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Item 7. Management’s Discussion and Analysis

2024-02-29 compared with 2023-03-01 · 264 added, 336 removed, 398 unchanged (60% of the section changed)

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See “Forward-Looking Statements” preceding Part I of this Annual Report on Form 10-K.

LegalZoom is a leading online platform for legal and compliance solutions in the United States, or U.S.

Our core offerings include business formations, intellectual property and estate planning services, and we have recently expanded our platform to include professional expertise and other products, both legal and non-legal, to better meet the needs of small businesses.

Our unique position at business inception allows us to become a trusted business advisor, supporting the evolving needs of a new business throughout its lifecycle.

Along with formations, our services include ongoing compliance and tax advice and filings, virtual mailbox solutions, trademark filings, and estate plans.

Additionally, we have unique insights into our customers and leverage our product as a channel to introduce small businesses to leading brands in our partner ecosystem, solving even more of their business needs.

We operate across all 50 states and over 3,000 counties in the U.S.

and have more than 20 years of experience navigating complex regulation and simplifying the legal and compliance process for our customers.

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 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 an aggregate of 46,162,160 shares of common stock.

Following the completion of the IPO, we have one class of authorized and outstanding common stock.

Our Business Model and Growth Strategy

Our business model is to acquire customers at the time of business formation and then continue to serve their legal, compliance and tax solutions needs over the life of their businesses with our mix of transaction, subscription, and partner offerings.

Transaction products include legal documents, business filings, and related services for small business owners and their families, such as business formations, annual compliance filings, intellectual property, estate planning documents, forms, and agreements.

Subscription products include compliance solutions and credentialed professional subscription services, including legal and tax advisory and preparation services as well as additional owned services such as virtual mail.

We also introduce our customers to a variety of third-party partners, giving them access to critical services they need to start and run their businesses, such as business license services, credit card and banking services, website development, productivity tools, and business insurance, among others.

Our strategy is to scale our existing business and gain market share by investing in core products and sales and marketing;

integrating our independent attorney network and tax professionals into our core product set;

expanding our addressable market;

and attracting additional customers and increasing conversion through the introduction of lower-priced products and services.

We are innovating our product lineup to target more price-sensitive customer segments and have made certain of our business formation services available at a low cost or without charge in certain geographies on a test-basis.

We expect this new lineup, with a free formation product as a foundational element, will be rolled out to 100% of traffic by the end of the first quarter.

We expect to continue to test new products and price points going forward as we seek to optimize our product offerings across our lineup.

We also aim to grow average revenue per subscription unit, or ARPU, and partnership revenue through building in-house adjacencies and expanding our partner ecosystem to provide new recurring revenue streams.

For additional information regarding our business and strategy, see Part I, Item 1, Business of this Annual Report on Form 10-K.

Key Business Metrics

In addition to the measures presented in our consolidated financial statements, we regularly monitor the following financial and operating metrics to evaluate the growth of our business, measure the effectiveness of our marketing efforts, identify trends, formulate financial forecasts and make strategic decisions.

Number of business formations

We define the number of business formations in a given period as the number of limited liability company, or LLC, incorporation, not-for-profit and doing business as, or DBA orders placed on our platform in such period, excluding such orders from our operations in the U.K.

We consider the number of business formations to be an important metric considering that it is typically the first product or service small business customers purchase on our platform, creating the foundation for additional products and subsequent subscription and partner revenue as customers adopt additional products and services throughout the lifecycle of their business.

We believe that including customers filing DBAs on our platform provides a more accurate representation of the number of newly formed businesses we serve.

These transactions are most often completed by sole proprietors who represent potential future transaction and subscription cross-sell opportunities as their businesses mature.

Furthermore, we believe our definition of the number of business formations is most closely aligned with U.S.

Census reporting of new applications for Employer Identification Numbers, or EINs, which we believe to be the most relevant source of publicly available U.S.

The below table sets forth the number of business formations for the years ended December 31, 2022 and 2021:

Year Ended December 31,

(in thousands)

Number of business formations

We experienced a 2% decrease in business formation transactions during the year ended December 31, 2022 compared to the year ended December 31, 2021.

While year-over-year growth in the number of business formations on our platform accelerated in the second half of 2022 due to higher volumes in our partner integration channel and further testing of our lower-priced business formation offerings, the decline for the full year was primarily due to a decline in overall U.S.

business formations during this period based on a review of U.S.

Census data revealing new applications for EINs.

We expect the decline in overall U.S.

business formations to continue in 2023.

Number of transactions

We define the number of transactions in a given period as gross transaction order volume, prior to refunds, on our platform during such period.

Transactions may include one or more services purchased at the same time.

For example, a customer of our business formation services may choose to form an LLC and purchase an operating agreement and business licenses at the same time.

This constitutes a single transaction.

Refunds, or partial refunds, may be issued under certain circumstances pursuant to the terms of our customer satisfaction guarantee.

We consider the number of transactions to be an important metric considering that our customers generally begin their LegalZoom journey with a transaction, creating the foundation for generating subsequent subscription and partner revenue.

The below table sets forth the number of transactions for the years ended December 31, 2022 and 2021 :

Year Ended December 31,

(in thousands)

Number of transactions

We experienced a 5% decrease in the number of transactions during the year ended December 31, 2022 compared to the year ended December 31, 2021.

The decrease in the number of transactions during the year ended December 31, 2022 resulted from a reduction in estate planning and other consumer transactions, lower volumes in our intellectual property business largely due to the discontinuation of our do-it-yourself trademark product in favor of our attorney-assisted solution and, to a lesser extent, the decrease in business formations during this same period.

Our estate planning and other consumer transactions declined as a percentage of total transactions in the year ended December 31, 2022.

We expect the proportion of estate planning and other consumer transactions to continue to decrease over time as we focus more of our investment in small business formations.

Over the long-term, we expect to continue to grow transactions;

however, the growth may fluctuate period-over-period based on the variability of overall business formations and estate planning transactions.

Average order value

We define average order value for a given period as total transaction revenue divided by total number of transactions in such period.

We consider average order value to be an important metric given it indicates how much customers are spending on our platform per transaction.

Estate planning transactions are generally at a lower price point, making our overall average order value lower than our typical price point for small business formations.

The below table sets forth the average order value for the years ended December 31, 2022 and 2021:

Year Ended December 31,

Average order value

Average order value decreased by 2% during the year ended December 31, 2022 compared to the year ended December 31, 2021.

The reduction in average order value for the year ended December 31, 2022 was primarily driven by an increase in transactions from our wholesale-priced partner integration channel as a percentage of total transactions and testing of lower-priced business formation services partially offset by the timing of revenue recognition.

Transactions offered through our partner integration channel are generally at lower price points than our other small business products and services.

During the year ended December 31, 2022, we also made certain of our business formation services available at a low cost or without charge in certain geographies on a test-basis as we continued to innovate our product lineup to target more price-sensitive customer segments.

Finally, we were more efficient in our fulfillment in the year ended December 31, 2022, resulting in additional recognized revenue during the period.

Growth in our average order value may fluctuate period-over-period based on the mix of business formations relative to estate planning and other consumer transactions, the timing of transaction revenue recognition, and our ability to introduce and sell new products.

We expect average order value to decline year-over-year in 2023 as we introduce lower-priced products and services.

We expect to continue to test new products and price points going forward as we optimize our product offerings across our lineup.

Number of subscription units

We define the number of subscription units in a given period as the paid subscriptions at the end of such period, including those that are not yet 60 days past their subscription order dates.

Refunds, or partial refunds, may be issued under certain circumstances pursuant to the terms of our customer satisfaction guarantee.

We consider the number of subscription units to be an important metric since subscriptions enable us to increase the lifetime value of a customer through deeper, longer-term relationships.

Subscriptions typically range from 30 days to one year in duration and the vast majority of our new subscriptions originate from business formation orders and have an annual term.

Our customers can have multiple subscriptions at the end of a period.

For example, a popular combination for a new small business owner is attorney advice and registered agent subscriptions.

The below table sets forth the number of subscription units as of December 31, 2022 and 2021:

As of December 31,

(in thousands)

Number of subscription units

We achieved 8% growth in our number of subscription units from December 31, 2021 to December 31, 2022, reflecting strong growth in subscriptions acquired through our partner integration channel, our registered agent, compliance, and tax products, as well as from our purchase of Earth Class Mail during the fourth quarter of 2021.

We aim to continue to grow subscription units by increasing the proportion of our small business customers that purchase a subscription service at the time of their initial formation purchase and by improving retention rates.

Average revenue per subscription unit

We define average revenue per subscription unit, or ARPU as of a given date as subscription revenue for the last twelve-month period ended on such date, or LTM, divided by the average of the number of subscription units at the beginning and end of the LTM period.

We consider ARPU to be an important metric because it helps to illustrate our ability to deepen our relationship with our existing customers as they purchase incremental and higher-value services.

The below table sets forth ARPU as of December 31, 2022 and 2021:

Year Ended December 31,

Average revenue per subscription unit

ARPU increased 9% as of December 31, 2022 as compared to December 31, 2021.

The increase in ARPU primarily resulted from growth of our tax service, subscriptions acquired through our purchase of Earth Class Mail and growth of our registered agent and compliance products, which carry higher average price points than our other subscription products.

ARPU also increased as a result of a price increase to our small business legal advisory plan that was implemented in the fourth quarter of 2021.

These increases were partially offset by an increase in wholesale-priced subscriptions from our partner integration channel.

We expect year-over-year ARPU growth to moderate in 2023 as we anniversaried the acquisition of Earth Class Mail in the fourth quarter of 2022.

LegalZoom is a leading online platform for business formation in the U.S.

Our unique position at business inception allows us to become a trusted business advisor, supporting the evolving needs of a new business throughout its lifecycle, and we have expanded our platform to include professional expertise and other products, both legal and non-legal, to better meet the needs of small businesses.

Driven by a mission to unleash entrepreneurship, we deliver comprehensive legal, tax, accounting and compliance products and expertise for small business owners through easy-to-use technology.

We operate across all 50 states and in over 3,000 counties in the U.S., with over two decades of experience in simplifying the legal and compliance process for our customers and empowering entrepreneurs to make their dream a reality.

Recent Developments and Updates

• In November 2023, LucasZoom, LLC, or the selling stockholder, sold 15,099,993 shares of our common stock in an underwritten public offering at a price paid to the selling stockholder of $10.84 per share.

We did not offer any shares of common stock in the secondary offering and did not receive any proceeds from the sale of shares of common stock in the secondary offering.

Upon the closing of the offering, the selling stockholder ceased to own any shares of our common stock.

• In November 2023, we announced the launch of a new business license offering.

This new offering is built on a proprietary nationwide database that matches a small business profile with the required licenses and permits at all levels of government.

• In December 2023, we launched a new Beneficial Ownership Information Report to help customers satisfy the federally mandated beneficial ownership information reporting rule under the Corporate Transparency Act, which went into effect on January 1, 2024.

• In 2023, we exited certain channel partnership relationships as part of our focus on profitable, customer-led growth.

In the first half of 2024, we expect these exits to negatively impact business formations and, in turn, our subscription unit growth, as business formations act as an entrance point for many customers into the LegalZoom ecosystem.

• We are continuing to scale up LZ Tax and we are learning more about our tax customers in the process.

As we optimize our LZ Tax offerings to better meet the needs of our target customers, we are seeing and expect to continue to see a decrease in the number of customers purchasing and retaining an LZ Tax subscription unit.

While this decrease will produce a revenue headwind throughout 2024, we expect increased retention of our LZ Tax subscription units over the long term.

Key Factors Affecting Our Performance

We believe that our future performance will depend on many factors, including the following:

• Macroeconomic factors .

Adverse changes in general macroeconomic, political, regulatory and market conditions can negatively impact consumer spending patterns, the success of existing small businesses and the formation of new small businesses.

While we continue to actively monitor the impacts of the evolving macroeconomic environment on all aspects of our business, future negative or decelerating impacts from factors such as inflation, higher interest rates, regulatory obstacles or changes in laws (including changes in tax laws and regulations) remain uncertain.

• Our share of business formations .

The majority of our transaction revenue is generated by providing formation services to guide our customers through the transition from being aspiring business owners to actually launching their entities.

We offer entity formation services for LLCs, corporations and non-profits.

In the years ended December 31, 2022 and 2021, business formations represented the largest share of our total transaction orders.

In addition, business formations act as an entrance point for many customers to the LegalZoom ecosystem, where they then often purchase additional products and services.

Our business depends on the continuation of new business formations in the U.S., which may be seasonal in nature and dependent on macroeconomic factors, and even more so, on our ability to increase our share of these formations.

• Product leadership .

We have invested significantly and expect to continue to invest in our user experience, which we believe is critical to attracting and converting customers and improving retention.

These investments consist mainly of creating educational content, improving our website and application user interface, and creating and offering additional products and services, including the growing use of experts in the customer journey.

The performance of our product is important to attracting new customers to our platform, maintaining a healthy subscriber base and retaining our customers.

In 2023, business formations represented the largest share of our total transaction orders.

Business formations act as an entrance point for many customers to the LegalZoom ecosystem, where they then often purchase a mix of transaction and subscription offerings alongside and after the initial formation transaction.

As a result, our operating results depend on the continuation of new business formations in the U.S.

and even more so, on our ability to increase our share of these formations.

In an effort to increase our share of new business formations in the U.S., we have introduced and may continue to introduce lower-priced products and services to target more price conscious customers.

• Ability to enhance customer lifetime value .

Many of our subscribers have increased their cumulative spend with us over time as they have expanded their use of our platform to include additional products and subscription services.

Our relationship with our small business customers typically starts with the formation of their business and deepens as their businesses grow and their needs become more complex.

By continuing to develop new products and subscription services such as tax advice and preparation to address such needs, we expect to see higher customer engagement and retention, which in turn would further increase our customer lifetime value.

Additionally, we offer third-party services via our partner ecosystem, such as our partnership with Wix, which enables our small business customers to build their online presence, and we expect to be able to generate incremental revenue via these offerings.

• Investment in marketing.

We have invested, and expect that we will continue to invest, in our brand and the promotion of our services through our various customer acquisition channels, including search engine marketing, search engine optimization, television, digital video, social, radio, and our inside sales team to acquire new customers and grow our business.

We frequently evaluate how we price, market, and sell transaction products in order to optimize our subscription business.

• Investment in tax offerings.

Tax represents a natural adjacency in our mission to make legal and compliance services accessible to small businesses.

To address the customer need, we launched our Tax advisory and preparation offering.

We anticipate incurring additional costs related to our tax offerings as we continue to invest in these offerings throughout 2023.

We believe that our tax offerings represent an attractive opportunity for incremental revenue growth.

• Talent acquisition and retention.

We are focused on providing a quality employee experience as we believe the future success of our business is heavily dependent on our ability to attract and retain talented and highly productive employees.

We compete for talent within the technology industry and believe that our strong brand recognition and greater company purpose are important, positive considerations in our ability to recruit talent.

We also are scaling an in-house team of certified public accountants or CPAs, and enrolled agents that are critical to our tax offerings.

• Macroeconomic factors .

Fluctuations in general macroeconomic, political, regulatory and market conditions, such as recessionary fears, the current inflationary environment, rising interest rates and lingering effects of the COVID-19 pandemic can adversely impact consumer spending patterns, the success of existing small businesses and the formation of new small businesses.

For example, overall U.S.

business formations declined in the year ended December 31, 2022 compared to 2021 based on a review of U.S.

Census data and

we expect the this decline to continue in 2023 due, in part, to the current challenging macroeconomic environment.

While we believe that secular trends toward greater adoption of online services continue to exist, future negative or decelerating impact from sustained inflation, higher interest rates or other macroeconomic fluctuations remains uncertain.

Our goal is for customers to grow their use of our platform post-formation to include additional transaction products and subscription services as their businesses evolve and that, in turn, customers increase their cumulative spend with us over time.

As a result, our future performance depends on our ability to integrate new products and services into our LegalZoom ecosystem and to increase recurring revenue through subscription offerings.

As we continue to test new and existing products and services in order to optimize our product line-up, we expect increased volatility across our key business metrics.

In addition, in an effort to enhance customer lifetime value, we intend to continue to invest in improving our customer experience, which includes investments in our educational content and improving our website and mobile experience.

• Ability to integrate experts .

We believe that our expert offerings significantly expand our addressable market.

We aim to increase the consumption of our higher-cost expert offerings through targeted cross-selling and promotion of our products, as well as by improving the platforms through which our customers and experts interact.

Our ability to further integrate experts into our LegalZoom ecosystem and to increase the consumption of our expert offerings by new and existing customers is key to our future success.

Key Components of our Results of Operations

We generate revenue from the sources identified below.

Transaction revenue .

Transaction revenue is primarily generated from our customized legal document services upon fulfillment of these services.

Beginning in the fourth quarter of 2023, we no longer present partner revenue on a standalone basis and partner revenue is now included within transaction and subscription revenue.

This change had no impact on total revenue.

Prior period disclosures and amounts have been conformed to the current period presentation.

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.

Until April 2020, when we ceased providing such services, we also generated transaction revenue from our residential and commercial conveyancing business in the United Kingdom, or U.K., and revenue for these services was recognized when delivered to the customer.

In the fourth quarter of 2020, we commenced providing tax preparation services in the U.S.

which are recognized at the point in time when the customer’s tax return is filed and accepted by the applicable government authority.

Subscription revenue .

Subscription revenue is generated primarily from subscriptions to our registered agent services, compliance packages, attorney advice, legal forms services, tax advisory and preparation services, and virtual mail services in addition to software-as-a-service, or SaaS, subscriptions in the U.K.

In the fourth quarter of 2020, we commenced providing tax and payroll subscription services.

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.

We also earn fees from third-party providers from leads generated to such providers through our online legal platform.

Subscription revenue —Subscription revenue is generated primarily from subscriptions to our registered agent, compliance packages, attorney advice, legal forms, tax and accounting, virtual mail and e-signature services, and software-as-a-service, or SaaS, accounting solution subscriptions and 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.

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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.

We expect partner revenue will continue to decline in 2023 as we transition away from legacy partners that do not align with our new strategic direction and focus more on long-term opportunities to have strategic partnerships that build on recurring revenue models.

See the section titled “—Critical Accounting Estimates—Revenue Recognition” for a description of the accounting policies related to revenue recognition, including arrangements that contain multiple deliverables.

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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 and credentialed professionals, and related benefits, including stock-based compensation;

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.

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.

We expect our cost of revenue to increase in absolute dollars as we continue to invest in enhancing our customer experience and in new product development, including expert-assisted offerings for our tax and attorney-assisted legal offerings.

We expect our cost of revenue to increase in absolute dollars as we continue to invest in enhancing our customer experience and in new product development.

Gross profit and gross margin

Gross profit, or revenue less cost of revenue, and gross margin, or gross profit as a percentage of revenue, have been and will continue to be affected by various factors, primarily the mix between transaction, subscription and partner revenue.

Our gross margin on subscription and partner revenue is higher than our gross margin on transaction revenue.

Our long-term gross margin expansion is also expected to be driven by automation improvements and digitization efforts.

Further, our acquisitions of other companies have negatively impacted our gross margin in the short term, and any such future acquisitions could have a similar effect.

In the short term, we expect our gross profit to increase in absolute dollars but our gross margin to be impacted by our continued investment in scaling our tax business, which has lower gross margins than other products in our portfolio.

In the short term, we expect our gross profit to increase in absolute dollars but our gross margin to be impacted by higher filing fees as a percentage of revenue due to our offering of free LLC formations, as well as our continued investment in scaling our tax and attorney-assisted legal offerings, which have lower gross margins than other products in our portfolio.

However, we expect our gross margin to increase modestly over the longer term as we continue to focus on growing higher-margin subscription revenue and invest in fulfillment automation technologies.

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Sales and marketing

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.

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 social media costs.

Marketing and advertising costs to promote our services are expensed in the period incurred.

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We intend to continue to invest in sales and marketing to drive additional revenue, further penetrate our expanding addressable market, and build on our digital brand leadership and awareness.

While we anticipate that sales and marketing expenses will continue to be our largest operating expense category for the foreseeable future, we expect marketing expenses to decline in the near-term as we pivot our media spend toward search engine marketing and other performance-based channels to provide additional flexibility given the uncertain macroeconomic environment.

We anticipate that sales and marketing expenses will continue to be our largest operating expense category for the foreseeable future.

Technology and development

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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.

We expense legal costs for defending legal proceedings as incurred.

Excluding stock-based compensation, we expect our general and administrative expenses to increase in absolute dollars for the foreseeable future due to additional costs associated with accounting, compliance, insurance and investor relations as we have recently become a public company.

Over the next year, we will continue to incur stock-based compensation expense as a result of certain modifications to equity awards that occurred in connection with our IPO;

We will continue to incur stock-based compensation expense related to certain modifications to equity awards that occurred in connection with our IPO through 2024;

however, we expect our general and administrative expenses to decrease as a percentage of our revenue over the longer term.

Our general and administrative expenses may fluctuate as a percentage of our revenue from period-to-period due to seasonality and the timing and extent of these expenses.

Interest expense, net

Interest income (expense), net, consists primarily of interest income generated from our investment in money market fund offset by amortization of debt issuance costs related to our Amended and Restated Credit and Guaranty Agreement, or 2021 Revolving Facility.

Prior year interest income (expense), net, consisted of interest expense on our prior credit facility, hedging instruments and amortization of debt issuance costs, which were extinguished after our IPO in July 2021.

We expect interest income (expense), net, to remain insignificant in the near term as we have no outstanding indebtedness.

Interest expense

Interest expense consists primarily of amortization of debt issuance costs related to our Amended and Restated Credit and Guaranty Agreement, or 2021 Revolving Facility.

We expect interest expense to remain insignificant in the near term as we have no outstanding indebtedness.

However, we would incur interest expense in the longer term should we draw down on our 2021 Revolving Facility or incur other indebtedness.

Interest income

Interest income consists primarily of interest income generated from our investment in money market funds.

Our provision for income taxes consists of current and deferred federal, state and foreign income taxes.

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This limitation has been accounted for in calculating our available NOL carryforwards.

Key Business Metrics

Number of business formations

We define the number of business formations in a given period as the number of limited liability company, or LLC, incorporation, not-for-profit and doing business as, or DBA, orders placed on our platform in such period, excluding such orders from our operations in the United Kingdom, or U.K.

We consider the number of business formations to be an important metric considering that it is typically the first product small business customers purchase on our platform, creating the foundation for additional purchases of transaction and subscription offerings throughout the lifecycle of their business, deepening our relationship with our customers.

We believe that including customers filing DBAs on our platform provides a more accurate representation of the number of newly formed businesses we serve.

These transactions are most often completed by sole proprietors who represent potential future transaction and subscription cross-sell opportunities as their businesses mature.

Furthermore, we believe our definition of the number of business formations is most closely aligned with U.S.

Census reporting of new applications for EINs, which we believe to be the most relevant source of publicly available U.S.

The below table sets forth the number of business formations for the years ended December 31, 2023 and 2022:

Year Ended December 31,

(in thousands)

Number of business formations

We experienced a 23% increase in business formation transactions during the year ended December 31, 2023 compared to the year ended December 31, 2022.

Our business formation transactions increased during the year ended December 31, 2023 primarily due to an increase in LLC formations driven by our nationwide

roll-out of free LLC formations beginning in the first quarter of 2023.

This increase in business formation transactions was partially offset by the exit of certain channel partner relationships in the third quarter of 2023.

Our business formation transactions outpaced the 8% increase in overall U.S.

business formations during the year ended December 31, 2023 compared to the year ended December 31, 2022, based on a review of U.S.

Census data revealing new applications for EINs.

Number of transactions

We define the number of transactions in a given period as gross transaction order volume, prior to refunds, on our platform during such period.

Transactions may include one or more services purchased at the same time.

For example, a customer of our business formation services may choose to form an LLC and purchase an operating agreement and business licenses at the same time.

This constitutes a single transaction.

Refunds, or partial refunds, may be issued under certain circumstances pursuant to the terms of our customer satisfaction guarantee.

The below table sets forth the number of transactions for the years ended December 31, 2023 and 2022 :

Year Ended December 31,

(in thousands)

Number of transactions

We experienced a 12% increase in the number of transactions during the year ended December 31, 2023 compared to the year ended December 31, 2022.

The increase in the number of transactions during the year ended December 31, 2023 resulted primarily from the increase in business formations discussed above, as well as an increase in the number of compliance-related transactions.

These increases were partially offset by a 12% reduction in estate planning transactions during the year ended December 31, 2023.

Average order value

We define average order value for a given period as total transaction revenue divided by total number of transactions in such period.

We consider average order value to be an important metric given it indicates how much customers are spending on our platform per transaction.

The below table sets forth the average order value for the years ended December 31, 2023 and 2022:

Year Ended December 31,

Average order value

Average order value decreased by 15% during the year ended December 31, 2023 compared to the year ended December 31, 2022.

The decrease in average order value during the year ended December 31, 2023 was primarily driven by a 25% decrease in average order value related to our business formations due to the nationwide rollout of free LLC formations during the first quarter of 2023.

We expect variability in average order value throughout 2024 as we lap our exit of certain channel partner relationships and due to changes in the mix of our non-formation transaction products.

Number of subscription units

We define the number of subscription units in a given period as the paid subscriptions at the end of such period, including those that are not yet 60 days past their subscription order dates.

Refunds, or partial refunds, may be issued under certain circumstances pursuant to the terms of our customer satisfaction guarantee.

We consider the number of subscription units to be an important metric since subscriptions enable us to increase the lifetime value of a customer through deeper, longer-term relationships.

In addition, as we innovate our product line-up and make a free business formation a foundational element of our business model, we believe the number of subscription units, when viewed together with the number of business formations during a particular period, provides insight into the effectiveness of our “freemium” strategy and its ability to drive growth in our subscription business.

Subscriptions typically range from 30 days to one year in duration and the vast majority of our new subscriptions originate from business formation orders.

Our customers can have multiple subscriptions at the end of a period.

For example, a popular combination for a new small business owner is attorney advice and registered agent subscriptions.

The below table sets forth the number of subscription units as of December 31, 2023 and 2022:

As of December 31,

(in thousands)

Number of subscription units

We achieved 7% growth in our number of subscription units from December 31, 2022 to December 31, 2023, primarily driven by a 4% increase in our registered agent and compliance subscription units, which was dampened by the exit of certain channel partner relationships in the back half of 2023.

The increase in subscription units was also driven to a lesser extent by an increase in virtual mail, forms and e-signature subscriptions.

On a sequential basis, the number of subscription units as of December 31, 2023 decreased 1% from 1,568 thousand subscription units as of September 30, 2023.

Average revenue per subscription unit

We define average revenue per subscription unit, or ARPU, as of a given date as subscription revenue for the twelve-month period ended on such date, or LTM, divided by the average of the number of subscription units at the beginning and end of the LTM period.

We consider ARPU to be an important metric because it helps to illustrate our ability to provide and monetize higher value subscriptions.

In addition, when viewed together with subscription units, ARPU provides insight into the impact that higher-value subscriptions have on our ability to grow our subscription units.

The below table sets forth ARPU as of December 31, 2023 and 2022:

Year Ended December 31,

Average revenue per subscription unit

ARPU increased 7% as of December 31, 2023 as compared to December 31, 2022 driven primarily by a shift in mix of our higher priced subscription offerings.

ARPU as of December 31, 2023 was up 4% sequentially compared to September 30, 2023.

Annual small business retention rate

We define annual small business retention rate as the percentage of small business subscription units active as of the last day of the quarter one year ago that were still active subscriptions 12 months later.

Small business subscription units represent our subscriptions targeted at our small business customers and include subscriptions for our registered agent and compliance services, LZ Tax, our small business legal advisory plan and subscriptions acquired through our purchase of Earth Class Mail and Revvsales, and exclude subscriptions from our enterprise customers, our operations in the U.K.

and our consumer legal advisory plan.

Annual small business retention rate includes both monthly and annual subscription units and reflects all subscription unit attrition, including as a result of actual business failures of certain of our customers.

Our annual small business retention rate as of December 31, 2023 was approximately 63%.

We expect annual retention rate to fluctuate as we continue to test new products, subscription term lengths and price points and seek to optimize our product offerings across our lineup in connection with our “freemium” strategy.

While there may be a general correlation between annual small business retention rate and our ability to increase customer lifetime value and the growth of our customer base, we do not view it as a predictor of future revenue given the varying needs of a small business during its lifecycle and the varying use cases of the products underlying our subscription units.

Results of Operations

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106,352 116,057

Impairment of long-lived and other assets 248 924

Impairment of long-lived assets — 248

Total operating expenses 400,405 450,623

Loss from operations (41,739) (85,076)

Interest income (expense), net 1,543 (27,984)

Other (expense) income, net (4,477) 1,193

Income (loss) from operations 21,059 (41,739)

Interest expense (493) (260)

Interest income 9,307 1,803

Other income (expense), net 1,621 (4,477)

Impairment of other equity security — (3,000)

Loss on debt extinguishment — (7,748)

Loss before income taxes (47,673) (119,615)

Income (loss) before income taxes 31,494 (47,673)

Provision for (benefit from) income taxes 17,541 1,060

Net loss $ (48,733) $ (108,664)

Net income (loss) $ 13,953 $ (48,733)

(1) Includes stock-based compensation expense as follows:

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Sales and marketing

10,144 15,746

Technology and development

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$ 66,015 $ 80,469

Stock-based compensation expense decreased significantly for the year ended December 31, 2022 compared to the year ended December 31, 2021 due to the modification of certain equity awards in connection with our IPO.

Stock-based compensation expense decreased for the year ended December 31, 2023 compared to the year ended December 31, 2022 due to the modification of certain equity awards in connection with our IPO.

Refer to Note 15 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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412,947 359,198 53,749 15 %

22,157 28,017 (5,860) (21 %)

Total revenue

$ 660,727 $ 619,979 $ 40,748 7 %

The increase in total revenue was primarily driven by an increase in subscription revenue.

(1) Beginning in the fourth quarter of 2023, we no longer present partner revenue on a standalone basis and partner revenue is now included within transaction and subscription revenue.

This change had no impact on total revenue.

Prior period disclosures and amounts have been conformed to the current period presentation.

The increase in total revenue for the year ended December 31, 2023 compared to the year ended December 31, 2022 was driven by an increase in subscription revenue.

Subscription revenue was 62% and 58% of total revenue for the year ended December 31, 2023 and 2022, respectively, and transaction revenue was 38% and 42% of total revenue for the year ended December 31, 2023 and 2022, respectively.

Subscription revenue for the year ended December 31, 2022 increased primarily due to a 15% increase in the average number of subscription units and a 9% improvement in ARPU compared to the year ended December 31, 2021.

The increase in average subscription units was primarily driven by strong growth in subscriptions acquired through our partner integration channel, our registered agent, compliance, and tax products, as well as from our purchase of Earth Class Mail during the fourth quarter of 2021.

The increase in ARPU was primarily due to a change in mix, as our tax services, subscriptions from Earth Class Mail, compliance and registered agent products, which carry higher average price points than our other subscription services, increased as a percentage of total subscription units.

ARPU also increased as a result of a price increase to our small business legal advisory plan that was implemented in the fourth quarter of 2021.

These increases were partially offset by an increase in wholesale-priced subscriptions from our partner integration channel.

Transaction revenue for the year ended December 31, 2022 decreased due to a 5% decrease in the number of transactions and a 2% reduction in average order value compared to the year ended December 31, 2021.

The decrease in the number of transactions resulted from a reduction in estate planning and other consumer transactions, lower volumes in our intellectual property business largely due to the discontinuation of our do-it-yourself trademark product in favor of our attorney-assisted solution and, to a lesser extent, the decrease in business formations during this same period.

Partner revenue for the year ended December 31, 2022 decreased due to lower formation volumes and our transition away from certain legacy partner relationships that no longer align with our strategic direction.

Transaction revenue for the year ended December 31, 2023 decreased due to a 15% decrease in average order value compared to the year ended December 31, 2022, partially offset by a 12% increase in the number of transaction units over the same period.

The decrease in average order value for the year ended December 31, 2023 was driven primarily by a 25% decrease in average order value related to our business formations due to the nationwide rollout of free LLC formations during the first quarter of 2023.

The overall increase in transaction units during the year ended December 31, 2023 was due to a 23% increase in business formations due primarily to the nationwide rollout of free LLC formations.

This increase was partially offset by a 12% reduction in estate planning transactions.

Subscription revenue for the year ended December 31, 2023 increased primarily due to a 7% increase in the number of subscription units as of December 31, 2023 compared to December 31, 2022 and a 7% increase in ARPU compared to December 31, 2022.

The increase in subscription units was driven primarily by a 4% increase in our registered agent and compliance subscription units, which was dampened by the exit of certain channel partner relationships in the back half of 2023.

The increase in subscription units was also driven to a lesser extent by an increase in virtual mail, forms and e-signature subscriptions .

ARPU increased 7% compared to December 31, 2022 driven primarily by a shift in the mix of our higher priced subscription offerings.

Cost of revenue

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$ 239,263 $ 211,095 $ 28,168 13 %

Cost of revenue for the year ended December 31, 2022 increased mainly due to higher fulfillment costs, partially offset by a reduction in filing fees and other variable costs related to the decline in transaction revenue.

Fulfillment costs increased by $23.4 million compared to the year ended December 31, 2021, including an $8.3 million increase resulting from our acquisition of Earth Class Mail, an $8.0 million increase related to expanded headcount in our tax business for the 2022 tax filing season and to support future growth as well as a $5.1 million increase in our core business due to higher depreciation expense and investment in additional production capacity to enhance our customer experience.

Cost of revenue for the year ended December 31, 2023 increased by $28.2 million mainly due to a $14.0 million increase in filing fees, a $4.2 million increase i n depreciation and amortization expense, a $2.8 million increase in third-party staffing fees, a $2.1 million increase in payroll and related benefits expense, and $1.4 million increase in stock-based compensation.

The increase in filing fees was primarily driven by the increase in business formations during the year ended December 31, 2023 compared to the year ended December 31, 2022 .

Year Ended December 31,

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$ 421,464 $ 408,884 $ 12,580 3 %

The increase in gross profit was driven by a $44.9 million increase in revenue partially offset by a $21.7 million increase in cost of revenue.

The increase in gross profit was driven by a $40.7 million increase in revenue partially offset by a $28.2 million increase in cost of revenue as discussed above.

Sales and marketing

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$ 210,872 $ 263,884 $ (53,012) (20 %)

Sales and marketing expenses for the year ended December 31, 2022 decreased primarily due to a $20.7 million reduction in customer acquisition marketing spend and a $5.6 million decrease in stock-based compensation, mainly in connection with award modifications from our IPO in July 2021, partially offset by a $6.4 million increase in payroll and related costs due to higher average headcount and a $3.8 million increase in media production and other non-programmatic spend.

Customer acquisition marketing spend was $174.6 million and $195.4 million for the year ended December 31, 2022 and 2021, respectively, as we reduced our marketing spend in response to the year-over-year decline in overall U.S.

business formations and the uncertain macroeconomic environment.

Sales and marketing expenses for the year ended December 31, 2023 decreased primarily due to a $29.3 million reduction in customer acquisition media spend, an $18.1 million reduction in payroll and related benefits, a $5.8 million reduction in media production spend, a $4.0 million reduction in stock-based compensation expense, and a $1.7 million reduction in depreciation and amortization expense, partially offset by a $9.0 million increase in consulting fees.

The decrease in stock-based compensation expense and payroll and related benefits was largely due to decreased sales and marketing headcount.

Customer acquisition media spend was $145.3 million and $174.6 million for the year ended December 31, 2023 and 2022, respectively, as we reduced our marketing spend in 2023 to align with our freemium strategy.

Technology and development

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$ 83,181 $ 70,434 $ 12,747 18 %

Technology and development expenses for the year ended December 31, 2022 decreased primarily due to a decrease in stock-based compensation of $22.2 million, mainly in connection with award modifications from our IPO in July 2021.

This decrease was partially offset by a $3.8 million increase in professional services expense, including contingent staff costs related to our purchase of Earth Class Mail, an increase in other payroll and related benefits of $2.7 million resulting from higher headcount as we added staff to support our investment in new products and services, and a $1.6 million increase in software licensing costs.

Technology and development expenses for the year ended December 31, 2023 increased primarily due to an increase in payroll and related benefits largely due to increased technology and development headcount.

General and administrative

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$ 106,352 $ 116,057 $ (9,705) (8 %)

General and administrative expenses for the year ended December 31, 2022 increased primarily due to a $9.0 million increase in payroll and related benefits, largely due to increased headcount, $1.4 million of additional insurance expense as a public company and a $1.9 million increase in restructuring costs, partially offset by a $5.7 million reduction in stock-based compensation, mainly in connection with award modifications from our IPO in July 2021 and a $1.2 million decrease in professional services expense.

Impairment of long-lived and other assets

General and administrative expenses for the year ended December 31, 2023 decreased primarily due to a $14.1 million decrease in stock-based compensation, partially offset by a $2.7 million increase in severance and related termination benefits costs primarily related to a reduction in headcount in our U.S.

Impairment of long-lived assets

Year Ended December 31,

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(in thousands, except percentages)

Impairment of long-lived and other assets

Impairment of long-lived assets

$ — $ 248 $ (248) (100 %)

In 2022, we recorded non-cash charges related to the impairment of certain customer relationship assets and in 2021 we recorded non-cash charges related to the impairment of internal-use software projects that were no longer aligned with our go-forward strategy.

Interest (income) expense, net

In 2022, we recorded non-cash charges related to the impairment of certain customer relationship assets.

Interest expense

Year Ended December 31,

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(in thousands, except percentages)

Interest (income) expense, net

Interest expense

$ 493 $ 260 $ 233 90 %

The change in interest (income) expense, net, was primarily due to the repayment of the 2018 term loan in July 2021 in connection with our IPO.

Other (expense) income, net

Interest expense consists primarily of amortization of debt issuance costs related to our 2021 Revolving Facility.

Interest income

Year Ended December 31,

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(in thousands, except percentages)

Other (expense) income, net

Interest income

$ 9,307 $ 1,803 $ 7,504 416 %

The change in other (expense) income, net, between 2022 and 2021 was primarily due to changes in foreign currency movements related to our intercompany loans which were denominated in British Pound Sterling, or GBP.

Loss on debt extinguishment

The change in interest income was primarily due to dividend income generated from our money market investments during the year ended December 31, 2023.

Other (expense) income, net

Year Ended December 31,

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(in thousands, except percentages)

Loss on debt extinguishment

Other (expense) income, net

$ 1,621 $ (4,477) $ 6,098 (136 %)

Loss on debt extinguishment for the year ended December 31, 2021 of $7.7 million was due to the write down of unamortized debt issuance costs associated with the full repayment of our 2018 term loan in July 2021.

The change in other (expense) income, net, between 2023 and 2022 was primarily due to changes in foreign currency movements related to our intercompany loans which were denominated in British pound sterling.

Impairment of other equity security

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Effective tax rate

The provision for income taxes for the year ended December 31, 2022 resulted from a $12.0 million unfavorable change in our income taxes as compared to the year ended December 31, 2021.

The change was primarily due to changes in pre-tax book income, utilization of net operating losses and capitalization of research expenditures for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The $16.5 million unfavorable change in tax provision in 2023 as compared to 2022 was primarily due to pre-tax book income and non-deductible stock-based compensation as well as timing differences for IRC section 174 research and development costs which resulted in higher taxable income for the year ended December 31, 2023 compared to a pre-tax loss for the year ended December 31, 2022.

Comparison of the Years Ended December 31, 2022 and 2021

For a discussion related to the results of operations and changes in financial condition for the year ended December 31, 2021 compared to the year ended December 31, 2020, refer to Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the Securities and Exchange Commission, or SEC, on March 24, 2022.

For a discussion related to the results of operations and changes in financial condition for the year ended December 31, 2022 compared to the year ended December 31, 2021, refer to Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 1, 2023.

Liquidity and Capital Resources

Since inception, we have funded our operations and capital expenditures primarily from public and private sales of equity securities, cash flows provided by operating activities and equity and debt financing arrangements, including the proceeds of our IPO.

Our primary requirements for liquidity and capital are to finance working capital, capital expenditures and general corporate purposes.

At December 31, 2022, our principal sources of liquidity were cash and cash equivalents of $189.1 million, which consisted of cash on deposit with banks and a money market fund, of which approximately $1.1 million related to our foreign subsidiaries.

Our cash and cash equivalents decreased by $50.2 million from December 31, 2021 to December 31, 2022, primarily from the stock repurchases during the period.

We currently anticipate that our available cash, cash equivalents and cash provided by operating activities will be sufficient to meet our operational cash needs for at least the next year.

We have the ability to supplement our liquidity needs over the longer term with borrowings under our 2021 Revolving Facility.

We fund our operations and capital expenditures from cash flows from operating activities.

Our primary requirements for liquidity and capital are to finance working capital, capital expenditures and general co rporate purposes.

At December 31, 2023, our principal sources of liquidity were cash and cash equivalents of $225.7 million, which consisted of cash on deposit with banks and money market funds, of which approximately $2.0 million related to our foreign subsidiaries.

Our cash and cash equivalents increased by $36.6 million from December 31, 2022 to December 31, 2023, primarily as a result of cash provided by operating activities, partially offset by purchases of property and equipment and stock repurchases during the year.

We currently anticipate that our available cash, cash equivalents and cash provided by operating activities will be sufficient to meet our operational cash needs for at least the next twelve months and in the foreseeable future.

We have the ability to supplement our liquidity needs with borrowings under our 2021 Revolving Facility.

In addition, we previously announced our intention to sell our operating headquarters in Austin, Texas, which is discussed in more detail in Note 4 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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state income taxes.

Furthermore, our board of directors has authorized our management to repurchase up to $150.0 million of shares of our common stock from time to time.

As of the date of this filing, we have repurchased $95.1 million of our common stock under our stock repurchase program.

For additional information regarding our stock repurchase program, refer to Note 15 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

On March 1, 2022, our board of directors approved the 2022 stock repurchase program, which authorized management to repurchase up to $150.0 million of our common stock from time to time.

The 2022 stock repurchase program was exhausted in September 2023.

In October 2023, our board of directors approved the new 2023 stock repurchase program, which authorizes management to repurchase up to $100.0 million of our common stock from time to time.

At December 31, 2023, $100.0 million remained available for repurchases of our common stock under the 2023 stock repurchase program.

For additional information regarding our stock

repurchase programs, refer to Note 14 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

2021 Revolving Facility

On July 2, 2021, we entered into our 2021 Revolving Facility with JPMorgan Chase Bank, N.A., as the administrative agent.

This agreement amends and restates our first lien credit and guarantee agreement with JPMorgan Chase Bank, N.A, or 2018 Credit Facility, and permits revolving borrowings of up to $150.0 million.

The 2021 Revolving Facility provides for the issuance of up to $20.0 million of letters of credit as well as borrowings on same-day notice, referred to as swingline loans, in an amount of up to $10.0 million.

We have no amounts outstanding and $150.0 million available for use under our 2021 Revolving Facility.

Subject to the satisfaction of certain criteria, we will be able to increase the facility by an amount equal to the sum of (i) the greater of $90.0 million and 75% of consolidated last year cash earnings before interest expense, tax, depreciation and amortization, or Cash EBITDA, which is defined in the 2018 Credit Facility, or LTM Cash EBITDA, plus (ii) unused amounts under the general debt basket (i.e., an amount equal to the greater of $50.0 million and an equivalent percentage of consolidated LTM Cash EBITDA), plus (iii) an unlimited amount so long as the borrower is in pro forma compliance with the Financial Covenant (as defined below), in each case, with the consent of the lenders participating in the increase.

On July 2, 2021, we entered into our $150.0 million 2021 Revolving Facility with JPMorgan Chase Bank, N.A., as the administrative agent.

The 2021 Revolving Facility, as amended, provides for the issuance of up to $20.0 million of letters of credit as well as borrowings on same-day notice, referred to as swingline loans, in an amount of up to $10.0 million .

At December 31, 2023, we had no borrowings outstanding and $150.0 million was available for use under our 2021 Revolving Facility.

Subject to the satisfaction of certain criteria, we will be able to increase the 2021 Revolving Facility by an amount equal to the sum of (i) the greater of $90.0 million and 75% of consolidated last twelve months cash earnings before interest expense, tax, depreciation and amortization, or LTM CEBITDA, plus (ii) unused amounts under the general debt basket (i.e., an amount equal to the greater of $50.0 million and an equivalent percentage of consolidated LTM CEBITDA), plus (iii) an unlimited amount so long as we are in pro forma compliance with the Financial Covenant (as defined below), in each case, with the consent of the lenders participating in the increase.

We are required to pay a commitment fee in respect of unutilized commitments under the 2021 Revolving Facility.

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We are also required to pay customary letter of credit fees and agency fees.

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% and (iii) one month LIBOR (subject to a 1.00% floor), plus 1.00% or LIBOR (subject to a 0.00% floor) plus 2.00%.

At December 31, 2023, the interest rate applicable to the 2021 Revolving Facility was subject to a 1.0% floor and was 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%;

and (iii) the secured overnight financing rate, or SOFR, plus a 0.10% credit spread adjustment to the SOFR benchmark, or Adjusted Term SOFR, plus 1.0%;

provided that if the Adjusted Term SOFR is less than zero, the Adjusted Term SOFR shall be deemed to be zero.

The interest rate margins under the 2021 Revolving Facility are subject to a reduction of 0.25% and a further reduction of 0.25% if the total net first lien leverage ratio does not exceed 3.50 to 1.00 and 2.50 to 1.00, respectively.

We have the option to voluntarily repay outstanding loans at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans.

We have the option to voluntarily repay outstanding loans at any time without premium or penalty, other than customary “breakage” costs with respect to SOFR loans.

There is no scheduled amortization under the 2021 Revolving Facility.

The principal amount outstanding is due and payable in full at maturity, five years from the closing date of the 2021 Revolving Facility.

The principal amount outstanding is due and payable in full on July 1, 2026.

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 is secured by a first-priority security interest in substantially all of the assets of the borrower and the guarantors, subject to certain exceptions.

The 2021 Revolving Facility contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability and the ability of our restricted subsidiaries to incur additional indebtedness and guarantee indebtedness;

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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 2021 Revolving Facility requires compliance with a total net first lien leverage ratio of 4.50 to 1.00, or the 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.

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Net cash used in investing activities (31,555) (30,622)

Net cash (used in) provided by financing activities (93,343) 123,359

Net cash used in financing activities (56,150) (93,343)

Effect of exchange rate changes on cash, cash equivalents and restricted cash equivalent 34 (87)

Net (decrease) increase in cash, cash equivalents and restricted cash equivalent $ (50,215) $ 99,827

For a discussion related to our cash flows for the year ended December 31, 2020, refer to Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in our Annual Report on Form

10-K for the year ended December 31, 2021, which was filed with the Securities and Exchange Commission on March 24, 2022.

Net increase (decrease) in cash and cash equivalents $ 36,637 $ (50,215)

For a discussion of our cash flows for the year ended December 31, 2021, refer to Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the Securities and Exchange Commission on March 1, 2023.

Net cash provided by operating activities

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Our primary uses of cash in operating activities are for our fulfillment, production and customer care costs, employee salaries and benefits, sales and marketing expenses and third-party consulting expenses.

Net cash provided by operating activities is impacted by our net loss adjusted for certain non-cash items, including depreciation and amortization expense, stock-based compensation and impairments of long-lived assets, as well as the effect of changes in operating assets and liabilities.

In 2022, cash provided by operating activities was $73.8 million resulting from a net loss of $48.7 million, adjusted for stock-based compensation and other non-cash expenses of $110.5 million and net cash flows provided by changes in operating assets and liabilities of $12.0 million.

The $12.0 million of net cash flows provided from changes in our operating assets and liabilities included a $17.1 million increase in deferred revenue largely due to growth of our subscription units, which are predominantly billed in advance of our revenue recognition, partially offset by a net $2.2 million reduction in accounts payable, accrued expenses, operating lease liability and other liabilities due to the timing of our payments and a $2.8 million net increase in accounts receivable, prepaid expenses and other assets.

Net cash provided by operating activities is impacted by our net income (loss) adjusted for certain non-cash items, including depreciation and amortization expense, stock-based compensation and impairments of long-lived assets, as well as the effect of changes in operating assets and liabilities.

In 2023, cash provided by operating activities was $124.3 million resulting from a net income of $14.0 million, adjusted for stock-based compensation and other non-cash expenses of $96.8 million and net cash flows provided by changes in operating assets and liabilities of $13.6 million.

The $13.6 million of net cash flows provided from changes in our operating assets and liabilities included a net $6.8 million increase in accounts payable, accrued expenses and other liabilities, and operating lease liabilities due to the timing of our payments, a $3.3 million increase in deferred revenue largely due to growth of our subscription units, which are predominantly billed in advance of our revenue recognition, and a $3.0 million decrease in accounts receivable, prepaid expenses and other current assets.

The $23.7 million of net cash flows provided from changes in our operating assets and liabilities included a $17.9 million increase in deferred revenue resulting from growth of our subscription units, which are predominantly billed in advance of our revenue recognition, a $16.0 million increase in accounts payable, accrued expenses and other liabilities due to the timing of our payments, partially offset by a $10.1 million increase in accounts receivable, prepaid expenses and other assets.

The $12.0 million of net cash flows provided from changes in our operating assets and liabilities included a $17.1 million increase in deferred revenue largely due to growth of our subscription units, which are predominantly billed in advance of our revenue recognition, partially offset by a net $2.2 million reduction in accounts payable, accrued expenses and other liabilities, and operating lease liabilities due to the timing of our payments and a $3.0 million increase in accounts receivable, prepaid expenses and other assets.

Net cash used in investing activities

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As our business grows, we expect our capital expenditures to continue to increase.

In 2022, net cash used in investing activities was $30.6 million, resulting primarily from $22.1 million paid for property and equipment, including capitalized internal-use software and payments for the acquisition of UA Services of $2.5 million and $6.3 million primarily for developed technology acquired from Revvsales Inc.

In 2021, net cash used in investing activities was $77.7 million, resulting primarily from the acquisition of Earth Class Mail, Inc.

in November 2021 for $61.5 million, net of cash acquired, $11.7 million paid for property and equipment, including capitalized internal-use software and a $3.3 million payment on the extinguishment of interest rate swaps in the third quarter.

Net cash provided by (used in) financing activities

In 2023, net cash used in investing activities was $31.6 million, resulting primarily from purchase of property and equipment, including capitalized internal-use software.

In 2022, net cash used in investing activities was $30.6 million, resulting primarily from $22.1 million paid for property and equipment, including capitalized internal-use software, a $6.3 million payment for developed technology acquired from Revvsales Inc., and a $2.5 million payment for the acquisition of United Agency Services Corp.

Net cash used in financing activities

Our primary uses of cash in financing activities are for repurchases of common stock.

Net cash provided by financing activities is primarily impacted by exercises of stock options by our employees and issuance of common stock.

Net cash provided by financing activities is primarily impacted by exercises of stock options by our employees and issuances of common stock.

In 2023, net cash used in financing activities was $56.2 million, primarily for the repurchase of common stock under our 2022 stock repurchase program.

In 2021, net cash provided by financing activities was $123.4 million, primarily from issuance of common stock for net proceeds of $666.9 million, offset by full repayment of our 2018 Term Loan and hybrid debt totaling $525.6 million and payment of offering costs of $5.6 million.

In 2022, net cash used in financing activities was $93.3 million, primarily for the repurchase of common stock under our 2022 stock repurchase program.

Material Cash Requirements

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Our material cash requirements include the below contractual and other obligations:

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.

Other Commitments

We have non-cancelable agreements with various vendors, which require us to pay $46.5 million over a four year period, of which $32.8 million remains to be paid as of December 31, 2023.

Lease Obligations

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.

As of December 31, 2022, we had total minimum operating lease maturities of $12.8 million, $2.8 million of which mature within twelve months.

At December 31, 2023, we had various non-cancelable operating leases for office space and equipment, which expire between January 2024 and November 2029.

At December 31, 2023, we had total minimum operating lease maturities of $10.1 million, $2.4 million of which mature within twelve months.

See Note 8 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information regarding our future operating lease payments.

Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with U.S.

To supplement our unaudited condensed consolidated financial statements, which are prepared and presented in accordance with U.S.

generally accepted accounting principles, or GAAP, we use certain non-GAAP financial measures, as described below, to understand and evaluate our core operating performance.

These non-GAAP financial measures, which may be different than similarly titled measures used by other companies, are presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

We believe that these non-GAAP financial measures provide useful information about our financial performance, enhance the overall understanding of our past performance and future prospects and allow for greater transparency with respect to important measures used by our management for financial and operational decision-making.

These non-GAAP financial measures, which may be different from similarly titled measures used by other companies, are presented to enhance investors’ overall understanding of our financial performance and liquidity and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

We believe that these non-GAAP financial measures provide useful information about our financial performance and liquidity, enhance the overall understanding of our past performance and future prospects and allow for greater transparency with respect to important measures used by our management for financial and operational decision-making.

We are presenting these non-GAAP measures to assist investors in seeing our financial performance using a management view and because we believe that these measures provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.

Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA as Net (loss) income adjusted to exclude interest expense, net, provision for (benefit from) income taxes, depreciation and amortization, other (income) expense, net, stock-based compensation, impairment of other equity security, loss on debt extinguishment, impairment of goodwill, long-lived and other assets, losses from impairment of available-for-sale debt securities, restructuring expenses, IPO-related costs and other transaction-related expenses and certain other non-recurring expenses.

We define Adjusted EBITDA as net income (loss) adjusted to exclude interest expense, interest income, provision for (benefit from) income taxes, depreciation and amortization, other expense (income), net, stock-based compensation, impairment of goodwill, long-lived and other assets, restructuring expenses, legal expenses, transaction-related expenses and certain other non-recurring income and expenses from time to time.

Our Adjusted EBITDA financial measure differs from GAAP in that it excludes certain items of income and expense.

We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of revenue.

We define Net (loss) income margin as Net (loss) income as a percentage of revenue based on our consolidated financial statements.

We define net income (loss) margin as net income (loss) as a percentage of revenue based on our consolidated financial statements.

Adjusted EBITDA is one of the primary performance measures used by our management and our board of directors to understand and evaluate our financial performance and operating trends, including period-to-period comparisons, prepare and approve our annual budget, develop short and long-term operational plans and determine appropriate compensation plans for our employees.

Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management team and board of directors.

In assessing our performance, we exclude certain expenses that we believe are not comparable period over period.

In assessing our performance, we exclude certain expenses that we believe are not comparable period over period or that we believe are not indicative of our underlying operating performance.

Adjusted EBITDA should not be considered in isolation of, or as an alternative to, measures prepared and presented in accordance with GAAP.

There are a number of limitations related to the use of Adjusted EBITDA rather than net (loss) income, which is the nearest GAAP equivalent of Adjusted EBITDA, and it may be calculated differently by other companies in our industry, limiting its usefulness as a comparative measure.

There are a number of limitations related to the use of Adjusted EBITDA rather than net income (loss), which is the

nearest GAAP equivalent of Adjusted EBITDA.

Some of these limitations include that the non-GAAP financial measure:

• does not reflect interest expense, or the cash requirements necessary to service interest or principal payments, which reduces cash available to us;

• does not reflect provision for income taxes that may result in payments that reduce cash available to us;

• may be calculated differently by other companies in our industry, limiting its usefulness as a comparative measure;

• does not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments;

• excludes depreciation and amortization and, although these are non-cash expenses, the assets being depreciated may be replaced in the future;

• does not reflect foreign currency exchange or other gains or losses, which are included in other (expense) income, net;

• does not reflect changes in, or cash requirements for, our working capital needs;

• excludes stock-based compensation expense, which has been, and will continue to be, a significant recurring expense for our business and an important part of our compensation strategy;

• excludes impairments of other equity securities;

• excludes losses from impairments of long-lived and other assets;

• excludes restructuring expenses, which reduce cash available to us;

• excludes IPO-related costs and other transaction-related expenses that are not considered representative of our underlying performance, which reduce cash available to us;

• does not reflect certain other non-recurring expenses that are not considered representative of our underlying performance, which reduce cash available to us.

The following table presents a reconciliation of net (loss) income to Adjusted EBITDA for each of the periods indicated:

• does not reflect certain other expenses that we do not consider representative of our underlying operating performance, but that reduce cash available to us.

The following table presents a reconciliation of net income (loss) to Adjusted EBITDA for each of the periods indicated:

Year Ended December 31,

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Reconciliation of Net income (loss) to Adjusted EBITDA

Net loss $ (48,733) $ (108,664)

Interest (income) expense, net (1,543) 27,984

Provision for (benefit from) income taxes 1,060 (10,951)

Net income (loss)

$ 13,953 $ (48,733)

Interest expense

Interest income

(9,307) (1,803)

Provision for income taxes

Depreciation and amortization 25,383 21,745

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Impairment of other equity security — 3,000

Impairment of long-lived and other assets 237 924

Acquisition related expenses 758 1,356

Impairment of long-lived assets — 237

Transaction-related expenses

Restructuring costs (1)

Loss on debt extinguishment — 7,748

IPO-related costs and other transaction related expenses (2)

Certain other non-recurring expenses (2)

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Adjusted EBITDA margin 18 % 10 %

(1) Restructuring expenses related to a phased severance event to reduce the U.S.

Restructuring expenses include severance for the impacted employees and are included in general and administrative expenses in the accompanying consolidated statements of operations.

(2) IPO-related costs and other transaction related expenses includes certain non-recurring expenses, which occurred in connection with our IPO in 2021.

(3) For 2022, certain other non-recurring expenses includes severance costs incurred related to the departure of a member of management.

In 2021, we incurred expenses related to early termination of our U.K.

lease agreement.

The increase in Adjusted EBITDA of $16.0 million for the year ended December 31, 2022 reflects an increase in revenue of $44.9 million offset by increases in cost of revenue of $18.3 million and other operating expenses of $10.6 million, excluding non-cash and non-recurring items.

We expect our Adjusted EBITDA to increase in absolute dollars in the longer term, although the rate at which our Adjusted EBITDA may grow could vary based upon the interplay of the foregoing factors.

(1) For 2023, restructuring costs related to the reduction of our U.S.

For 2022, restructuring expenses related to a phased severance event to reduce the U.S.

headcount in June and August 2022.

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 appearing elsewhere in this Annual Report on Form 10-K.

(2) For 2023, certain other non-recurring expenses included costs incurred by us in conjunction with secondary offerings of shares of our common stock by a selling stockholder in September 2023 and November 2023.

For 2022, certain other non-recurring expenses included costs related to the departure of a member of management.

The increase in Adjusted EBITDA of $55.0 million for the year ended December 31, 2023 reflects an increase in revenue of $40.7 million, a reduction in operating expenses, excluding non-cash and non-recurring items, of $33.8 million, and a $7.5 million increase in interest income partially offset by increases in cost of revenue of $28.2 million.

Free cash flow

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The usefulness of free cash flow as an analytical tool has limitations because it excludes certain items that are settled in cash, does not represent residual cash flow available for discretionary expenses, does not reflect our future contractual commitments, and may be calculated differently by other companies in our industry.

Accordingly, it should not be considered in isolation or as a substitute for analysis of other GAAP financial measures, such as net cash provided by operating activities.

Accordingly, it should not be considered in isolation or as a substitute for analysis of other GAAP financial measures, such as net cash used in or provided by operating activities.

The following table presents a reconciliation of net cash provided by operating activities, the most directly comparable GAAP measure, to free cash flow:

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$ 92,715 $ 51,739

We experienced an increase in our free cash flow from $42.4 million for the year ended December 31, 2021 to $51.7 million for the year ended December 31, 2022, primarily due to a $19.7 million increase in net cash provided by operating activities.

The increase in net cash provided by operating activities resulted from a $31.3 million increase in net income after adjusting for stock-based compensation and other non-cash items, offset by an $11.6 million unfavorable change in our operating assets and liabilities primarily due to the timing of our accounts payable payments and accrued expenses partially offset by a favorable change in prepaid expenses and other assets.

The increase in our free cash flow of $41.0 million for the year ended December 31, 2023 was primarily due to a $50.5 million increase in net cash provided by operating activities.

The increase in net cash provided by operating activities resulted from a $48.9 million increase in net income after adjusting for stock-based compensation and other non-cash items and a $1.5 million favorable change in our operating assets and liabilities.

Free cash flow was also impacted by higher capital expenditures for the purchase of property and equipment, including capitalization of internal-use software.

We expect our free cash flow to increase in absolute dollars over the longer term, although the rate at which our free cash flow may grow could vary based upon the interplay of the factors discussed above.

Recent Accounting Pronouncements

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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 advisory and preparation 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.

We also earn fees from third-party providers from leads generated to such providers through our online legal platform.

Subscription revenue —Subscription revenue is generated primarily from subscriptions to our registered agent, compliance packages, attorney advice, legal forms, tax and accounting, virtual mail and e-signature services, and SaaS accounting solution subscriptions and 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.

For transaction and subscription revenue, we generally collect payments and fees at the time orders are placed and prior to services being rendered.

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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.

We determine revenue recognition through the following five steps:

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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.

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.

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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.

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 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.

Our ABS provides independent legal advice to our customers and is directly responsible for, and control the fulfillment of, the legal services.

Accordingly, for services provided by our ABS, 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.

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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 other services provided by third-parties, including deed transfer, accounting, tax, credit monitoring, business data protection, 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.

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.

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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 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.

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We expense legal costs for defending legal proceedings as incurred.

As discussed in Note 14 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we are subject to pending matters for which we believe that we have meritorious defenses to the claims and intend to defend against vigorously.

See Note 13 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further information.

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.

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We also consider 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 (benefit from) provision for income taxes and the related impact on our net (loss) income.

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 (benefit from) income taxes and the related impact on our net income (loss).

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.

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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.

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.

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The Black-Scholes option pricing model and the Monte Carlo simulation model requires us to make certain assumptions including the fair value of our underlying common stock, the expected term, the expected stock price volatility, the risk-free interest rates and the expected dividend yield of our common stock.

These assumptions

used in the Black-Scholes option pricing model, other than the fair value of our common stock (see the section titled “Common Stock Valuations” below), are estimated as follows:

These assumptions used in the Black-Scholes option pricing model, other than the fair value of our common stock, are estimated as follows:

• Expected term .

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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 determine the expected volatility assumption using the frequency of daily historical prices of comparable public companies’ 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.

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Other than the special dividends declared in 2015, 2017, 2018, 2020 and 2021 which resulted in corresponding reductions in the exercise price of the stock options, we have not declared any cash dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.

• Common stock valuation.

We utilize our common stock values as traded in the public market as an input into our valuation models.

Stock-based compensation expense is recognized based on awards that are ultimately expected to vest.

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The determination of stock-based compensation is inherently uncertain and subjective and involves the application of valuation models and assumptions requiring the use of judgment.

If we had made different assumptions, our stock-based compensation expense, and our net loss for 2022, 2021 and 2020, may have been materially different.

If we had made different assumptions, our stock-based compensation expense, and our net income (loss) for 2023 and 2022 may have been materially different.

The weighted-average assumptions that were used to calculate the grant-date fair-value of our stock option grants were as follows:

Year Ended December 31,

2022 2021 2020

Expected term (years)

Expected life (years) 5.9 5.6

Risk-free interest rate 3.4%-3.8%

2.6 % 1.0 % 1.1 %

Expected volatility 50.4%-50.7%

48 % 46 % 45 %

Expected dividend yield — —

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RSUs with performance or market conditions are recognized using graded vesting.

Common stock valuations .

Prior to our IPO, we determined the fair value of our common stock using valuation approaches in accordance with the American Institute of Certified Public Accountants, Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation.

Subsequent to our IPO, we utilized our common stock values as traded in the public market as an input into our valuation models.

Award issuances and modifications in connection with our IPO.

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See Note 15 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.

Emerging Growth Company Status

Upon completion of our IPO, we elected to be an Emerging Growth Company, or EGC, as defined in the Jumpstart Our Business Startups Act.

Effective December 31, 2022, we lost our EGC status due to becoming a “large accelerated filer”.

As a result, we must comply with all financial disclosure and governance requirements applicable to a “large accelerated filer”.

For further information, see Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis