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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 June 30, 2022
OR
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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareLZ
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 August 5, 2022, the registrant had outstanding 194,559,013 shares of common stock, $0.001 par value per share, outstanding.
1

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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 magnitude and duration of the COVID-19 pandemic; the impact of macroeconomic challenges, including as a result of inflation, global conflict, supply chain issues and recessionary concerns; fluctuations or declines in the number of business formations; our ability to provide high-quality services, customer care and customer experience and add new services that meet our customers’ expectations; our ability to attract and maintain subscribers and convert our transactional customers to subscribers; our ability to drive additional purchases and cross-sell to existing customers; our ability to hire and retain top talent and motivate our employees; our ability to maintain and expand strategic relationships with third parties, changes in the U.S. legal and regulatory landscape; and the other important factors discussed in Part II, Item 1A, “Risk Factors” and elsewhere 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.




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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)
June 30, 2022December 31, 2021
Assets
Current assets:
Cash and cash equivalents
$215,537 $239,297 
Accounts receivable, net
12,993 10,635 
Prepaid expenses and other current assets
13,860 16,589 
Total current assets
242,390 266,521 
Property and equipment, net
49,342 47,013 
Goodwill
59,933 59,910 
Intangible assets, net
14,570 16,031 
Operating lease right-of-use assets 6,961 — 
Deferred income taxes
25,685 27,653 
Available-for-sale debt securities
1,182 1,122 
Other assets
13,319 12,765 
Total assets
$413,382 $431,015 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
$18,404 $31,788 
Accrued expenses and other current liabilities
55,820 50,817 
Deferred revenue
163,140 146,364 
Operating lease liabilities1,542 — 
Total current liabilities
238,906 228,969 
Operating lease liabilities, non-current
4,842 — 
Deferred revenue
1,137 1,554 
Other liabilities
2,841 2,941 
Total liabilities
247,726 233,464 
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock, $0.001 par value; 100,000 shares authorized at June 30, 2022, none issued or outstanding at June 30, 2022 and December 31, 2021
  
Common stock, $0.001 par value; 1,000,000 shares authorized; 196,079 shares and 198,084 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively
196 198 
Additional paid-in capital
994,558 947,160 
Accumulated deficit
(830,952)(748,012)
Accumulated other comprehensive income (loss)
1,854 (1,795)
Total stockholders’ equity
165,656 197,551 
Total liabilities and stockholders’ equity
$413,382 $431,015 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Revenue$163,867 $150,432 $318,076 $285,064 
Cost of revenue57,393 49,859 113,333 93,819 
Gross profit106,474 100,573 204,743 191,245 
Operating expenses:
Sales and marketing72,945 65,431 149,819 136,792 
Technology and development16,197 28,426 34,156 38,925 
General and administrative28,969 33,845 58,457 47,010 
Impairment of long-lived and other assets 379  379 
Total operating expenses118,111 128,081 242,432 223,106 
Loss from operations(11,637)(27,508)(37,689)(31,861)
Interest income (expense), net29 (9,312)(24)(17,966)
Other (expense) income, net(2,022)420 (3,566)668 
Loss before income taxes(13,630)(36,400)(41,279)(49,159)
(Benefit from) provision for income taxes(451)1,995 2,509 (941)
Net loss$(13,179)$(38,395)$(43,788)$(48,218)
Net loss per share attributable to common stockholders—basic and diluted:$(0.07)$(0.31)$(0.22)$(0.38)
Weighted-average shares used to compute net loss per share attributable to common stockholders—basic and diluted:197,819 125,423 198,040 125,245 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Net loss$(13,179)$(38,395)$(43,788)$(48,218)
Other comprehensive income, net of tax:
Change in foreign currency translation adjustments:2,209 (204)3,611 (351)
Change in available-for-sale debt securities:
Unrealized gains (loss) (41)38 (28)
Total change in available-for-sale debt securities (41)38 (28)
Change in unrealized gain on cash flow hedges:
Unrealized gain on interest rate cap and swaps 270  2,351 
Reclassification of prior hedge effectiveness and losses from interest rate cap and swaps to net loss 1,298  2,315 
Total net changes in cash flow hedges 1,568  4,666 
Total other comprehensive income2,209 1,323 3,649 4,287 
Total comprehensive loss$(10,970)$(37,072)$(40,139)$(43,931)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(In thousands)
 Common StockAdditional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
(Loss) Income
Total
Stockholders’
Equity
 SharesAmount
Balance at December 31, 2021198,084 $198 $947,160 $(748,012)$(1,795)$197,551 
Issuance of common stock upon exercise of stock options202 — 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, 2022198,599 $198 $969,731 $(779,723)$(355)$189,851 
Issuance of common stock upon exercise of stock options and ESPP1741,2621,262
Issuance of common stock upon vesting of restricted stock awards2681(1)
Shares surrendered for settlement of minimum statutory tax withholdings(1)(30)(30)
Stock-based compensation23,59623,596
Repurchased common stock (2,961)(3)(38,050)(38,053)
Other comprehensive income2,2092,209
Net loss(13,179)(13,179)
Balance at June 30, 2022196,079 $196 $994,558 $(830,952)$1,854 $165,656 

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











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LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) (continued)
(In thousands)

 Series A Redeemable
Convertible Preferred
Stock
Common StockAdditional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’ Deficit
 SharesAmountSharesAmount
Balance at December 31, 202023,081 $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 income— — — — — — 2,964 2,964 
Net loss— — — — — (9,823)— (9,823)
Balance at March 31, 202123,081 $70,906 125,299 $126 $106,288 $(649,171)$(10,863)$(553,620)
Issuance of common stock upon exercise of stock options— — 213 — 136 — — 136 
Issuance of common stock upon vesting of restricted stock awards— — 32 — — — — — 
Shares surrendered for settlement of minimum statutory tax withholdings— — (6)— (109)— — (109)
Stock-based compensation— — — — 44,810 — — 44,810 
Special dividends— — — — (16)— — (16)
Other comprehensive income— — — — — — 1,323 1,323 
Net loss— — — — — (38,395)— (38,395)
Balance at June 30, 202123,081 $70,906 125,538 $126 $151,109 $(687,566)$(9,540)$(545,871)


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended June 30,
20222021
Cash flows from operating activities
Net loss$(43,788)$(48,218)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization10,933 7,829 
Amortization of right-of-use asset852  
Amortization of debt issuance costs112 1,273 
Amortization of prior hedge effectiveness 3,076 
Impairment of other equity securities170  
Impairment of long-lived assets 379 
Stock-based compensation44,712 48,584 
Deferred income taxes1,955 (1,612)
Change in fair value of financial guarantee (150)
Change in fair value of derivative instruments 28 
Change in fair value of contingent consideration(150) 
Unrealized foreign exchange loss (gain)3,405 (401)
Other(1)4 
Changes in operating assets and liabilities:
Accounts receivable(2,357)(2,308)
Prepaid expenses and other current assets(417)(1,693)
Other assets(345)(668)
Accounts payable(13,553)7,891 
Accrued expenses and other liabilities8,156 3,195 
Operating lease liabilities(1,642) 
Income tax payable15 (276)
Deferred revenue16,700 23,763 
Net cash provided by operating activities24,757 40,696 
Cash flows from investing activities
Proceeds from acquisition working capital adjustment307  
Purchase of property and equipment(10,379)(6,004)
Net cash used in investing activities(10,072)(6,004)
Cash flows from financing activities
Repayment of capital lease obligations (16)
Repayment of 2018 Term Loan (2,675)
Repayment of hybrid debt (1,332)
Payment of initial public offering costs (2,794)
Payment of contingent consideration (600)(500)
Payment of special dividends (47)
Repurchase of common stock(39,155) 
Shares surrendered for settlement of minimum statutory tax withholding (30)(209)
Proceeds from issuance of stock under employee stock plans1,487 327 
Net cash used in financing activities(38,298)(7,246)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows (continued)
(In thousands)
Six Months Ended June 30,
20222021
Effect of exchange rate changes on cash and cash equivalents (147)56 
Net (decrease) increase in cash and cash equivalents, and restricted cash equivalents (23,760)27,502 
Cash and cash equivalents, and restricted cash equivalents, at beginning of the period239,297 139,470 
Cash and cash equivalents at end of the period$215,537 $166,972 
Non-cash investing and financing activities
Purchase of property and equipment included in accounts payable and accrued expenses and other current liabilities869 584 
Change in fair value of hedged interest rate swaps and interest rate cap (3,133)
Capitalized stock-based compensation1,230 13 
Deferred offering costs included in accounts payable and accrued expenses and other current liabilities 2,678 
Deferred financing costs included in accounts payable and accrued expenses and other current liabilities 742 
Right-of-use assets under operating leases7,814  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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LegalZoom.com, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Description of the Business
LegalZoom.com, Inc., or the Company, 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 for interim financial information. 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 and the related notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2021. 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 and six months ended June 30, 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 and six months ended June 30, 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,
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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 June 30, 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 and six months ended June 30, 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, 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 and six months ended June 30, 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 June 30, 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 $2.0 million and gains of $0.3 million during the three months ended June 30, 2022 and 2021, respectively, and losses of $3.4 million and gains of $0.4 million during the six months ended June 30, 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 for the three and six months ended June 30, 2022 and 2021. At June 30, 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 No. 840, Leases, or ASC 840. 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
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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 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 the incremental borrowing rate based on the information available at commencement date in determining the discount rate used to present value lease payments. We used the incremental borrowing rate on January 1, 2022 for operating leases that commenced on or prior to that date. The incremental borrowing rate used is estimated based on what we would be required to pay for a collateralized loan over a similar term. Our leases typically do not include any residual value guarantees, bargain purchase options, or asset retirement obligations.
Our lease terms are only for periods in which we have enforceable rights. A lease is no longer enforceable when both the lessee and the lessor each have the right to terminate the lease without permission from the other party with no more than an insignificant penalty. Our lease terms are impacted by options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We generally use the base, non-cancelable lease term when determining the lease assets and liabilities.
Our agreements may contain variable lease payments. We include variable lease payments that depend on an index or a rate and exclude those which depend on facts or circumstances occurring after the commencement date, other than the passage of time.
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.
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Revenue from our transaction, subscription and partner revenue is as follows (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Transaction
$66,532 $73,360 $130,616 $134,748 
Subscription
91,285 69,384 175,672 134,877 
Partner
6,050 7,688 11,788 15,439 
Total revenue
$163,867 $150,432 $318,076 $285,064 
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.
In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement—Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (Topic 820), or Topic 820, which clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. Based upon our current filing status, the amendments are effective for fiscal years, beginning after December 15, 2024. We are currently evaluating the impact of the adoption on our consolidated financial statements.
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Note 3. Other Financial Statement Information
Accounts Receivable
Changes in the allowance consisted of the following (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Beginning balance$3,633 $4,709 $4,060 $5,256 
Add: amounts recognized as a reduction of revenue2,471 1,445 4,193 3,027 
Add: bad debt expense recognized in general and administrative expense68 16 140 30 
Less: write-offs, net of recoveries(1,664)(1,056)(3,885)(3,199)
Ending balance$4,508 $5,114 $4,508 $5,114 
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):
June 30, 2022December 31, 2021
Prepaid expenses$9,292 $10,968 
Deferred cost of revenue2,118 1,819 
Capitalized cloud computing development costs869 867 
Other current assets1,581 2,935 
Total prepaid expenses and other current assets$13,860 $16,589 
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
June 30, 2022December 31, 2021
Accrued payroll and related expenses$18,741 $21,858 
Accrued vendor payables15,003 18,239
Accrued advertising11,621 426
Sales allowances4,570 4,862
Accrued sales, use and business taxes3,380 2,678
Other2,505 2,754
Total accrued expenses and other current liabilities$55,820 $50,817 
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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 June 30,Six Months Ended June 30,
2022202120222021
Cost of revenue$2,184 $1,398 $4,254 $3,076 
Sales and marketing1,879 1,323 3,754 2,798 
Technology and development692 584 1,418 1,171 
General and administrative784 358 1,507 784 
Total depreciation and amortization expense$5,539 $3,663 $10,933 $7,829 
Deferred revenue
Deferred revenue as of June 30, 2022 and December 31, 2021 was $164.3 million and $147.9 million, respectively. Revenue recognized in the three months ended June 30, 2022 and 2021 that was included in deferred revenue at March 31, 2022 and 2021 was $93.3 million and $77.5 million, respectively. Revenue recognized in the six months ended June 30, 2022 and 2021, respectively, that was included in deferred revenue as of December 31, 2021 and 2020 was $123.9 million and $102.3 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 consisted largely of the assembled workforce and synergies expected from combining Earth Class Mail into our operations.
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
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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 June 30, 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 June 30, 2021, we held interest rate swap contracts with an aggregate notional amount of $395.0 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 six months ended June 30, 2021.
Note 7. Commitments and Contingencies
Operating Leases
We conduct operations from certain leased facilities in various locations. At June 30, 2022, we had various non-cancelable operating leases for office space and equipment, which expire between July 31, 2022 and September 30, 2029, which represent the non-cancelable periods of the leases and include extension options that we determined are reasonably certain to be exercised. We exclude extension options that are not reasonably certain to be exercised from our lease terms. Our lease payments consist primarily of fixed rental payments for the right to use the underlying leased assets over the lease terms. We often receive customary incentives from our landlords, such as reimbursements for tenant improvements and rent abatement periods, which effectively reduce the total lease payments owed for these leases.
Operating lease ROU 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 June 30, 2022, the maturities of our remaining operating lease liabilities were as follows (in thousands, except years and percentages):
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June 30, 2022
2022$898 
2023
1,763 
20241,355 
2025814 
2026776 
Thereafter1,304 
Total minimum lease payments$6,910 
Less: Effects of discounting526 
Present value of lease liabilities under ASC 8426,384 
Less: current portion1,542 
Long-term lease liabilities$4,842 
Weighted-average remaining lease term4.8 years
Weighted-average incremental borrowing rate3.25 %
The component of our lease costs included in our unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2022, were as follows (in thousands):
Three Months Ended June 30, 2022Six Months Ended June 30, 2022
Lease cost
  Operating lease cost
$524 $939 
Other variable cost61 177 
Net lease cost
$585 $1,116 
At June 30, 2022, we had lease agreements with commencement dates beginning on or after July 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$134 
2023
807 
2024832 
2025857 
2026882 
Thereafter2,644 
Total minimum lease payments$6,156 
Less: Effects of discounting707 
Present value of lease liabilities under ASC 842$5,449 

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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 
20231,101 
2024867 
2025550 
2026505 
Thereafter1,033 
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 June 30, 2022, we had non-cancelable minimum advertising and media commitments for future advertising spots of $17.1 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 $55.4 million over a 5-year period, of which $42.2 million remains to be paid as of June 30, 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 June 30, 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 June 30, 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.
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Note 8. Stockholders’ 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 six months ended June 30, 2022, using the Rule 10b5-1 plans, we repurchased a total of 3,039,443 shares of our common stock through open market purchases at an average per share price of $12.88 for a total repurchase of $39.2 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 June 30, 2022 of 1,537,158 shares of our common stock through open market purchases, amounting to $15.1 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 June 30,Six Months Ended June 30,
2022202120222021
Cost of revenue
$1,331 $762 $1,608 $821 
Sales and marketing
3,536 5,143 6,661 5,350 
Technology and development
4,148 17,619 8,446 18,145 
General and administrative
13,832 21,430 27,997 24,580 
Total stock-based compensation expense
22,847 44,954 44,712 48,896 
Amount capitalized to internal-use software
749 13 1,230 26 
Total stock-based compensation expense
$23,596 $44,967 $45,942 $48,922 
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 six months ended June 30, 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
(258)1.11 
Cancelled/forfeited
(10)1.16 
Outstanding at June 30, 2022
17,772 $11.15 7.9$21,781 
Vested and expected to vest at June 30, 2022
17,764 $11.19 7.9$21,757 
Exercisable at June 30, 2022
8,516 $9.21 7.3$15,200 
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There was a realized tax benefit of, $0.6 million and $2.5 million for tax deductions from stock options exercised during the three and six months ended June 30, 2022, respectively, and $3.2 million and $5.5 million for tax deductions from stock options exercised during the three and six months ended June 30, 2021, respectively. At June 30, 2022, total unrecognized stock-based compensation expense is $50.8 million, which is expected to be recognized over a weighted-average period of 2.5 years.
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 June 30,Six Months Ended June 30,
2022202120222021
Expected life (years)
— 5.45.65.4
Risk-free interest rate
 %