ 82,995 $ 113,506 $ 13,767 84 Stock Options Stock option activity for the year ended December 31, 2022 is as follows (in thousands, except weighted-average exercise price and remaining contract life): Number of Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Life (in Years) Aggregate Intrinsic Value Outstanding at December 31, 2021 15,274 $ 10.47 8.0 $ 97,094 Granted 2,766 14.15 Exercised ( 333 ) 1.52 Cancelled/forfeited ( 552 ) 13.97 Outstanding at December 31, 2022 17,155 $ 11.13 7.1 $ 3,698 Vested and expected to vest at December 31, 2022 17,153 $ 11.13 7.1 $ 3,698 Exercisable at December 31, 2022 10,582 $ 9.85 6.4 $ 3,669 The aggregate intrinsic values in the table above represents the difference, if any, between the fair value per share of our common stock and the option exercise prices multiplied by the number of options at the respective balance sheet dates. The total intrinsic value of stock options exercised in 2022, 2021 and 2020 was $ 3.9 million, $ 13.5 million and $ 12.3 million, respectively. At December 31, 2022, total remaining stock-based compensation expense for unvested awards is $ 29.5 million, which is expected to be recognized over a weighted-average period of 2.2 years. The weighted-average grant-date fair value per share of options granted using the Black-Scholes option pricing model for 2022, 2021 and 2020 was $ 6.61 , $ 11.78 and $ 4.32 , respectively. There was a realized tax benefit of $ 2.6 million, $ 12.3 million and $ 14.2 million for tax deductions from stock options exercised in 2022, 2021 and 2020, respectively. All tax effects related to stock-based compensation have been recorded in our provision for income taxes in the accompanying consolidated statements of operations. The weighted-average assumptions that were used to calculate the grant-date fair value of our stock option grants using the Black-Scholes option pricing model were as follows: Year Ended December 31, 2022 2021 2020 Expected life (years) 5.6 5.4 5.2 Risk-free interest rate 2.6 % 1.0 % 1.1 % Expected volatility 48 % 46 % 45 % Expected dividend yield — — — In June 2021, we granted 970,970 options to our executive officers that were contingent on the effectiveness of the registration statement of our IPO, which occurred on June 29, 2021, or IPO Options. Because the number of options and exercise price of the IPO Options were based on the IPO price to the public, the grant date for accounting purposes was not established until the effective date of our IPO. As the IPO was a performance condition, no stock-based compensation expense was recognized until our IPO registration statement was declared effective. The related stock-based compensation expense for the year ended December 31, 2022 was $ 4.5 million and stock-based compensation of $ 3.1 million will be recognized over a weighted-average requisite service period of approximately 2.6 years. 85 Restricted and Performance Stock Units A summary of restricted stock units, or RSUs, and performance stock units, or PSUs, activity for the year ended December 31, 2022 is as follows (in thousands, except weighted-average grant-date fair value): Number of Units Weighted- Average Grant- Date Fair Value (1) Unvested at December 31, 2021 3,577 $ 21.52 Granted 8,024 12.88 Cancelled/forfeited ( 1,264 ) 15.19 Vested ( 1,458 ) 20.60 Unvested at December 31, 2022 8,879 $ 14.76 (1) Includes weighted average grant date and modification date fair values. The fair value of vested RSUs in 2022, 2021 and 2020, were $ 18.5 million and $ 18.1 million and $ 3.4 million, respectively. Our RSUs consist of time-based RSUs. For the year ended December 31, 2022, 2021 and 2020, total stock-based compensation expense related to RSUs was $ 41.4 million, $ 38.6 million and $ 3.7 million, respectively. At December 31, 2022, total remaining stock-based compensation expense for unvested RSU awards is $ 97.6 million, which is expected to be recognized over a weighted-average period of 3.0 years. Since the consummation of our IPO, our outstanding RSUs no longer contain performance conditions which impact future vesting. There was no tax benefit for 2022. There was a realized tax benefit of $ 3.5 million and $ 0.4 million, for tax deductions from RSU settlements in 2021 and 2020, respectively. In November 2022, we granted 211,864 PSUs, with a grant date fair value of $ 2.0 million to certain employees where 25 % and 50 % of the PSUs vest upon the first and second anniversaries, respectively, from the Revv asset acquisition date should certain headcount thresholds be maintained, and 25 % will vest upon the third anniversary from the Revv asset acquisition date. Stock-based compensation expense for these PSUs of $ 0.1 million was recognized on a graded vesting basis during the year ended December 31, 2022 and stock-based compensation of $ 1.9 million will be recognized over a weighted-average requisite service period of approximately 3.9 years. In June 2021, we granted 388,389 RSUs with a value of $ 10.9 million to our executive officers that were contingent on the effectiveness of the registration statement of our IPO, or IPO RSUs. As the IPO was a performance condition, no stock-based compensation expense was recognized until our IPO registration statement was declared effective. Stock-based compensation expense for the year ended December 31, 2022 was $ 4.3 million and was $ 3.1 million for the year ended December 31, 2021. Stock-based compensation of $ 2.9 million will be recognized over a weighted-average requisite service period of approximately 2.6 years. Upon the effectiveness of our IPO and through December 31, 2021, there were 550,091 RSUs that vested. Such shares of common stock were settled until after the lock-up period relating to our IPO that ended in the fourth quarter of 2021. In 2021, we granted 1,338,028 liquidity event RSUs, or LERSUs, to various employees, which only vest upon the achievement of up to four-years of service and upon the consummation of a change in control, or CIC event, which included an IPO. If the recipient employee terminates for any reason other than for cause, the employee shall retain any service-vested LERSUs until 6.5 years from the date of grant or the earlier settlement of the service-vested LERSUs upon the consummation of a CIC event. For the LERSUs, recognition of expense does not occur until the consummation of a CIC event and expense is recognized thereafter for any remaining service period, as such events are not considered probable of occurring prior to the CIC event for stock-based compensation purposes. Upon the effective date of our IPO registration statement on June 29, 2021, we commenced recognition of stock-based compensation for all LERSUs as the CIC performance event and service conditions for vested RSUs were satisfied. In March 2021, we granted 30,434 RSUs to various employees where the RSUs will vest depending upon the appreciation of the fair value of our common stock compared to the grant-date fair value of our common stock and upon the consummation of a CIC event, which included an IPO, merger, acquisition, or sale of more than 50 % of our assets, or performance RSUs. The performance RSUs vest on a linear basis, starting at 0 % with a fair value of our common stock equal to $ 19.64 per share and ending at 100 % upon reaching a fair value of our common stock of $ 29.46 per share. The performance options were subsequently modified in June 2021, prior to the effective date of our IPO registration statement, as discussed below. 86 Stock-option and RSU activity described above, including total stock-based compensation expense recognized and total remaining stock-based compensation expense, is inclusive of awards modified during the period as discussed below. Modification of Stock-Based Compensation Awards In June 2021, we modified the vesting conditions of certain stock options and RSUs as described below. We modified the vesting conditions of 4,477,218 outstanding performance options of certain executive officers and employees so that the performance options do not fully vest immediately upon an IPO. 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. 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. This new fair value of $ 76.6 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 registration statement for the modified performance options for which the service vesting condition was satisfied on or prior to the effective date of the IPO registration statement, and all remaining compensation expense will be recognized thereafter over the remaining service period. We recognized stock-based compensation expense of $ 23.3 million from the effective date of our IPO registration statement through June 30, 2021 and we recognized stock-based compensation of $ 24.1 million during the six months ended December 31, 2021. Stock-based compensation expense for the year ended December 31, 2022 was $ 19.9 million. At December 31, 2022, remaining compensation of $ 7.1 million will be recognized over a remaining weighted-average service period of 1.5 years. We modified the vesting conditions of 3,627,936 outstanding 2019 performance options of an executive officer so that in the event of an IPO, the modified 2019 performance options will vest monthly over a four-year period from the original 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. Incremental stock-based compensation expense as a result of this modification was $ 11.4 million. Upon our IPO, we recognized stock-based compensation expense for the modified 2019 performance options for which the service vesting condition was satisfied on or prior to the effective date of the IPO registration statement, and all remaining compensation will be recognized thereafter over the remaining service period using the graded vesting method. We recognized stock-based compensation expense of $ 6.6 million from the effective date of our IPO registration statement through June 30, 2021 and we recognized stock-based compensation of $ 6.7 million during the six months ended December 31, 2021. Stock-based compensation expense for the year ended December 31, 2022 was $ 5.0 million. At December 31, 2022, remaining compensation expense of $ 0.9 million will be recognized over a remaining weighted-average service period of 0.8 years. 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. Instead, subject to and contingent upon the effective date of an IPO registration statement, the modified performance RSUs vest 25 % on the first anniversary from their respective vesting commencement dates, then monthly over the remaining service period, subject to the continued employment through the applicable vesting dates. As the modified RSUs contain a performance condition that is satisfied upon an IPO, we remeasured the fair value of the performance RSUs on the date of modification. 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 registration statement for the performance RSUs for which the service vesting condition was satisfied on or prior to the effective date of the IPO registration statement, and all remaining compensation will be recognized thereafter over the remaining service period. We recognized stock-based compensation expense of $ 0.2 million from the effective date of our IPO registration statement through June 30, 2021 and we recognized stock-based compensation of $ 1.2 million during the six months ended December 31, 2021. Stock-based compensation expense for the year ended December 31, 2022 was $ 0.6 million. At December 31, 2022, remaining compensation expense of $ 0.4 million will be recognized over a remaining weighted-average service period of 1.8 years. We modified the vesting conditions of 1,725,942 outstanding 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 to remove the CIC event vesting acceleration benefit for the time-based options. There was no incremental stock-based compensation associated with the modification of the time-based options. 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 registration statement for the modified LERSUs that have satisfied the service-vesting condition on or prior to the effective date of our IPO registration statement, and all remaining compensation will be recognized thereafter over the remaining service period. We recognized stock-based compensation expense of $ 7.4 million from the effective date of our IPO registration statement through June 30, 2021 and we recognized stock-based compensation of $ 15.8 million during the six months ended December 31, 2021. Stock-based compensation expense for the year 87 ended December 31, 2022 was $ 13.0 million. At December 31, 2022, remaining compensation expense of $ 6.2 million will be recognized over a remaining weighted-average service period of 1.8 years. During 2021, we modified 63,235 vested options to extend the exercise period for terminated employees who were not able to exercise their options during the IPO lock-up period. We recognized $ 1.4 million in incremental stock-based compensation related to this modification during the year ended December 31, 2021. The fair value of the modified 2020 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 on the cover page of the preliminary prospectus filed with the SEC on June 21, 2021 as part of our registration statement on Form S-1/A. Note 17. Net (Loss) Income Per Share Attributable to Common Stockholders The following table shows the computation of basic and diluted net (loss) income per share attributable to common stockholders (in thousands, except per share amounts): Year Ended December 31, 2022 2021 2020 Numerator: Net (loss) income $ ( 48,733 ) $ ( 108,664 ) $ 9,896 Less: amounts attributable to redeemable convertible preferred stock — — ( 2,673 ) Net (loss) income attributable to common stockholders—basic ( 48,733 ) ( 108,664 ) 7,223 Add: undistributed earnings reallocated to common stockholders — — 39 Net (loss) income attributable to common stockholders—diluted $ ( 48,733 ) $ ( 108,664 ) $ 7,262 Denominator: Weighted-average common stock used in computing net (loss) income per share attributable to common stockholders—basic 195,829 161,424 124,709 Effect of potentially dilutive securities: Stock options — — 2,444 Restricted stock units — — 106 Weighted-average common stock used in computing net (loss) income per share attributable to common stockholders—diluted 195,829 161,424 127,259 Net (loss) income per share attributable to common stockholders—basic and diluted $ ( 0.25 ) $ ( 0.67 ) $ 0.06 The following table presents the number of options, RSUs, PSUs and restricted stock excluded from the calculation of diluted net (loss) income per share attributable to common stockholders because they are anti-dilutive (in thousands): As of December 31, 2022 2021 2020 Options to purchase common stock 17,155 15,274 12,529 RSUs and PSUs 8,879 3,577 2,235 ESPP 140 96 — Restricted stock — 50 100 Total 26,174 18,997 14,864 88 Note 18. Fair Value Measurements The following tables summarize our assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy (in thousands): As of December 31, 2022 Level 1 Level 2 Level 3 Available-for-sale debt securities $ — $ — $ 995 Money market fund 130,215 — — Total assets $ 130,215 $ — $ 995 Contingent consideration — — 836 Total liabilities $ — $ — $ 836 As of December 31, 2021 Level 1 Level 2 Level 3 Available-for-sale debt securities $ — $ — $ 1,122 Money market fund 30,215 — — Total assets $ 30,215 $ — $ 1,122 Contingent consideration — — 750 Total liabilities $ — $ — $ 750 There was no change in the fair value of the contingent consideration from our acquisition of UAS and Pure for the years ended December 31, 2022 and 2021. Our available-for-sale debt securities measured using Level 3 inputs have the following activity (in thousands): As of December 31, 2022 2021 2020 Beginning balance $ 1,122 $ 1,050 $ 5,528 Change in fair value ( 127 ) 72 434 Other-than-temporary impairment — — ( 4,912 ) Ending balance $ 995 $ 1,122 $ 1,050 Our financial guarantee measured using Level 3 inputs has the following activity (in thousands): As of December 31, 2021 2020 Beginning balance $ 150 $ 1,900 Change in fair value — ( 1,750 ) Gain on cancellation of financial guarantee ( 150 ) — Ending balance $ — $ 150 Note 19. Restructuring In 2022, we incurred $ 1.9 million in severance costs related to a reduction in headcount in our U.S. workforce. Restructuring expenses include salary and benefits for the impacted employees and are included in general and administrative expenses in the accompanying consolidated statements of operations. In 2020, we incurred $ 0.6 million in severance costs related to a reduction in headcount in our U.K. workforce. In 2020, we incurred $ 1.9 million in severance costs related to a reduction in headcount in our U.S. workforce in October, or U.S. restructuring. Restructuring expenses include salary and benefits for the impacted employees and are included in general and administrative expenses in the accompanying consolidated statements of operations. As part of the severance arrangement for our U.S. restructuring, certain separated employees were eligible to participate in a tender offer transaction and we repurchased 319,257 shares of common stock from employees who were existing stockholders and vested option holders for total consideration of approximately $ 3.1 million. The repurchased shares were constructively retired. 89 Note 20. Income Taxes The following are the domestic and foreign components of our (loss) income before income taxes (in thousands): Year Ended December 31, 2022 2021 2020 Domestic $ ( 49,383 ) $ ( 119,195 ) $ 25,272 Foreign 1,710 ( 420 ) ( 12,947 ) Total (loss) income before income taxes $ ( 47,673 ) $ ( 119,615 ) $ 12,325 The details for the provision for (benefit from) for income taxes by jurisdiction are as follows (in thousands): Year Ended December 31, 2022 2021 2020 Current Federal $ 647 $ ( 194 ) $ 846 State 1,143 760 243 Foreign 63 78 15 Total current provision 1,853 644 1,104 Deferred Federal 1,142 ( 9,605 ) 2,322 State ( 1,935 ) ( 1,990 ) ( 997 ) Foreign — — — Total deferred provision ( 793 ) ( 11,595 ) 1,325 Total provision for (benefit from) income tax $ 1,060 $ ( 10,951 ) $ 2,429 The provision for (benefit from) income taxes for December 31, 2022, 2021, and 2020, differed from the amounts computed by applying the U.S. Federal income tax rate of 21% to (loss) income before income taxes as a result of the following (in thousands): Year Ended December 31, 2022 2021 2020 (Benefit from) provision for income taxes at statutory rate $ ( 10,012 ) $ ( 25,120 ) $ 2,588 State income taxes, net of federal benefit ( 1,424 ) ( 2,309 ) ( 891 ) Rate differential on foreign earnings ( 104 ) ( 68 ) ( 1,217 ) Research and development credits ( 1,346 ) ( 887 ) ( 1,340 ) Change in valuation allowance 304 809 5,011 Stock-based compensation 2,021 ( 3,065 ) ( 2,162 ) Nondeductible stock-based compensation 10,012 18,267 — Unrecognized tax benefits 975 703 978 Non-deductible expenses 630 287 ( 52 ) Other 4 432 ( 486 ) Total provision for (benefit from) income taxes $ 1,060 $ ( 10,951 ) $ 2,429 90 The tax effects of temporary differences that give rise to significant portions of our deferred tax assets and liabilities consisted of the following as of December 31, 2022 and 2021, (in thousands): As of December 31, 2022 2021 Deferred tax assets Deferred revenue $ 316 $ 697 Accrued expenses 7,995 5,321 Stock-based compensation 9,293 7,631 Impairment on investment 1,445 1,445 Net operating loss carryforwards 15,117 17,206 Tax credit carryforwards 12,839 12,112 Lease liabilities 2,934 — Interest expense carryforwards 6,004 10,851 Capital loss carryforwards 453 452 Capitalized research expenses 6,674 — Total deferred tax assets 63,070 55,715 Valuation allowance ( 14,644 ) ( 14,170 ) Net deferred tax assets 48,426 41,545 Deferred tax liabilities Depreciation and amortization ( 12,780 ) ( 10,865 ) Right of use asset ( 2,900 ) — State taxes ( 3,366 ) ( 3,026 ) Net deferred tax liabilities ( 19,046 ) ( 13,891 ) Net deferred tax assets and liabilities $ 29,380 $ 27,654 We evaluated the realizability of net deferred tax assets and determined it is more likely than not that separate state net operating losses, state net operating losses from the acquisition of LegalInc, capital loss carryovers from the acquisition of Earth Class Mail, the deferred tax assets for Pulse IP, LLC and Pulse Business, LLC, and foreign deferred tax assets will not be realized based on the available objective evidence and have recorded a valuation allowance on such deferred tax assets. The following table summarizes the valuation allowance: Year Ended December 31, 2022 2021 2020 Beginning balance $ 14,170 $ 12,950 $ 7,816 Net increase in current year 91 1,312 4,646 Net increase (decrease) in valuation prior period 383 ( 14 ) 528 Net decrease in valuation allowance from acquisitions — ( 78 ) ( 40 ) Ending balance $ 14,644 $ 14,170 $ 12,950 Net changes in the valuation allowance in the years ended December 31, 2022, 2021, and 2020 include changes recorded through earnings relating to losses primarily from foreign operations and to a lesser extent valuation allowances established relating to acquired businesses. At December 31, 2022 and 2021, we had federal net operating loss, or NOL, carryforwards of $ 16.8 million and $ 29.8 million, respectively, which will begin to expire in 2032. At December 31, 2022, and 2021, we had state NOL carryforwards of $ 59.9 million and $ 58.8 million, respectively, which will begin to expire in 2027. At December 31, 2022 and 2021, we had foreign NOL carryforwards of $ 33.6 million and $ 31.8 million, respectively, which can be carried forward indefinitely and are not subject to expiration. At December 31, 2022 and 2021, we had federal tax credit carryforwards of $ 7.1 million and $ 7.6 million, respectively, which will begin to expire in 2035. At December 31, 2022 and 2021, we had state tax credit carryforwards of $ 10.8 million and $ 9.6 million, respectively, which carry forward indefinitely. Our domestic entities may be subject to an annual limitation on the utilization of NOL and credit carryforwards based on changes in ownership as defined by Section 382 of the Internal Revenue Code of 1986 . In 2021 91 we acquired Earth Class Mail and in 2022 we acquired Revvsales Inc. Both were structured as stock acquisitions. Since there was a change in ownership, the acquired NOL carryforwards are subject to an annual Section 382 limitation on the utilization of the NOL carryforwards. We have had foreign operations since 2013. We have not provided for U.S. income taxes on the undistributed earnings and other outside temporary differences of foreign subsidiaries as they are considered indefinitely reinvested outside the U.S. At December 31, 2022, 2021, and 2020, the amount of temporary differences related to undistributed earnings and other outside temporary differences upon which U.S. income taxes are not material to our consolidated financial statements. The following table summarizes the changes in unrecognized tax benefits for the years ended December 31, 2022, 2021, and 2020 (in thousands): Gross Unrealized Tax Benefits Balance at December 31, 2019 $ 6,256 Additions for tax positions related to the current year 916 Additions for tax positions related to prior years 59 Balance at December 31, 2020 $ 7,231 Additions for tax positions related to the current year 887 Reductions for tax positions related to prior years ( 245 ) Balance at December 31, 2021 $ 7,873 Additions for tax positions related to the current year 999 Additions for tax positions related to prior years 48 Balance at December 31, 2022 $ 8,920 If recognized, $ 8.9 million of unrecognized tax benefits, excluding interest and penalties, would reduce our annual effective tax rate. Due to the uncertain and complex application of tax laws and regulations, it is possible that the ultimate resolution of uncertain positions may result in liabilities that could be materially different from these estimates. In such an event, we will record additional tax expense or benefit in the period in which resolution occurs. Our policy is to recognize interest and penalties related to income tax matters in income tax expense. At December 31, 2022 and 2021, accrued interest and penalties related to income tax positions were not material to our consolidated financial statements. We do not anticipate that unrecognized tax benefits will materially change within the next twelve months. We are subject to taxation and file income tax returns in the U.S. federal, state, and foreign jurisdictions. The federal income tax returns for the years 2019 through 2021 and state income tax returns for the tax years 2008 through 2021 remain open to examination. Note 21. Related Party Transactions There were no related party transactions identified for December 31, 2022. In 2021 and 2020, we incurred software and software maintenance fees of $ 0.9 million and $ 1.0 million, respectively, from two software vendors controlled by our largest stockholder. Amounts due to these vendors were immaterial as of December 31, 2021. In December 31, 2020, we paid lead generation payments of $ 0.8 million, to a vendor in which a relative of the chairman of our board of directors is their President. At December 31, 2020, amounts due to this vendor were $ 1.5 million, respectively. In December 31, 2020, we received lead generation payments of $ 0.6 million, from this same vendor. There were no such transactions during the years ended December 31, 2022 and 2021. Note 22. 401(k) Savings Plan We have a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Under the 401(k) plan, matching contributions are based upon the amount of the employees’ contributions subject to certain limitations. We contributed $ 3.7 million, $ 2.3 million, and $ 1.8 million to the 401(k) plan in 2022, 2021, and 2020, respectively. 92 Note 23. Accumulated Other Comprehensive Income (Loss) Changes in accumulated other comprehensive income (loss) consisted of the following: Year Ended December 31, 2022 (in thousands) Before Tax Amount Tax Effect Net of Tax Amount Foreign currency translation adjustments: Beginning balance $ ( 2,078 ) $ — $ ( 2,078 ) Change during period 3,436 — 3,436 Ending balance $ 1,358 $ — $ 1,358 Available-for-sale debt securities: Beginning balance $ 331 $ ( 48 ) $ 283 Unrealized loss ( 147 ) 3 ( 144 ) Ending balance $ 184 $ ( 45 ) $ 139 Accumulated other comprehensive income: Beginning balance $ ( 1,747 ) $ ( 48 ) $ ( 1,795 ) Other comprehensive income 3,289 3 3,292 Ending balance $ 1,542 $ ( 45 ) $ 1,497 Year Ended December 31, 2021 (in thousands) Before Tax Amount Tax Effect Net of Tax Amount Foreign currency translation adjustments: Beginning balance $ ( 3,014 ) $ — $ ( 3,014 ) Change during period 936 — 936 Ending balance $ ( 2,078 ) $ — $ ( 2,078 ) Available-for-sale debt securities: Beginning balance $ 281 $ ( 36 ) $ 245 Unrealized gains 50 ( 12 ) 38 Ending balance $ 331 $ ( 48 ) $ 283 Cash flow hedges: Beginning balance $ ( 14,708 ) $ 3,650 $ ( 11,058 ) Unrealized gain on interest rate swaps and cap 2,897 ( 1,449 ) 1,448 Reclassification of losses from interest rate cap to net loss 28 ( 8 ) 20 Reclassification of prior hedge effectiveness to net loss 3,076 ( 781 ) 2,295 Reclassification to net loss upon extinguishment of interest rate swaps 8,707 ( 1,412 ) 7,295 Ending balance $ — $ — $ — Accumulated other comprehensive loss: Beginning balance $ ( 17,441 ) $ 3,614 $ ( 13,827 ) Other comprehensive income 15,694 ( 3,662 ) 12,032 Ending balance $ ( 1,747 ) $ ( 48 ) $ ( 1,795 ) 93 Year Ended December 31, 2020 (in thousands) Before Tax Amount Tax Effect Net of Tax Amount Foreign currency translation adjustments: Beginning balance $ ( 1,718 ) $ — $ ( 1,718 ) Change during period ( 1,296 ) — ( 1,296 ) Ending balance $ ( 3,014 ) $ — $ ( 3,014 ) Available-for-sale debt securities: Beginning balance $ 231 $ — $ 231 Unrealized gains 144 ( 36 ) 108 Loss from impairment ( 94 ) — ( 94 ) Ending balance $ 281 $ ( 36 ) $ 245 Cash flow hedges: Beginning balance $ ( 5,627 ) $ 1,387 $ ( 4,240 ) Unrealized losses on interest rate swaps and cap ( 12,756 ) 3,178 ( 9,578 ) Reclassification of losses from interest rate cap to net income 194 ( 48 ) 146 Reclassification of prior hedge effectiveness to net income 3,481 ( 867 ) 2,614 Ending balance $ ( 14,708 ) $ 3,650 $ ( 11,058 ) Accumulated other comprehensive loss: Beginning balance $ ( 7,114 ) $ 1,387 $ ( 5,727 ) Other comprehensive loss ( 10,327 ) 2,227 ( 8,100 ) Ending balance $ ( 17,441 ) $ 3,614 $ ( 13,827 ) Note 24. Unaudited Selected Quarterly Financial Information As previously disclosed on February 17, 2023 and February 27, 2023, in connection with the preparation of our consolidated financial statements for the year ended December 31, 2022, we identified tax errors within our previously issued unaudited condensed consolidated financial statements as of and for the quarterly and year to date periods ended March 31, 2022, (“Q1 2022”), June 30, 2022 (“Q2 2022”), and September 30, 2022 (“Q3 2022”) as included in our previously filed Quarterly Reports on Form 10-Q. Specifically, within our income tax provision there was an error relating to the identification of named executive officers subject to limitation on the deductibility of executive compensation under Internal Revenue Code Section 162(m), or Section 162(m). As a result of this error, Q1 2022 deferred tax assets were understated and the provision for income taxes was overstated by $ 3.9 million, reflecting a discrete impact of $ 2.4 million and a $ 1.5 million impact resulting from the error in the annual effective tax rate. The Section 162(m) error also had the impact of a $ 0.2 million understatement of the benefit for income taxes and a $ 4.1 million overstatement of the provision for income taxes for the three and six months ended June 30, 2022, respectively, and a $ 1.2 million overstatement of the benefit for income taxes and a $ 2.8 million overstatement of the provision for income taxes for the three and nine months ended September 30, 2022, respectively, and the associated impacts on deferred tax assets. Management has concluded that such errors resulted in the previously issued Q1 2022, Q2 2022, and Q3 2022 unaudited condensed consolidated financial statements, including the respective year-to-date periods, being materially misstated and therefore require restatement. In connection with the tax errors noted above, we are also correcting other previously identified immaterial errors related to: i) $ 1.2 million of revenue and $ 0.2 million of associated costs of revenue, that should have been recognized in Q1 2022, and which was initially corrected for as an out of period correction in Q2 2022; ii) $ 1.2 million of a late customer acquisition marketing, or CAM credit, that should have been recognized as a reduction to sales and marketing expense in Q2 2022, and which was initially corrected for as an out of period adjustment in Q3 2022; and iii) $ 0.9 million of revenue and $ 0.3 million of associated costs of revenue that should have been recognized in Q3 2022. The following table presents summarized unaudited consolidated quarterly financial information for each of the quarters in the year ended December 31, 2022 (in thousands, except per share amounts): 94 Three Months Ended December 31, 2022 September 30, 2022 As Restated June 30, 2022 As Restated March 31, 2022 As Restated Revenue $ 146,626 $ 155,277 $ 162,649 $ 155,427 Cost of revenue 47,448 50,314 57,151 56,182 Gross profit 99,178 104,963 105,498 99,245 Operating expenses: Sales and marketing 47,920 67,369 71,721 76,874 Technology and development 18,821 17,457 16,197 17,959 General and administrative 27,497 30,103 28,969 29,488 Impairment of long-lived and other assets 11 237 — — Total operating expenses 94,249 115,166 116,887 124,321 Income (loss) from operations 4,929 ( 10,203 ) ( 11,389 ) ( 25,076 ) Interest income (expense), net 1,032 535 29 ( 53 ) Other income (expense), net 1,625 ( 2,536 ) ( 2,022 ) ( 1,544 ) Impairment of other equity security ( 3,000 ) — — — Income (loss) before income taxes 4,586 ( 12,204 ) ( 13,382 ) ( 26,673 ) Provision for (benefit from) income taxes 2,842 ( 223 ) ( 639 ) ( 920 ) Net income (loss) $ 1,744 $ ( 11,981 ) $ ( 12,743 ) $ ( 25,753 ) Net income (loss) per share attributable to common stockholders—basic and diluted: $ 0.01 $ ( 0.06 ) $ ( 0.06 ) $ ( 0.13 ) Weighted-average shares used to compute net income (loss) per share attributable to common stockholders—basic: 192,401 194,906 197,819 198,265 Weighted-average shares used to compute net income (loss) per share attributable to common stockholders—diluted: 193,327 194,906 197,819 198,265 Description of Restatement of Financial Information In the following tables, we have presented a reconciliation of our unaudited condensed consolidated financial information as originally reported, to the as restated amounts as of and for the three months ended March 31, 2022, the three and six months ended June 30, 2022, and the three and nine months ended September 30, 2022. The restatements will be effected in future filings of our 2023 unaudited condensed consolidated financial statements within our Quarterly Reports on Form 10-Q. The table below sets forth the unaudited condensed consolidated balance sheet information, including the balances as reported, adjustments and the balances as restated (in thousands, except per share amounts): September 30, 2022 June 30, 2022 March 31, 2022 As Reported Adjustments As Restated As Reported Adjustments As Restated As Reported Adjustments As Restated Assets Current assets: Cash and cash equivalents $ 211,812 $ — $ 211,812 $ 215,537 $ — $ 215,537 $ 247,504 $ — $ 247,504 Accounts receivable, net of allowance $ 4,419 , $ 4,508 . and $ 3,633 , respectively 13,578 122 13,700 12,993 — 12,993 12,784 605 13,389 Prepaid expenses and other current assets 16,624 ( 264 ) 16,360 13,860 — 13,860 23,172 ( 242 ) 22,930 Current assets held for sale 22,722 — 22,722 — — — — — — Total current assets 264,736 ( 142 ) 264,594 242,390 — 242,390 283,460 363 283,823 Property and equipment, net 29,012 — 29,012 49,342 — 49,342 47,769 — 47,769 Goodwill 63,184 — 63,184 59,933 — 59,933 59,994 — 59,994 Intangible assets, net 13,552 — 13,552 14,570 — 14,570 15,361 — 15,361 Operating lease right-of-use assets 11,796 — 11,796 6,961 — 6,961 5,292 — 5,292 Deferred income taxes 27,473 2,803 30,276 25,685 4,064 29,749 24,849 3,877 28,726 95 Available-for-sale debt securities 1,183 — 1,183 1,182 — 1,182 1,182 — 1,182 Other assets 12,877 ( 1 ) 12,876 13,319 ( 7 ) 13,312 13,157 — 13,157 Total assets $ 423,813 $ 2,660 $ 426,473 $ 413,382 $ 4,057 $ 417,439 $ 451,064 $ 4,240 $ 455,304 Liabilities and stockholders’ equity Current liabilities: Accounts payable 25,805 — 25,805 18,404 — 18,404 31,747 — 31,747 Accrued expenses and other current liabilities 59,916 ( 21 ) 59,895 55,820 ( 1,235 ) 54,585 56,509 97 56,606 Deferred revenue 168,705 ( 738 ) 167,967 163,140 — 163,140 163,729 ( 713 ) 163,016 Operating lease liabilities 2,054 — 2,054 1,542 — 1,542 1,607 — 1,607 Total current liabilities 256,480 ( 759 ) 255,721 238,906 ( 1,235 ) 237,671 253,592 ( 616 ) 252,976 Operating lease liabilities, non-current 9,568 — 9,568 4,842 — 4,842 3,505 — 3,505 Deferred revenue 1,013 — 1,013 1,137 — 1,137 1,283 — 1,283 Other liabilities 2,926 — 2,926 2,841 — 2,841 2,833 — 2,833 Total liabilities 269,987 ( 759 ) 269,228 247,726 ( 1,235 ) 246,491 261,213 ( 616 ) 260,597 Commitments and contingencies Stockholders’ equity: Preferred stock, $ 0.001 par value; 100,000 shares authorized; 0 issued or outstanding at September 30, 2022, June 30, 2022, and March 31, 2022, respectively — — — — — — — — — Common stock, $ 0.001 par value; 1,000,000 shares authorized; 193,848 , 196,076 , and 198,599 shares issued and outstanding at September 30, 2022, June 30, 2022, and March 31, 2022, respectively 193 — 193 196 — 196 198 — 198 Additional paid-in capital 1,015,068 — 1,015,068 994,558 — 994,558 969,731 — 969,731 Accumulated deficit ( 865,933 ) 3,419 ( 862,514 ) ( 830,952 ) 5,292 ( 825,660 ) ( 779,723 ) 4,856 ( 774,867 ) Accumulated other comprehensive income (loss) 4,498 — 4,498 1,854 — 1,854 ( 355 ) — ( 355 ) Total stockholders’ equity 153,826 3,419 157,245 165,656 5,292 170,948 189,851 4,856 194,707 Total liabilities and stockholders’ equity $ 423,813 $ 2,660 $ 426,473 $ 413,382 $ 4,057 $ 417,439 $ 451,064 $ 4,240 $ 455,304 The table below sets forth the unaudited condensed consolidated statements of operations, including the balances as reported, adjustments and the as restated balances (in thousands, except per share amounts): 96 Three Months Ended September 30, 2022 June 30, 2022 March 31, 2022 As Reported Adjustments As Restated As Reported Adjustments As Restated As Reported Adjustments As Restated Revenue $ 154,416 $ 861 $ 155,277 $ 163,867 $ ( 1,218 ) $ 162,649 $ 154,209 $ 1,218 $ 155,427 Cost of revenue 50,050 264 50,314 57,393 ( 242 ) 57,151 55,940 242 56,182 Gross profit 104,366 597 104,963 106,474 ( 976 ) 105,498 98,269 976 99,245 Operating expenses: Sales and marketing 66,145 1,224 67,369 72,945 ( 1,224 ) 71,721 76,874 — 76,874 Technology and development 17,457 — 17,457 16,197 — 16,197 17,959 — 17,959 General and administrative 30,103 — 30,103 28,969 — 28,969 29,488 — 29,488 Impairment of long-lived and other assets 237 — 237 — — — — — — Total operating expenses 113,942 1,224 115,166 118,111 ( 1,224 ) 116,887 124,321 — 124,321 Loss from operations ( 9,576 ) ( 627 ) ( 10,203 ) ( 11,637 ) 248 ( 11,389 ) ( 26,052 ) 976 ( 25,076 ) Interest income (expense), net 535 — 535 29 — 29 ( 53 ) — ( 53 ) Other expense, net ( 2,536 ) — ( 2,536 ) ( 2,022 ) — ( 2,022 ) ( 1,544 ) — ( 1,544 ) Loss before income taxes ( 11,577 ) ( 627 ) ( 12,204 ) ( 13,630 ) 248 ( 13,382 ) ( 27,649 ) 976 ( 26,673 ) (Benefit from) provision for income taxes ( 1,469 ) 1,246 ( 223 ) ( 451 ) ( 188 ) ( 639 ) 2,960 ( 3,880 ) ( 920 ) Net loss $ ( 10,108 ) $ ( 1,873 ) $ ( 11,981 ) $ ( 13,179 ) $ 436 $ ( 12,743 ) $ ( 30,609 ) $ 4,856 $ ( 25,753 ) Net loss per share attributable to common stockholders—basic and diluted: $ ( 0.05 ) $ — $ ( 0.06 ) $ ( 0.07 ) $ — $ ( 0.06 ) $ ( 0.15 ) $ — $ ( 0.13 ) Weighted-average shares used to compute net loss per share attributable to common stockholders—basic and diluted: 194,906 — 194,906 197,819 — 197,819 198,265 — 198,265 The table below sets forth the unaudited condensed consolidated statements of operations, including the balances as reported, adjustments and the balances as restated (in thousands, except per share amounts): Nine Months Ended Six Months Ended September 30, 2022 June 30, 2022 As Reported Adjustments As Restated As Reported Adjustments As Restated Revenue $ 472,492 $ 861 $ 473,353 $ 318,076 $ — $ 318,076 Cost of revenue 163,383 264 163,647 113,333 — 113,333 Gross profit 309,109 597 309,706 204,743 — 204,743 Operating expenses: Sales and marketing 215,964 — 215,964 149,819 ( 1,224 ) 148,595 Technology and development 51,613 — 51,613 34,156 — 34,156 General and administrative 88,560 — 88,560 58,457 — 58,457 Impairment of long-lived and other assets 237 — 237 — — — Total operating expenses 356,374 — 356,374 242,432 ( 1,224 ) 241,208 Loss from operations ( 47,265 ) 597 ( 46,668 ) ( 37,689 ) 1,224 ( 36,465 ) Interest income (expense), net 511 — 511 ( 24 ) — ( 24 ) Other expense, net ( 6,102 ) — ( 6,102 ) ( 3,566 ) — ( 3,566 ) Loss before income taxes ( 52,856 ) 597 ( 52,259 ) ( 41,279 ) 1,224 ( 40,055 ) Provision for (benefit from) income taxes 1,040 ( 2,822 ) ( 1,782 ) 2,509 ( 4,068 ) ( 1,559 ) Net loss $ ( 53,896 ) $ 3,419 $ ( 50,477 ) $ ( 43,788 ) $ 5,292 $ ( 38,496 ) Net loss per share attributable to common stockholders—basic and diluted: $ ( 0.27 ) $ — $ ( 0.26 ) $ ( 0.22 ) $ — $ ( 0.19 ) Weighted-average shares used to compute net loss per share attributable to common stockholders—basic and diluted: 196,984 — 196,984 198,040 — 198,040 97 The tables below sets forth the unaudited condensed consolidated statements of comprehensive (loss) income, including balances as reported, adjustments and balances as restated amounts (in thousands): Three Months Ended September 30, 2022 June 30, 2022 March 31, 2022 As Reported Adjustments As Restated As Reported Adjustments As Restated As Reported Adjustments As Restated Net Loss $ ( 10,108 ) $ ( 1,873 ) $ ( 11,981 ) $ ( 13,179 ) $ 436 $ ( 12,743 ) $ ( 30,609 ) $ 4,856 $ ( 25,753 ) Total other comprehensive income 2,644 — 2,644 2,209 — 2,209 1,440 — 1,440 Total comprehensive loss $ ( 7,464 ) $ ( 1,873 ) $ ( 9,337 ) $ ( 10,970 ) $ 436 $ ( 10,534 ) $ ( 29,169 ) $ 4,856 $ ( 24,313 ) Nine Months Ended September 30, 2022 Six Months Ended June 30, 2022 As Reported Adjustments As Restated As Reported Adjustments As Restated Net loss $ ( 53,896 ) $ 3,419 $ ( 50,477 ) $ ( 43,788 ) $ 5,292 $ ( 38,496 ) Total other comprehensive income 6,293 — 6,293 3,649 — 3,649 Total comprehensive loss $ ( 47,603 ) $ 3,419 $ ( 44,184 ) $ ( 40,139 ) $ 5,292 $ ( 34,847 ) The table below sets forth the unaudited condensed consolidated statements of stockholders’ equity, including balances as reported, adjustments and balances as restated amounts (in thousands): Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive (Loss) income Total Stockholders’ Equity Shares Amount Balance at March 31, 2022 as reported 198,599 $ 198 $ 969,731 $ ( 779,723 ) $ ( 355 ) $ 189,851 Cumulative adjustments to net loss — — — 4,856 — 4,856 Balance at March 31, 2022 as restated 198,599 $ 198 $ 969,731 $ ( 774,867 ) $ ( 355 ) $ 194,707 Balance at June 30, 2022 as reported 196,079 $ 196 $ 994,558 $ ( 830,952 ) $ 1,854 $ 165,656 Cumulative adjustments to net loss — — — 5,292 — 5,292 Balance at June 30, 2022 as restated 196,079 $ 196 $ 994,558 $ ( 825,660 ) $ 1,854 $ 170,948 Balance at September 30, 2022 as reported 193,848 $ 193 $ 1,015,068 $ ( 865,933 ) $ 4,498 $ 153,826 Cumulative adjustments to net loss — — — 3,419 — 3,419 Balance at September 30, 2022 as restated 193,848 $ 193 $ 1,015,068 $ ( 862,514 ) $ 4,498 $ 157,245 The table below sets forth the unaudited condensed consolidated statements of cash flows, including balances as reported, adjustments and balances as restated amounts (in thousands): 98 Nine Months Ended September 30, 2022 Six Months Ended June 30, 2022 Three Months Ended March 31, 2022 As Reported Adjustments As Restated As Reported Adjustments As Restated As Reported Adjustments As Restated Cash flows from operating activities Net loss $ ( 53,896 ) $ 3,419 $ ( 50,477 ) $ ( 43,788 ) $ 5,292 $ ( 38,496 ) $ ( 30,609 ) $ 4,856 $ ( 25,753 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 16,187 — 16,187 10,933 — 10,933 5,394 — 5,394 Amortization of right-of-use assets 1,290 — 1,290 852 — 852 378 — 378 Amortization of debt issuance costs 170 — 170 112 — 112 56 — 56 Impairment of other equity securities 170 — 170 170 — 170 170 — 170 Impairment of long-lived assets 237 — 237 — — — — — — Stock-based compensation 64,490 — 64,490 44,712 — 44,712 21,865 — 21,865 Deferred income taxes 166 ( 2,803 ) ( 2,637 ) 1,955 ( 4,064 ) ( 2,109 ) 2,791 ( 3,877 ) ( 1,086 ) Change in fair value of contingent consideration ( 150 ) — ( 150 ) ( 150 ) — ( 150 ) — — — Unrealized foreign exchange loss 5,958 — 5,958 3,405 — 3,405 1,379 — 1,379 Other ( 1 ) — ( 1 ) ( 1 ) — ( 1 ) — — — Changes in operating assets and liabilities, net of effects of business combination: Accounts receivable ( 2,902 ) ( 122 ) ( 3,024 ) ( 2,357 ) — ( 2,357 ) ( 2,150 ) ( 605 ) ( 2,755 ) Prepaid expenses and other current assets ( 560 ) 264 ( 296 ) ( 417 ) — ( 417 ) ( 6,706 ) 242 ( 6,464 ) Other assets ( 864 ) 1 ( 863 ) ( 345 ) 7 ( 338 ) ( 811 ) — ( 811 ) Accounts payable ( 6,417 ) — ( 6,417 ) ( 13,553 ) — ( 13,553 ) ( 117 ) — ( 117 ) Accrued expenses and other liabilities 7,606 ( 21 ) 7,585 8,156 ( 1,235 ) 6,921 5,675 97 5,772 Operating lease liabilities ( 1,599 ) — ( 1,599 ) ( 1,642 ) — ( 1,642 ) ( 770 ) — ( 770 ) Income tax payable 22 — 22 15 — 15 7 — 7 Deferred revenue 22,108 ( 738 ) 21,370 16,700 — 16,700 17,185 ( 713 ) 16,472 Net cash provided by operating activities 52,015 — 52,015 24,757 — 24,757 13,737 — 13,737 Cash flows from investing activities Acquisition, net of cash acquired ( 2,532 ) — ( 2,532 ) — — — — — — Proceeds from acquisition working capital adjustment 307 — 307 307 — 307 304 — 304 Purchase of property and equipment ( 16,441 ) — ( 16,441 ) ( 10,379 ) — ( 10,379 ) ( 4,911 ) — ( 4,911 ) Net cash used in investing activities ( 18,666 ) — ( 18,666 ) ( 10,072 ) — ( 10,072 ) ( 4,607 ) — ( 4,607 ) Cash flows from financing activities Repayment of capital lease obligations — — — — — — ( 4 ) — ( 4 ) Payment of contingent consideration ( 600 ) — ( 600 ) ( 600 ) — ( 600 ) — — — Repurchase of common stock ( 61,736 ) — ( 61,736 ) ( 39,155 ) — ( 39,155 ) ( 1,094 ) — ( 1,094 ) Shares surrendered for settlement of minimum statutory tax withholding ( 41 ) — ( 41 ) ( 30 ) — ( 30 ) ( 11 ) — ( 11 ) Proceeds from issuance of stock under employee stock plans 1,682 — 1,682 1,487 — 1,487 237 — 237 Net cash (used in) financing activities ( 60,695 ) — ( 60,695 ) ( 38,298 ) — ( 38,298 ) ( 872 ) — ( 872 ) Effect of exchange rate changes on cash and cash equivalents ( 139 ) — ( 139 ) ( 147 ) — ( 147 ) ( 51 ) — ( 51 ) Net (decrease) increase in cash and cash equivalents, and restricted cash equivalents ( 27,485 ) — ( 27,485 ) ( 23,760 ) — ( 23,760 ) 8,207 — 8,207 Cash and cash equivalents, and restricted cash equivalents, at beginning of the period 239,297 — 239,297 239,297 — 239,297 239,297 — 239,297 Cash and cash equivalents at end of the period $ 211,812 $ — $ 211,812 $ 215,537 $ — $ 215,537 $ 247,504 $ — $ 247,504 99 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures None