SEC Filing | LegalZoom.com, Inc.

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lz-20220331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the three months ended March 31, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-35618

LegalZoom.com, Inc.

(Exact name of registrant as specified in its charter)

___________________________________


Delaware			95-4752856
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

101 North Brand Boulevard, 11th Floor, Glendale, California 91203
(Address of Principal Executive Offices, including Zip code)

(323) 962-8600

Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	LZ	The Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	☒	Smaller reporting company	o
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 9, 2022, the registrant had outstanding 198,095,857 shares of common stock, $0.001 par value per share, outstanding.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “forecasts,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to statements regarding our future results of operations and financial position, industry and business trends, stock compensation, business strategy, plans, market growth and our objectives for future operations.

The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to, the important factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 24, 2022 and others discussed in this Quarterly Report on Form 10-Q. The forward-looking statements in this Quarterly Report on Form 10-Q are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.

Note Regarding Third-Party Information

This Quarterly Report on Form 10-Q includes market data and certain other statistical information and estimates that are based on reports and other publications from industry analysts, market research firms, and other independent sources, as well as management's own good faith estimates and analyses. We believe these third-party reports to be reputable, but have not independently verified the underlying data sources, methodologies, or assumptions. The reports and other publications referenced are generally available to the public and were not commissioned by LegalZoom.com, Inc. Information that is based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances reflected in this information.

Table of Contents

TABLE OF CONTENTS


		Page
Part I	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	5
	Condensed Consolidated Statements of Comprehensive Loss	6
	Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit )	7
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2 6
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40
Item 4.	Controls and Procedures	4 1
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	4 3
Item 1A.	Risk Factors	4 3
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7 1
Item 3.	Defaults Upon Senior Securities	72
Item 4.	Mine Safety Disclosures	72
Item 5.	Other Information	72
Item 6.	Exhibits	72
Signatures		7 3

Table of Contents

Part I

Item 1. Condensed Consolidated Financial Statements (Unaudited)

LegalZoom.com, Inc.

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except par values)


	March 31, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	247,504	$	239,297
Accounts receivable, net	12,784		10,635
Prepaid expenses and other current assets	23,172		16,589
Total current assets	283,460		266,521
Property and equipment, net	47,769		47,013
Goodwill	59,994		59,910
Intangible assets, net	15,361		16,031
Operating lease right-of-use assets	5,292		—
Deferred income taxes	24,849		27,653
Available-for-sale debt securities	1,182		1,122
Other assets	13,157		12,765
Total assets	$	451,064	$	431,015
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	31,747	$	31,788
Accrued expenses and other current liabilities	56,509		50,817
Deferred revenue	163,729		146,364
Operating lease liabilities	1,607		—
Total current liabilities	253,592		228,969
Operating lease liabilities, non current	3,505		—
Deferred revenue	1,283		1,554
Other liabilities	2,833		2,941
Total liabilities	261,213		233,464
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock, $0.001 par value; 100,000 shares authorized at March 31, 2022, none issued or outstanding at March 31, 2022 and December 31, 2021	—		—
Common stock, $0.001 par value; 1,000,000 shares authorized; 198,599 shares and 198,084 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively	198		198
Additional paid-in capital	969,731		947,160
Accumulated deficit	(779,723)		(748,012)
Accumulated other comprehensive loss	(355)		(1,795)
Total stockholders’ equity	189,851		197,551
Total liabilities and stockholders’ equity	$	451,064	$	431,015

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

LegalZoom.com, Inc.

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)


	Three Months Ended March 31,
	2022		2021
Revenue	$	154,209	$	134,632
Cost of revenue	55,940		43,960
Gross profit	98,269		90,672
Operating expenses:
Sales and marketing	76,874		71,361
Technology and development	17,959		10,499
General and administrative	29,488		13,165
Total operating expenses	124,321		95,025
Loss from operations	(26,052)		(4,353)
Interest expense, net	(53)		(8,654)
Other (expense) income, net	(1,544)		248
Loss before income taxes	(27,649)		(12,759)
Provision for (benefit from) income taxes	2,960		(2,936)
Net loss	$	(30,609)	$	(9,823)
Net loss attributable to common stockholders—basic and diluted	$	(30,609)	$	(9,823)
Net loss per share attributable to common stockholders—basic and diluted:	$	(0.15)	$	(0.08)
Weighted-average shares used to compute net loss per share attributable to common stockholders—basic and diluted:	198,265		125,065

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

LegalZoom.com, Inc.

Unaudited Condensed Consolidated Statements of Comprehensive Loss

(In thousands)


	Three Months Ended March 31,
	2022		2021
Net loss	$	(30,609)	$	(9,823)
Other comprehensive income, net of tax:
Change in foreign currency translation adjustments	1,402		(147)
Change in available-for-sale debt securities:
Unrealized gains	38		13
Total change in available-for-sale debt securities	38		13
Change in unrealized gain on cash flow hedges:
Unrealized gain on interest rate cap and swaps	—		2,081
Reclassification of prior hedge effectiveness and losses from interest rate cap to net loss	—		1,017
Total net changes in cash flow hedges	—		3,098
Total other comprehensive income	1,440		2,964
Total comprehensive loss	$	(29,169)	$	(6,859)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

LegalZoom.com, Inc.

Unaudited Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(In thousands)


	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2021	198,084	$	198	$	947,160	$	(748,012)	$	(1,795)	$	197,551
Issuance of common stock upon exercise of stock options	202	—		225		—		—		225
Issuance of common stock upon vesting of restricted stock awards	392	—		—		—		—		—
Stock-based compensation	—	—		22,346		—		—		22,346
Repurchased common stock	(79)	—		—		(1,102)		—		(1,102)
Other comprehensive income	—	—		—		—		1,440		1,440
Net loss	—	—		—		(30,609)		—		(30,609)
Balance at March 31, 2022	198,599	$	198	$	969,731	$	(779,723)	$	(355)	$	189,851


	Series A Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Stockholders’ Deficit
	Shares	Amount		Shares	Amount
Balance at December 31, 2020	23,081	$	70,906	125,037	$	126	$	102,417	$	(639,348)	$	(13,827)	$	(550,632)
Issuance of common stock upon exercise of stock options	—	—		244	—		151		—		—		151
Issuance of common stock upon vesting of restricted stock awards	—	—		27	—		—		—		—		—
Shares surrendered for settlement of minimum statutory tax withholdings	—	—		(9)	—		(100)		—		—		(100)
Stock-based compensation	—	—		—	—		3,799		—		—		3,799
Net issuance and repayments of full recourse notes receivable	—	—		—	—		44		—		—		44
Special dividends	—	—		—	—		(23)		—		—		(23)
Other comprehensive gain	—	—		—	—		—		—		2,964		2,964
Net loss	—	—		—	—		—		(9,823)		—		(9,823)
Balance at March 31, 2021	23,081	$	70,906	125,299	$	126	$	106,288	$	(649,171)	$	(10,863)	$	(553,620)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

LegalZoom.com, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)


	Three Months Ended March 31,
	2022		2021
Cash flows from operating activities
Net loss	$	(30,609)	$	(9,823)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	5,394		4,166
Amortization of right-of-use asset	378		—
Amortization of debt issuance costs	56		634
Amortization of prior hedge effectiveness	—		1,328
Impairment of other equity securities	170		—
Stock-based compensation	21,865		3,786
Deferred income taxes	2,791		(3,259)
Change in fair value of financial guarantee	—		(75)
Change in fair value of derivative instruments	—		28
Unrealized foreign exchange loss (gain)	1,379		(107)
Other	—		4
Changes in operating assets and liabilities:
Accounts receivable	(2,150)		(2,156)
Prepaid expenses and other current assets	(6,706)		(1,344)
Other assets	(811)		(215)
Accounts payable	(117)		6,026
Accrued expenses and other liabilities	5,675		14,062
Operating lease liabilities	(770)		—
Income tax payable	7		(1)
Deferred revenue	17,185		18,361
Net cash provided by operating activities	13,737		31,415
Cash flows from investing activities
Proceeds from acquisition working capital adjustment	304		—
Purchase of property and equipment	(4,911)		(2,911)
Net cash used in investing activities	(4,607)		(2,911)
Cash flows from financing activities
Repayment of capital lease obligations	(4)		(8)
Repayment of 2018 Term Loan	—		(1,337)
Repayment of hybrid debt	—		(546)
Repurchase of common stock	(1,094)		—
Deferred offering costs	—		(8)
Payment of special dividends	—		(25)
Repurchases of common stock for tax withholding obligations	(11)		(100)
Proceeds from issuance of stock under employee stock plans	237		190
Net cash used in financing activities	(872)		(1,834)
Effect of exchange rate changes on cash, cash equivalents and restricted cash equivalent	(51)		35
Net increase in cash, cash equivalents and restricted cash equivalent	8,207		26,705

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

LegalZoom.com, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows (continued)

(In thousands)


	Three Months Ended March 31,
	2022		2021
Cash, cash equivalents and restricted cash equivalent, at beginning of the period	239,297		139,470
Cash, cash equivalents and restricted cash equivalent, at end of the period	$	247,504	$	166,175

Reconciliation of cash, cash equivalents, and restricted cash equivalent reported in the consolidated balance sheets
Cash and cash equivalents	$	247,504	$	141,175
Restricted cash equivalent	—		25,000
Total cash, cash equivalents, and restricted cash equivalent shown in the consolidated statements of cash flows	$	247,504	$	166,175
Non-cash investing and financing activities
Purchase of property and equipment included in accounts payable and accrued expenses and other current liabilities	764		1,009
Change in fair value of hedged interest rate swaps and interest rate cap	—		(2,771)
Capitalized stock-based compensation	481		13
Deferred offering costs included in accounts payable and accrued expenses and other current liabilities	—		1,288
Right-of-use assets under operating leases	5,670		—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

LegalZoom.com, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Description of the Business

LegalZoom.com, Inc., was initially formed as a California corporation in 1999 and reincorporated as a Delaware corporation in 2007. LegalZoom.com, Inc., and its wholly owned subsidiaries, referred to herein as “we,” “us,” or “our,” has its executive headquarters in Glendale, California, its operational headquarters in Austin, Texas and additional locations in Frisco and San Antonio, Texas, Beaverton, Oregon and London in the United Kingdom, or U.K. We are a provider of services that meet the legal needs of small businesses and consumers. Our position at business inception allows us to become a trusted business advisor, supporting the evolving needs of a new business across its lifecycle. Along with formation, our offerings include ongoing compliance and tax advice and filings, trademark filings, and estate plans. Additionally, we have insights into our customers and leverage our offerings as a channel to introduce small businesses to leading brands in our partner ecosystem, solving even more of their business needs.

Initial Public Offering

The registration statement related to our initial public offering, or IPO, was declared effective on June 29, 2021, and our common stock began trading on the Nasdaq Global Select Market on June 30, 2021. On July 2, 2021, we completed our IPO for the sale of 19,121,000 shares of our common stock, $0.001 par value per share at an offering price of $28.00 per share, for proceeds of $505.9 million, net of underwriting discounts and commissions. In addition, we sold 2,868,150 shares of our common stock for net proceeds of $75.9 million pursuant to the full exercise of the underwriter’s option to purchase additional shares in connection with the IPO. In addition, on July 2, 2021, we sold 3,214,285 shares of our common stock in a private placement with an existing related party stockholder for proceeds of $85.0 million, net of underwriting discounts and commissions. We raised aggregate proceeds of $666.9 million from our IPO and private placement after deducting underwriting discounts and commissions. We incurred stock issuance costs of $5.6 million. Proceeds raised from our IPO were used to repay the full outstanding balance of $521.6 million on our 2018 Term Loan.

Upon the completion of our IPO, 23,081,080 outstanding shares of redeemable convertible preferred stock with a carrying value of $70.9 million converted into 46,162,160 shares of common stock. Following the completion of the IPO, we have one class of authorized and outstanding common stock. Immediately upon the completion of our IPO, we filed an Amended and Restated Certificate of Incorporation, which authorized a total of 1,000,000,000 shares of common stock, $0.001 par value per share and 100,000,000 shares of preferred stock, par value $0.001 per share.

Note 2. Summary of Significant Accounting Policies

A summary of the significant accounting policies we follow in the preparation of the accompanying unaudited condensed consolidated financial statements is set forth below.

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America, or GAAP. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2021 and the related notes thereto. The December 31, 2021 condensed consolidated balance sheet was derived from our audited consolidated financial statements as of that date. Our unaudited condensed consolidated financial statements include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair statement of the unaudited condensed consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. There have been no significant changes in accounting policies during the three months ended March 31, 2022 from those disclosed in the annual consolidated financial statements for the year ended December 31, 2021 and the related notes, except as noted below in the Recently Adopted Accounting Pronouncements.

The operating results for the three months ended March 31, 2022 are not necessarily indicative of the results expected for the full year ending December 31, 2022.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent liabilities in the unaudited condensed consolidated financial statements and accompanying notes. Estimates are used for, however not limited to, revenue recognition, sales allowances and credit reserves, available-for-sale debt securities, valuation of long-lived assets and goodwill, income taxes, commitments and contingencies, valuation of assets and

liabilities acquired in business combinations and stock-based compensation. Actual results could differ materially from those estimates.

The extent to which COVID-19 continues to impact our business and financial results will depend on numerous continuously evolving factors including, but not limited to, the magnitude and duration of COVID-19, including resurgences; the impact on our employees; the extent to which it will impact worldwide macroeconomic conditions, including interest rates, employment rates, and health insurance coverage; the speed and degree of the anticipated recovery, as well as variability in such recovery across different geographies, industries, and markets; and governmental and business reactions to the pandemic. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of March 31, 2022 and through the date of the issuance of these unaudited condensed consolidated financial statements. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, sales allowances, and the carrying value of goodwill and other long-lived assets. While there was not a material impact as a result of COVID-19 on our unaudited condensed consolidated financial statements at and for the three months ended March 31, 2022, our future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to our consolidated financial statements in future reporting periods.

Significant accounting policies

The Company’s significant accounting policies are detailed in "Note 2: Summary of Significant Accounting Policies" of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. On January 1, 2022, the Company adopted Accounting Standards Codification No. 842, Leases, with application to leases that existed as of the adoption date.

Segment and Geographic Information

Our Chief Executive Officer, as the Chief Operating Decision Maker, or CODM, organizes our company, manages resource allocations, and measures performance on the basis of one operating segment.

Revenue outside of the U.S., based on the location of the customer, represented less than 1% of our unaudited consolidated revenue for the three months ended March 31, 2022 and 2021, respectively. Our property and equipment located outside of the U.S. was less than 1% of our consolidated property and equipment as of March 31, 2022 and December 31, 2021.

Foreign Currency

The British Pound Sterling is the functional currency for our foreign subsidiaries. The financial statements of these foreign subsidiaries are translated to U.S. Dollars using period-end rates of exchange for assets and liabilities, historical rates of exchange for equity, and average rates of exchange for the period for revenue and expenses. Translation gains and losses are recorded in accumulated other comprehensive loss as a component of our unaudited consolidated statements of redeemable convertible preferred stock and stockholders’ equity (deficit). We recognized foreign currency transaction losses of $1.4 million and gains of $0.1 million during the three months ended March 31, 2022 and 2021, respectively.

Concentrations of Credit Risk

We maintain accounts in U.S. and U.K. banks with funds insured by the Federal Deposit Insurance Corporation, or FDIC, and the Financial Services Compensation Scheme, or FSCS, respectively. Our bank accounts may, at times, exceed the FDIC and FSCS insured limits. Financial instruments that potentially subject us to credit risk consist principally of cash and cash equivalents. Management believes that we are not exposed to any significant credit risk related to our cash or cash equivalents and have not experienced any losses in such accounts.

Due to a large and diverse customer base, no individual customer represented more than 1% of total revenue in three months ended March 31, 2022 and 2021. At March 31, 2022 and December 31, 2021, there were no customers with an outstanding balance of 10% or more of our accounts receivable balance.

Leases

Financial information related to periods prior to adoption will be as originally reported under the Financial Accounting Standards Board, or FASB, Accounting Standard Codification, or, ASC 840, Leases. On January 1, 2022 we recorded operating lease right-of-use, or ROU assets of $5.7 million and operating lease liabilities of $5.9 million. The difference between the leased assets and lease liabilities represents the existing deferred rent liabilities balance at adoption, resulting from historical straight-line recognition of operating leases, which was reclassified upon adoption to reduce the measurement of the leased assets. The adoption of the standard did not have a material impact on our stockholders’ equity, results of operations, or cash flows.

The new standard provides several optional practical expedients in transition. We elected the package of practical expedients permitted under the transition guidance, which eliminates the requirement to reassess whether a contract contains a lease and lease classification.

We have also made accounting policy elections, including a short-term lease exception policy, permitting us to not apply the recognition requirements of this standard to short-term leases, which are leases with expected terms of 12 months or less, and an accounting policy to account for lease and certain non-lease components as a single component for certain classes of assets. Additionally, the Company used the portfolio approach when applying the discount rate selected based on the dollar amount and term of the obligation.

We determined whether an arrangement is a lease, or contains a lease, at inception if we are both able to identify an asset and can conclude we have the right to control the identified asset for a period of time. Leases are included in operating lease ROU assets and operating lease liabilities in the accompanying unaudited condensed consolidated balance sheets. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheet.

ROU assets represent our right to control an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit rate, we use its incremental borrowing rate based on the information available at commencement date in determining the discount rate used to present value lease payments. We used the incremental borrowing rate on January 1, 2022 for operating leases that commenced on or prior to that date. The incremental borrowing rate used is estimated based on what we would be required to pay for a collateralized loan over a similar term. Our leases typically do not include any residual value guarantees, bargain purchase options, or asset retirement obligations.

Our lease terms are only for periods in which we have enforceable rights. A lease is no longer enforceable when both the lessee and the lessor each have the right to terminate the lease without permission from the other party with no more than an insignificant penalty. Our lease terms are impacted by options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We generally use the base, non-cancelable lease term when determining the lease assets and liabilities.

Our agreements may contain variable lease payments. We include variable lease payments that depend on an index or a rate and exclude those which depend on facts or circumstances occurring after the commencement date, other than the passage of time.

Revenue Recognition

We derive our revenue from the following sources:

Transaction revenue—Transaction revenue is primarily generated from our customized legal document services upon fulfillment of these services. Transaction revenue includes filing fees and is net of cancellations, promotional discounts and sales allowances.

Subscription revenue—Subscription revenue is generated primarily from subscriptions to our registered agent services, compliance packages, attorney advice, and legal forms services, in addition to software-as-a-service, or SaaS, subscriptions in the U.K. We generally recognize revenue from our subscriptions ratably over the subscription term. Subscription terms generally range from thirty days to one year. Subscription revenue includes the value allocated to bundled free-trials for our subscription services and is net of promotional discounts, cancellations, sales allowances and credit reserves and payments to third-party service providers such as legal plan law firms and tax service providers.

Partner revenue—Partner revenue consists primarily of one-time or recurring fees earned from third-party providers from leads generated to such providers through our online legal platform. Revenue is recognized when the related performance-based criteria have been met. We assess whether performance criteria have been met on a cost-per-click or cost-per-action basis.

Revenue from our transaction, subscription and partner revenue is as follows (in thousands):


	Three Months Ended March 31,
	2022		2021
Transaction	$	64,084	$	61,388
Subscription	84,387		65,493
Partner	5,738		7,751
Total revenue	$	154,209	$	134,632

Recent Accounting Pronouncements

Under the Jumpstart our Business Startups Act, or JOBS Act, we meet the definition of an emerging growth company. We have elected to use the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies. To the extent that we no longer qualify as an emerging growth company, we will be required to adopt certain accounting pronouncements earlier than the adoption dates disclosed below which are for non-public business entities.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We adopted this guidance effective January 1, 2022. Refer to Note 7 for further details.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) — Facilitation of the Effects of Reference Rate Reform on Financial Reporting, or Topic 848, that provides optional relief to applying reference rate reform to contracts, hedging relationships, and other transactions that reference the LIBOR, which has been discontinued as of the end of 2021. Also, in January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848) — Scope, to clarify that cash flow hedges are eligible for certain optional expedients and exceptions for the application of subsequent assessment methods to assume perfect effectiveness as previously presented in ASU 2020-04. Topic 848 is effective immediately and may be applied through December 31, 2022. We have adopted the provisions of Topic 848 and the adoption did not have a material impact to our unaudited condensed consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit losses: Measurement of Credit Losses on Financial Instruments (Topic 326), or Topic 326, which revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but not limited to, available-for-sale debt securities and accounts receivable. Based upon our current filing status, Topic 326 is effective for our annual reporting period beginning on January 1, 2023. We are currently evaluating the impact of the adoption of Topic 326 on our consolidated financial statements.

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. This standard eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share computation. Based upon our current filing status, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. We are currently evaluating the impact of the adoption on our consolidated financial statements.

Note 3. Other Financial Statement Information

Accounts Receivable

Changes in the allowance consisted of the following (in thousands):


	Three Months Ended March 31,
	2022		2021
Beginning balance	$	4,060	$	5,256
Add: amounts recognized as a reduction of revenue	1,722		1,582
Add: bad debt expense recognized in general and administrative expense	72		15
Less: write-offs, net of recoveries	(2,221)		(2,144)
Ending balance	$	3,633	$	4,709

The allowance recognized as a reduction of revenue primarily relates to our installment plan receivables for which we expect we will not be entitled to a portion of the transaction price based on our historical experience with similar transactions. The allowance recognized against general and administrative expense represents an allowance relating to receivables from partners that are no longer considered collectible.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):


	March 31, 2022		December 31, 2021
Prepaid expenses	$	15,409	$	10,968
Deferred cost of revenue	3,702		1,819
Capitalized cloud computing development costs	1,080		867
Other current assets	2,981		2,935
Total prepaid expenses and other current assets	$	23,172	$	16,589

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):


	March 31, 2022		December 31, 2021
Accrued payroll and related expenses	$	16,316	$	21,858
Accrued vendor payables	19,729		18,239
Accrued advertising	10,157		426
Sales allowances	4,771		4,862
Accrued sales, use and business taxes	2,725		2,678
Other	2,811		2,754
Total accrued expenses and other current liabilities	$	56,509	$	50,817

Depreciation and Amortization

Depreciation and amortization expense of our property and equipment, including capitalized internal-use software, and intangible assets consisted of the following (in thousands):


	Three Months Ended March 31,
	2022		2021
Cost of revenue	$	2,070	$	1,678
Sales and marketing	1,875		1,475
Technology and development	726		587
General and administrative	723		426
Total depreciation and amortization expense	$	5,394	$	4,166

Deferred revenue

Deferred revenue as of March 31, 2022 and December 31, 2021 was $165.0 million and $147.9 million, respectively. Revenue recognized in the three months ended March 31, 2022 and 2021 that was included in deferred revenue at the beginning of the year was $81.9 million and $69.7 million, respectively.

We have omitted disclosure on the transaction price allocated to remaining performance obligations and estimated timing of revenue recognition as our contracts with customers that have a duration of more than one year are immaterial.

Note 4. Acquisitions

Earth Class Mail, Inc.

In November 2021, we acquired all of the outstanding equity interests in Earth Class Mail, Inc., or Earth Class Mail, a company that provides virtual mailbox solutions for small businesses, in line with our strategy to scale our existing business through building in-house adjacencies. The total cash paid was $61.2 million, inclusive of a working capital adjustment of $0.3 million. Intangible assets acquired from Earth Class Mail included customer relationships of $10.6 million, developed technology of $5.4 million and trade names of $0.2 million, which are being amortized over their estimated useful life using the straight-line method. Goodwill of $48.6 million arising from the acquisition consists largely of the assembled workforce and synergies expected from combining Earth Class Mail into our operations.

The revenue and earnings of the acquired business have been included in our results since the acquisition date and are not material to the condensed consolidated financial results.

The purchase accounting for the Earth Class Mail acquisition remains incomplete with respect to acquired intangible assets as management continues to gather and evaluate information about circumstances that existed as of the acquisition date. Measurement period adjustments, will be recognized in the reporting period in which the adjustment amounts are determined within 12 months from the acquisition date.

Note 5. Long-term Debt

On July 2, 2021, we entered into an amended and restated credit and guaranty agreement, or 2021 Revolving Facility, providing for revolving borrowings of up to $150.0 million with an availability period of five years. Under the 2021 Revolving Facility, we can use up to $20.0 million in letters of credit as well as borrowings on same-day notice, referred to as swingline loans, in an amount of up to $10.0 million. Additional debt issuance costs of $0.8 million were allocated to the 2021 Revolving Facility.

The interest rate applicable to the 2021 Revolving Facility is, at our option, at a rate equal to the greatest of (i) the administrative agent’s prime rate (ii) the federal funds effective rate plus 1/2 of 1.0% or (iii) one month LIBOR (subject to a 1.00% floor), plus 1.00% or LIBOR (subject to a 0.00% floor) plus 2.00%. The interest rate margins under the 2021 Revolving Facility are subject to a reduction of 0.25% and a further reduction of 0.25% upon achieving total net first lien leverage ratios of 3.50 to 1.00 and 2.50 to 1.00, respectively. We are required to pay a commitment fee in respect of unutilized commitments under the 2021 Revolving Facility. The commitment fee is, initially, 0.35% per annum. The commitment fee is subject to a reduction of 0.10% if the total net first lien leverage ratio does not exceed 3.50 to 1.00. We are also required to pay customary letter of credit fees and agency fees. We have the option to voluntarily repay outstanding loans under the 2021 Revolving Facility at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans. There is no scheduled amortization under the 2021 Revolving Facility. Any principal amount outstanding is due and payable in full at maturity, five years from the closing

date of the 2021 Revolving Facility. Obligations under the 2021 Revolving Facility are guaranteed by our existing and future direct and indirect material wholly-owned domestic subsidiaries, subject to certain exceptions.

The 2021 Revolving Facility contains a number of covenants that, among other things, subject to certain exceptions, restrict our ability and the ability of our restricted subsidiaries to incur additional indebtedness and guarantee indebtedness; create or incur liens; pay dividends and distributions or repurchase capital stock; merge, liquidate and make asset sales; change lines of business; change our fiscal year; incur restrictions on our subsidiaries’ ability to make distributions and create liens; modify our organizational documents; make investments, loans and advances; and enter into certain transactions with affiliates.

The 2021 Revolving Facility requires compliance with a total net first lien leverage ratio of 4.50 to 1.00, or Financial Covenant. The Financial Covenant will be tested at quarter-end only if the total principal amount of all revolving loans, swingline loans and drawn letters of credit that have not been reimbursed exceeds 35% of the total commitments under the 2021 Revolving Facility on the last day of such fiscal quarter.

At March 31, 2022, and December 31, 2021, we had no amounts outstanding under our 2021 Revolving Facility or any outstanding letters of credit and were in compliance with all financial covenants.

Note 6. Derivative Financial Instruments

Interest Rate Swaps

At March 31, 2021, we held interest rate swap contracts with an aggregate notional amount of $394.2 million, which were designated as cash flow hedges. In July 2021, upon the full repayment of our 2018 Term Loan, our interest rate swaps were discontinued as cash flow hedges and were subsequently extinguished.

Financial Guarantee

In June 2021, our financial guarantee of the personal loan of a former executive officer was waived prior to our IPO. The associated restricted cash equivalent of $25.0 million became unrestricted and was reclassified to cash and cash equivalents. The change in fair value of our financial guarantee was not material to our unaudited condensed consolidated financial statements for the three months ended March 31, 2021.

Note 7. Commitments and Contingencies

Operating Leases

We conduct operations from certain leased facilities in various locations. At March 31, 2022, we had various non-cancelable operating leases for office space and equipment, which expire between June 30, 2022 and September 30, 2029, which represent the non-cancellable periods of the leases and include extension options that we determined are reasonably certain to be exercised. We exclude extension options that are not reasonably certain to be exercised from our lease terms. Our lease payments consist primarily of fixed rental payments for the right to use the underlying leased assets over the lease terms. We often receive customary incentives from our landlords, such as reimbursements for tenant improvements and rent abatement periods, which effectively reduce the total lease payments owed for these leases.

Operating lease right-of-use assets and liabilities on our condensed consolidated balance sheets represent the present value of our remaining lease payments over the remaining lease terms. We do not allocate lease payments to non-lease components. We use our incremental borrowing rate to calculate the present value of our lease payments, as the implicit rates in our leases are not readily determinable.

At March 31, 2022, the maturities of our remaining operating lease liabilities were as follows (in thousands, except years and percentages):


	March 31, 2022

2022	$	1,485
2023	1,099
2024	864
2025	548
2026	503
Thereafter	1,024
Total minimum lease payments	$	5,523
Less: Effects of discounting	411
Present value of lease liabilities under ASC 842	$	5,112
Less: current portion	$	1,607
Long-term lease liabilities	$	3,505
Weighted-average remaining lease term	4.9 years
Weighted-average incremental borrowing rate	3.25		%

The component of our lease costs included in our unaudited condensed consolidated statements of income for the three month ended March 31, 2022, were as follows (in thousands):


Lease cost
Operating lease cost	$	415
Other variable cost	115
Net lease cost	$	530

At March 31, 2022, we had lease agreements with commencement dates beginning on or after April 1, 2022. The total future aggregate minimum lease payments for such lease agreements calculated under ASC 842 were as follows (in thousands):


	Operating Leases

2022	$	462
2023	1,220
2024	1,064
2025	857
2026	882
Thereafter	2,645
Total minimum lease payments	$	7,130
Less: Effects of discounting	742
Present value of lease liabilities under ASC 842	$	6,388

Total future aggregate minimum lease payments calculated under ASC 840 as of December 31, 2021 were as follows (in thousands):


	Operating Leases

2022	$	2,372
2023	1,101
2024	867
2025	550
2026	505
Thereafter	1,033
Total minimum lease payments under ASC 840	$	6,428

Advertising, Media and Other Commitments

We use a variety of media to advertise our services, including search engine marketing, television and radio. At March 31, 2022, we had non-cancelable minimum advertising and media commitments for future advertising spots of $21.3 million, substantially all of which will be paid over a three year period. We also have non-cancelable agreements with various vendors, which require us to pay $52.5 million over a four year period, of which $41.8 million remains to be paid as of March 31, 2022.

Legal Proceedings

We received a demand letter dated April 20, 2020 from service partner Dun & Bradstreet alleging that Dun & Bradstreet had overpaid us for services. The letter alleges these overpayments occurred between 2015 and 2019, amounted to $5.6 million, and were caused by overreporting by us. The parties have continued to negotiate, and no claim has been filed. We deny and will continue to deny all of the allegations and claims asserted by Dun & Bradstreet, including, but not limited to, any allegation that Dun & Bradstreet has suffered any harm or damages. We believe we have meritorious defenses to the claims and will vigorously defend any action. While there is at least a reasonable possibility that a loss may be incurred, we have not recorded any loss or accrual in the accompanying unaudited condensed consolidated financial statements at March 31, 2022 for this matter as a loss is not probable.

In July 2021, Legalinc Corporate Services Inc., LegalZoom’s wholly owned subsidiary, or Legalinc, received a citation from the Wyoming Secretary of State of Wyoming regarding Legalinc’s registered agent services in Wyoming. The citation alleges that Legalinc failed to comply with Wyoming’s Registered Offices and Agents Act when carrying out its registered agent business in the state, and assessed an initial $4.1 million penalty and revoked Legalinc’s status as a commercial registered agent in Wyoming. Legalinc has requested a hearing to review the matter and is engaging in negotiations with the State. We are unable to predict the ultimate outcome of this matter. While there is at least a reasonable possibility that a loss may be incurred, we have not recorded any loss or accrual in the accompanying unaudited condensed consolidated financial statements at March 31, 2022 for this matter as a loss is not probable. If this matter is not resolved in our favor, the losses arising from the result of a final ruling, hearing or settlements may have a material adverse effect on our results of operations, cash flows and financial condition.

From time to time, we may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. Other than those described above and in our Annual Report on Form 10-K, we are not currently a party to any material legal proceedings, nor are we aware of any pending or threatened litigation that could have a material adverse effect on our results of operations, cash flows, and financial condition, should such litigation be resolved unfavorably.

Indemnifications

Indemnification provisions in our third-party service provider agreements provide that we will indemnify, hold harmless, and reimburse the indemnified parties on a case-by-case basis for losses suffered or incurred by the indemnified parties in connection with any claim by any third-party as a result of our website, advertising, marketing, payment processing, collection or customer service activities. The maximum potential amount of future payments we could be required to make under these indemnification provisions is undeterminable.

No amounts have been accrued or have been paid during any period presented as we believe the fair value of these indemnification obligations is immaterial.

Note 8. Stockholder’s Equity

Share Repurchase Program

On March 1, 2022, our board of directors approved a share repurchase program authorizing us to repurchase up to $150.0 million of our common stock. Stock repurchases under this program may be made through any manner, including open market transactions, accelerated share repurchase agreements, or privately negotiated transactions with third parties, and in such amounts as management deems appropriate. Open market repurchases will be structured to occur in accordance with applicable federal securities laws, including within the pricing and volume requirements of Rule 10b-18 under the Securities Exchange Act of 1934, as amended. We may also, from time to time, enter into Rule 10b5-1 plans to facilitate repurchases of our shares of common stock under this authorization. This program does not obligate us to acquire any particular amount of common stock and may be modified, suspended or terminated at any time at the discretion of our board of directors.

During the three months ended March 31, 2022, we entered into a Rule 10b5-1 plan and repurchased a total of 78,687 shares of our common stock through open market purchases at an average per share price of $14.0 for a total repurchase of $1.1 million including broker commission. The repurchases were recorded as a reduction to stockholders' equity. We have made additional repurchases under the share repurchase program subsequent to the three months ended March 31, 2022 of 591,982 share of our common stock through open market purchases, amounting to $8.1 million, as of the date of filing.

Note 9. Stock-based Compensation

Stock-based Compensation Expense

We recorded stock-based compensation expense in the following categories in the accompanying unaudited condensed consolidated statements of operations and balance sheets (in thousands):


	Three Months Ended March 31,
	2022		2021
Cost of revenue	$	277	$	59
Sales and marketing	3,125		207
Technology and development	4,298		526
General and administrative	14,165		3,150
Total stock-based compensation expense	21,865		3,942
Amount capitalized to internal-use software	481		13
Total stock-based compensation expense	$	22,346	$	3,955

The change in compensation expense is due to certain award modifications in connection with our IPO in 2021 as described in “Modification of Stock-Based Compensation Awards” below.

Stock Options

Stock option activity for the three months ended March 31, 2022 is as follows (in thousands, except weighted-average exercise price and remaining contract life):


	Number of Options	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value
Outstanding at December 31, 2021	15,274	$	10.47	8.0	$	97,094
Granted	2,766	14.15
Exercised	(203)	1.15
Cancelled/forfeited	(6)	1.04
Outstanding at March 31, 2022	17,831	$	11.15	8.1	$	66,773
Vested and expected to vest at March 31, 2022	17,821	$	11.15	8.1	$	66,704
Exercisable at March 31, 2022	7,724	$	9.09	7.5	$	39,034

At March 31, 2022, total unrecognized stock-based compensation expense is $62.2 million, which is expected to be recognized over a weighted-average period of 2.7 years.

In March 2022, we granted 2,765,901 service-based options with a value of $18.3 million to our executive officers. The related stock-based compensation expense for the three months ended March 31, 2022 was $0.1 million, and the remaining stock-based compensation of $18.2 million will be recognized over a weighted-average requisite service period of approximately 3.9 years. There was a realized tax benefit of $1.9 million and $2.3 million for tax deductions from stock options exercised during the three months ended March 31, 2022 and 2021, respectively.

We did not grant stock options during the three months ended March 31, 2021. The weighted-average assumptions that were used to calculate the grant-date fair value of our stock option grants using the Black-Scholes option pricing model were as follows:


	Three Months Ended March 31, 2022
Expected life (years)	5.6
Risk-free interest rate	2.6	%
Expected volatility	47.6	%
Expected dividend yield	—

In June 2021, we granted 970,970 options to our executive officers that were contingent on the effectiveness of the registration statement of our IPO, which occurred on June 29, 2021, or IPO Options. Because the number of options and exercise price of the IPO Options were based on the IPO price to the public, the grant date for accounting purposes was not established until the effective date of our IPO. As the IPO was a performance condition, no stock-based compensation expense was recognized until our IPO registration statement was declared effective. The related stock-based compensation expense for the three months ended March 31, 2022 was $1.4 million and the remaining stock-based compensation of $6.8 million will be recognized over a weighted-average requisite service period of approximately 3.4 years.

Restricted Stock Units

Restricted stock unit, or RSU, activity for the three months ended March 31, 2022 is as follows (in thousands, except weighted-average grant-date fair value):


	Number of Units	Weighted- Average Grant- Date Fair Value
Unvested at December 31, 2021	3,577	$	21.52
Granted	4,910	14.15
Cancelled/forfeited	(131)	13.35
Vested	(398)	17.87
Unvested at March 31, 2022	7,958	$	17.29

The fair value of vested RSUs for the three months ended March 31, 2022 and 2021, were $6.3 million and $0.4 million, respectively. Our RSUs consist of time-based RSUs. For the three months ended March 31, 2022 and 2021, total stock-based compensation expense related to RSUs was $9.8 million and $0.5 million, respectively. At March 31, 2022, total remaining stock-based compensation expense for unvested RSU awards is $112.8 million, which is expected to be recognized over a weighted-average period of 3.5 years.

In March 2022, we granted 4,909,929 service-based RSUs with a value of $69.5 million to our executive officers, certain employees and non-employee directors. The related stock-based compensation expense for the three months ended March 31, 2022 was $0.3 million, and the remaining stock-based compensation of $69.2 million will be recognized over a weighted-average requisite service period of approximately 3.8 years.

In June 2021, we granted 388,389 RSUs with a value of $10.9 million to our executive officers that were contingent on the effectiveness of the registration statement of our IPO, or IPO RSUs. As the IPO was a performance condition, no stock-based compensation expense was recognized until our IPO registration statement was declared effective. Stock-based compensation expense for the three months ended March 31, 2022 was $1.4 million, and the remaining stock-based compensation of $6.5 million is expected to be recognized over a weighted-average period of 3.4 years.

In 2021, we granted 1,338,028 liquidity event RSUs, or LERSUs, to various employees, which only vest upon the achievement of up to four-years of service and upon the consummation of a change-in-control, or CIC event, which included an IPO. If the recipient’s employment terminates for any reason other than for cause, the recipient shall retain any service-vested LERSUs until 6.5 years from the date of grant or the earlier settlement of the service-vested LERSUs upon the consummation of a CIC event. For the LERSUs, recognition of expense does not occur until the consummation of a CIC event and expense is recognized thereafter for any remaining service period, as such events are not considered probable of occurring prior to the CIC event for stock-based compensation purposes.

Upon the effective date of our IPO registration statement on June 29, 2021, we commenced recognition of stock-based compensation for all LERSUs as the CIC performance event and service conditions for vested RSUs were satisfied. Stock-based compensation expense for these LERSUs of $6.4 million was recognized on a graded vesting basis during the three months ended March 31, 2022.

In March 2021, we granted 30,434 RSUs to various employees where the RSUs will vest depending upon the appreciation of the fair value of our common stock compared to the grant-date fair value of our common stock and upon the consummation of a CIC event, which included an IPO, merger, acquisition, or sale of more than 50% of our assets, or performance RSUs. The performance RSUs vest on a linear basis, starting at 0% with a fair value of our common stock equal to $19.64 per share and ending at 100% upon reaching a fair value of our common stock of $29.46 per share. The performance options were subsequently modified in June 2021, prior to the effective date of our IPO registration statement, as discussed below.

Stock-option and RSU activity described above, including total stock-based compensation expense recognized and total remaining stock-based compensation expense, is inclusive of awards modified during the period as discussed below.

Modification of Stock-Based Compensation Awards

In June 2021, we modified the vesting conditions of certain stock options and RSUs as described below.

We modified the vesting conditions of 4,477,218 outstanding performance options of certain executive officers and employees so that the performance options do not fully vest immediately upon an IPO. Instead, subject to and contingent upon the effective date of an IPO, the modified performance options for executive officers will vest monthly over a four-year period from their original vesting commencement dates and the modified performance options of certain employees will vest 25% on the first anniversary from the vesting commencement date, and then vest monthly over the remaining service period, subject to continued employment through the applicable vesting dates. As the modified awards contain a performance condition that is satisfied upon an IPO, we remeasured the fair value of the performance options on the date of modification. This new fair value of $76.6 million will be recognized as stock-based compensation expense using the graded vesting method, with an immediate stock-based compensation expense recognized on the effective date of our IPO registration statement for the modified performance options for which the service vesting condition was satisfied on or prior to the effective date of the IPO registration statement, and all remaining compensation expense will be recognized thereafter over the remaining service period. We recognized stock-based compensation of $7.1 million during the three months ended March 31, 2022.

We modified the vesting conditions of 3,627,936 outstanding 2019 performance options of an executive officer so that in the event of an IPO, the modified 2019 performance options will vest monthly over a four-year period from the original vesting commencement date in 2019, subject to continued employment of the executive officer, rather than vesting upon the fourth anniversary of the original date of grant based on achieving certain stock price thresholds. Incremental stock-based compensation expense as a result of this modification was $11.4 million. Upon our IPO, we recognized stock-based compensation expense for the modified 2019 performance options for which the service vesting condition was satisfied on or prior to the effective date of the IPO registration statement, and all remaining compensation will be recognized thereafter over the remaining service period using the graded vesting method. We recognized stock-based compensation of $1.8 million during the three months ended March 31, 2022.

We modified the vesting conditions of 111,902 outstanding performance RSUs of certain employees so that the modified performance RSUs do not vest immediately upon an IPO. Instead, subject to and contingent upon the effective date of an IPO registration statement, the modified performance RSUs vest 25% on the first anniversary from their respective vesting commencement dates, then monthly over the remaining service period, subject to the continued employment through the applicable vesting dates. As the modified RSUs contain a performance condition that is satisfied upon an IPO, we remeasured the fair value of the performance RSUs on the date of modification. This new fair value of approximately $2.9 million will be recognized as stock-based compensation expense using the graded vesting method, with an immediate stock-based compensation expense recognized on the effective date of our IPO registration statement for the performance RSUs for which the service vesting condition was satisfied on or prior to the effective date of the IPO registration statement, and all remaining compensation will be recognized thereafter over the remaining service period. We recognized stock-based compensation expense of $0.2 million during the three months ended March 31, 2022.

We modified the vesting conditions of 1,725,942 outstanding LERSUs and 1,706,888 outstanding time-based options of certain executive officers to amend the severance vesting acceleration benefit applicable for the LERSUs and to remove the CIC event vesting acceleration benefit for the time-based options. There was no incremental stock-based compensation associated with the modification of the time-based options. We remeasured the fair value of the LERSUs on the date of modification and this new fair value of approximately $43.3 million will be recognized using the graded vesting method, with an immediate stock-based compensation expense recognized on the effective date of our IPO registration statement for the modified LERSUs that have satisfied the service-vesting condition on or prior to the effective date of our IPO registration statement, and all remaining compensation will be recognized thereafter over the remaining service period. We recognized stock-based compensation expense of $4.6 million during the three months ended March 31, 2022.

Note 10. Income Taxes

We account for income taxes in accordance with ASC 740, Income Taxes, which requires an estimate of the annual effective tax rate for the full year to be applied to the interim period, taking into account year-to-date amounts and projected results for the full year. Our effective tax rate could fluctuate significantly from quarter to quarter based on recurring and nonrecurring factors including, but not limited to: variations in the estimated and actual level of pre-tax income or loss by jurisdiction; changes in enacted tax laws and regulations, and interpretations thereof, including with respect to tax credits and state and local income taxes; developments in tax audits and other matters; recognition of excess tax benefits and tax deficiencies from stock-based compensation and certain nondeductible expenses. Changes in judgment from the evaluation of new information resulting in the recognition, derecognition, or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of the change.

We recorded a provision for income taxes of $3.0 million and benefit from income taxes of $2.9 million for the three months ended March 31, 2022 and 2021, respectively. The effective tax rate for the three months ended March 31, 2022 of (10.7)% differed from the federal statutory rate of 21% primarily due to the recognition of significant non-deductible stock-based compensation and other discrete adjustments. The effective tax rate for the quarter ended March 31, 2021 of 23% differed from the federal statutory rate of 21% primarily due to the valuation allowance against foreign losses and recognition of excess tax benefits of stock-based compensation.

Gross unrecognized tax benefits were $8.1 million and $7.9 million as of March 31, 2022 and December 31,2021 , respectively. The gross unrecognized tax benefits, if recognized by us, will result in a reduction of approximately $8.1 million, excluding interest and penalties, to the provision for income taxes thereby favorably impacting our effective tax rate. Our policy is to recognize interest and penalties related to income tax matters in income tax expense. For the periods presented, interest and penalties related to income tax positions were not material to our unaudited condensed consolidated financial statements.

We are subject to taxation and file income tax returns in the U.S. federal, state, and foreign jurisdictions. The federal income tax return for the years 2018 through 2020 and state income tax returns for the tax years 2008 through 2020 remain open to examination. We are under examination in one state which is not expected to have an impact on our results of operations, cash flows and financial condition.

Note 11. Net Loss Per Share Attributable to Common Stockholders

The following table shows the computation of basic and diluted net loss per share attributable to common stockholders (in thousands, except per share amounts):


	Three Months Ended March 31,
	2022		2021
Numerator:
Net loss	$	(30,609)	$	(9,823)
Net loss attributable to common stockholders—basic and diluted	$	(30,609)	$	(9,823)
Denominator:
Weighted-average common stock used in computing net loss per share attributable to common stockholders—basic and diluted	198,265		125,065
Net loss per share attributable to common stockholders—basic and diluted	$	(0.15)	$	(0.08)

The following table presents the number of options, RSUs and restricted stock excluded from the calculation of diluted net loss per share attributable to common stockholders because they are anti-dilutive (in thousands):


	Three Months Ended March 31,
	2022	2021
Options to purchase common stock	17,832	14,953
RSU	7,958	3,309
Employee stock purchase plan	91	—
Restricted stock	50	50
Total	25,931	18,312

Note 12. Fair Value Measurements

Fair value is defined as the price that would be received from selling an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:

Level 1 — Quoted prices in active markets for identical assets and liabilities.

Level 2 — Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

At March 31, 2022 and December 31, 2021, our financial assets and liabilities recorded at fair value on a recurring basis consisted of cash equivalents and available-for-sale debt securities. Cash equivalents consisted of money market funds valued using quoted prices in active markets, which represent Level 1 inputs in the fair value hierarchy. The available-for-sale debt securities were valued using a Monte Carlo simulation, which include inputs that represent Level 3 inputs in the fair value hierarchy.

The carrying amounts of accounts receivable, accounts payable and accrued expenses and other current liabilities approximate fair values because of the short-term nature of these items.

The following tables summarize our assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy (in thousands):


	As of March 31, 2022
	Level 1		Level 2		Level 3
Available-for-sale debt securities	$	—	$	—	$	1,182
Money market fund	30,219		—		—
Total assets	$	30,219	$	—	$	1,182
Contingent consideration	—		—		750
Total liabilities	$	—	$	—	$	750


	As of December 31, 2021
	Level 1		Level 2		Level 3
Available-for-sale debt securities	$	—	$	—	$	1,122
Money market fund	30,215		—		—
Total assets	$	30,215	$	—	$	1,122
Contingent consideration	—		—		750
Total liabilities	$	—	$	—	$	750

There was no material change in the fair value of the contingent consideration from our acquisition in October 2020 of Purely Solutions, LLC, for the three months ended March 31, 2022 and year ended December 31, 2021.

Note 13. Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss consisted of the following:


	As of March 31, 2022
(in thousands)	Before Tax Amount		Tax Effect		Net of Tax Amount
Foreign currency translation adjustments:
Beginning balance	$	(2,078)	$	—	$	(2,078)
Change during period	1,402				1,402
Ending balance	$	(676)	$	—	$	(676)
Available-for-sale debt securities:
Beginning balance	$	331	$	(48)	$	283
Unrealized gains	51		(13)		38
Ending balance	$	382	$	(61)	$	321
Accumulated other comprehensive loss:
Beginning balance	$	(1,747)	$	(48)	$	(1,795)
Other comprehensive gain	1,453		(13)		1,440
Ending balance	$	(294)	$	(61)	$	(355)


	As of March 31, 2021
(in thousands)	Before Tax Amount		Tax Effect		Net of Tax Amount
Foreign currency translation adjustments:
Beginning balance	$	(3,014)	$	—	$	(3,014)
Change during period	(147)		—		(147)
Ending balance	$	(3,161)	$	—	$	(3,161)
Available-for-sale debt securities:
Beginning balance	$	281	$	(36)	$	245
Unrealized gains	17		(4)		13
Ending balance	$	298	$	(40)	$	258
Cash flow hedges:
Beginning balance	$	(14,708)	$	3,650	$	(11,058)
Unrealized gain on interest rate swaps and cap	2,772		(691)		2,081
Reclassification of losses from interest rate cap to net loss	28		(8)		20
Reclassification of prior hedge effectiveness to net loss	1,328		(331)		997
Ending balance	$	(10,580)	$	2,620	$	(7,960)
Accumulated other comprehensive loss:
Beginning balance	$	(17,441)	$	3,614	$	(13,827)
Other comprehensive income	3,998		(1,034)		2,964
Ending balance	$	(13,443)	$	2,580	$	(10,863)

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

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and Part II, Item 8, “Financial Statements and Supplementary Data” included in our 2021 Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 24, 2022. This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the "Risk Factors" section of our Annual Report on Form 10-K and this Quarterly Report on Form 10-Q and other factors set forth in other parts of this Quarterly Report on Form 10-Q and our filings with the SEC. This discussion and analysis deals with comparisons of material changes in the unaudited condensed consolidated financial statements for the three months ended March 31, 2022 and 2021. For the comparison of the three months ended March 31,2021 and 2020, see the Management's Discussion and Analysis of Financial Condition and Results of Operations in our final Prospectus, filed with the SEC pursuant to Securities Act Rule 424(b)(4) on June 30, 2021, or Prospectus.

Overview

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, 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, $0.001 par value per share at an offering price of $28.00 per share, for proceeds of $505.9 million, net of underwriting discounts