Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2022

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) and the rules and regulations of the Securities and Exchange Commission. Other than net income or net loss, we do not have any other elements of comprehensive income or loss.

Principles of Consolidation

The consolidated financial statements include the financial statements of GoodRx Holdings, Inc., its wholly-owned subsidiaries and variable interest entities (“VIEs”) for which we are the primary beneficiary. Intercompany balances and transactions have been eliminated in consolidation. Results of businesses acquired are included in our consolidated financial statements from their respective dates of acquisition.

Consolidation of VIEs

We evaluate whether an entity in which we have a variable interest is considered a variable interest entity (“VIE”). VIEs are generally entities that have either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest (i.e., ability to make significant decisions through voting rights and a right to receive the expected residual returns of the entity or an obligation to absorb the expected losses of the entity).

Under the provisions of Accounting Standards Codification (“ASC”) 810, Consolidation, an entity consolidates a VIE if it is determined to be the primary beneficiary of the VIE. The primary beneficiary has both (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and (ii) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. We periodically reassess whether we are the primary beneficiary of a VIE.

Our wholly-owned subsidiary, GoodRx Care, provides management and other services to Professional Service Corporations (“PSCs”), which are owned by medical professionals in accordance with certain state laws which restrict the corporate practice of medicine and require medical practitioners to own such entities. We determined that the PSCs are VIEs. We also determined that we are able to direct the activities of the PSCs that most significantly impact their economic performance and we fund and absorb all losses of these VIEs resulting in us being the primary beneficiary of the PSCs. Accordingly, we consolidate the VIEs. The results of operations and financial position of the VIEs are not material to our consolidated financial statements.

Segment Reporting and Geographic Information

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker manages our business on the basis of one operating segment. During the years ended December 31, 2022, 2021 and 2020, all of our revenue was from customers located in the United States. In addition, at December 31, 2022 and 2021, all of our right-of-use assets and property and equipment were in the United States.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements, including the accompanying notes. We base our estimates on historical factors; current circumstances, including the impact of a grocery chain that previously did not accept discounted pricing for a subset of prescriptions drugs from our PBMs starting late in the first quarter of 2022 ("grocer issue"); macroeconomic events and conditions; consideration of the economic impact of COVID-19; and the experience and judgment of our management. We evaluate our estimates and assumptions on an ongoing basis. Actual results can differ materially from these estimates, and such differences can affect the results of operations reported in future periods. Although the grocer issue was addressed in August 2022 and our discounted pricing has since been consistently welcomed at the point of sale by the grocery chain, the sustained effects of the grocer issue on our business, future results of operations and financial condition continue to be difficult to estimate because there are several variables that are highly uncertain including, among others, consumer response to updated consumer pricing and timing and extent of returning user levels.

Certain Risks and Concentrations

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash, cash equivalents and accounts receivable. We maintain cash deposits with multiple financial institutions in the United States which, at times, may exceed federally insured limits. Cash may be withdrawn or redeemed on demand. We believe that the financial institutions that hold our cash are financially sound and, accordingly, minimal credit risk exists with respect to these balances. We have not experienced any losses in such accounts.

We extend credit to our customers based on an evaluation of their ability to pay amounts due under contractual arrangements and generally do not obtain or require collateral.

For the year ended December 31, 2022, one customer accounted for approximately 13% of our revenue. For the year ended December 31, 2021, two customers accounted for approximately 13% and 11% of our revenue. For the year ended December 31, 2020, three customers accounted for approximately 17%, 14% and 11% of our revenue. At December 31, 2022, one customer accounted for approximately 13% of our accounts receivable balance. At December 31, 2021, no customer accounted for more than 10% of our accounts receivable balance.

Cash and Cash Equivalents

We consider all short-term, highly liquid investments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash deposits are all in financial institutions in the United States. Cash and cash equivalents consist primarily of U.S. treasury securities money market funds held with an investment bank and cash on deposit.

Cash equivalents, consisting of money market funds, of $642.5 million and $852.5 million at December 31, 2022 and 2021, respectively, were classified as Level 1 of the fair value hierarchy and valued using quoted market prices in active markets.

Accounts Receivable and Allowance for Expected Credit Losses

Accounts receivable are recognized at the amounts due from various customers, net of allowance for expected credit losses. We estimate our expected credit losses based on factors including known facts and circumstances, historical experience, reasonable and supportable forecasts of economic conditions, and the age of the uncollected balances. We write off the asset when it is determined to be uncollectible. As of December 31, 2022 and 2021, the allowance for credit losses was not material.

Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are five years for furniture and fixtures and three years for computer equipment. Leasehold improvements are depreciated on the straight-line basis over the shorter of the life of the asset or the remaining lease term. Expenditures for repairs and maintenance are charged to general and administrative expenses as incurred.

Equity Investments

We retain minority equity interests in privately-held companies without readily determinable fair values. Our ownership interests are less than 20% of the voting stock of the investees and we do not have the ability to exercise significant influence over the operating and financial policies of the investees. The equity investments are accounted for under the measurement alternative in accordance with ASC 321, Investments – Equity Securities, which is cost minus impairment, if any, plus or minus changes resulting from observable price changes. Equity investments included in other assets in the consolidated balance sheets as of December 31, 2022 and 2021 were $19.0 million and $4.0 million, respectively. We have not recognized any changes resulting from observable price changes or impairment loss on such investments.

Business Combinations

The results of businesses acquired in a business combination are included in the consolidated financial statements from the date of acquisition. Acquisition accounting results in assets and liabilities of an acquired business being recognized at their estimated fair values on the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill.

We perform valuation of assets acquired and liabilities assumed for an acquisition and allocate the purchase price to its respective net tangible and intangible assets. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates including the selection of valuation methodologies, comparable guideline public companies, and Level 3 inputs in the fair value hierarchy such as forecasts of revenue and margins and estimates of royalty and discount rates, as applicable. We may engage the assistance of valuation specialists in concluding on fair value measurements of certain assets acquired or liabilities assumed in a business combination. During the measurement period, which shall not exceed one year from the acquisition date, we may adjust provisional amounts recognized for assets acquired and liabilities assumed to reflect new information subsequently obtained regarding facts and circumstances that existed as of the acquisition date.

Certain acquisitions contain provisions for contingent consideration to be transferred or received based on the post-acquisition results of the acquired businesses. The acquisition date estimated fair value of contingent consideration associated with business combinations is based on the amount of the consideration expected to be transferred or received using significant inputs that are not observable in the market (Level 3 inputs). Contingent consideration is remeasured to its estimated fair value on a recurring basis. Changes in the estimated fair value of contingent consideration, if any, is recognized within general and administrative expenses in the consolidated statements of operations.

Transaction costs associated with business combinations are expensed as incurred and are included in general and administrative expenses in the consolidated statements of operations.

Goodwill

Goodwill represents the excess of the consideration transferred over the fair value of the identifiable assets acquired and liabilities assumed in a business combination. We had one reporting unit during 2022, 2021 and 2020. We review goodwill for impairment annually in the fourth quarter and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. When testing goodwill for impairment, we may first perform an optional qualitative assessment. If we determine it is not more likely than not our reporting unit’s fair value is less than its carrying value, then no further analysis is necessary. If we determine that it is more likely than not that the fair value of our reporting unit is less than its carrying amount, then the quantitative impairment test will be performed. Under the quantitative impairment test, if the carrying amount of our reporting unit exceeds its fair value, we will recognize an impairment loss in an amount equal to that excess but limited to the total amount of goodwill. No impairments were recognized in 2022, 2021 or 2020.

Intangible Assets

Intangible assets reflect the value of customer relationships, developed technology, trademarks, content library and backlog recognized in connection with our acquisitions. Purchased intangible assets are recognized at their acquisition date fair value, less accumulated amortization. We determine the appropriate useful life of intangible assets by performing an

analysis of expected cash flows of the acquired assets. Intangible assets are amortized over their estimated useful lives on a straight-line basis, which approximates the pattern in which the economic benefits of the assets are consumed.

Capitalized Software Costs

We account for our internal-use software costs in accordance with ASC 350-40, Internal-Use Software. Capitalization of internal-use costs begins when the preliminary project stage is complete, management with the relevant authority authorizes and commits to funding the project, it is probable that the project will be completed, and the software will be used for the function intended. Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended purpose. Costs for post-configuration training, maintenance and minor modifications or enhancements are included in product development and technology expenses in the consolidated statements of operations as incurred. Capitalized internal-use costs are amortized on a straight-line basis over their estimated useful life of three years.

Cloud Computing Arrangements

We incur costs to implement cloud computing arrangements that are accounted for as service contracts. Implementation costs, such as integrating, configuring, and software customization, incurred during the application development stage are capitalized within other assets in the consolidated balance sheets until the software is ready for its intended purpose. Capitalized costs are then amortized on a straight-line basis over the term of the associated hosting arrangement, plus any reasonably certain renewal periods, and are recognized as operating expenses in the consolidated statements of operations.

Impairment of Long-Lived Assets

We account for the impairment of long-lived assets in accordance with ASC 360, Property, Plant, and Equipment. In accordance with ASC 360, long-lived assets to be held and used are reviewed for impairment when events or changes in circumstances indicate that their carrying values may not be recoverable. We perform impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying value. If an asset is determined to be impaired, the impairment is measured by the amount that the carrying value of the asset exceeds its fair value.

Leases

We account for leases in accordance with ASC 842, Leases. We have elected to account for lease and non-lease components as a single lease component and also elected not to recognize operating lease right-of-use assets and operating lease liabilities for leases with an initial term of twelve months or less. Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term.

We determine if a contract is, or contains, a lease at inception. All of our leases are operating leases. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments, less any tenant improvement allowance incentives when it is reasonably certain they will be received, over the lease term discounted using our incremental borrowing rate. As none of our leases provide an implicit rate, the incremental borrowing rate used is estimated based on what we would be required to pay for a collateralized loan over a similar term as the lease. Lease payments include fixed payments and variable payments based on an index or rate, if any, and are recognized as lease expense on a straight-line basis over the term of the lease. Variable lease payments not based on a rate or index are expensed as incurred. The lease term includes options to extend or terminate the lease when it is reasonably certain they will be exercised. Certain of our leases contain renewal options for periods of up to ten years and early termination options by up to two years, at our election. We have not recognized any renewal or early termination options in our estimate of the lease term as they are not reasonably certain of exercise. Right-of-use assets are evaluated for impairment in accordance with ASC 360, Property, Plant, and Equipment, when events or changes in circumstances indicate that their carrying values may not be recoverable. After a right-of-use asset is impaired, the remaining carrying value of the right-of-use asset is de-linked from the lease liability and amortized on a straight-line basis over the remaining lease term. The lease liability continues to be amortized using the same effective interest method as before the impairment. Thus, after impairment, the operating lease no longer qualifies for the straight-line treatment of total lease expense.

Debt Issuance Costs

Costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense over the contractual life of the loan using the effective-interest method. These costs are recognized as a reduction of the related

long-term debt balance on the consolidated balance sheets. Costs incurred in connection with the issuance of revolving credit facilities are recognized in other assets on the consolidated balance sheets and are amortized to interest expense in the consolidated statements of operations on a straight-line basis over the term of the revolving credit facility.

Income Taxes

Deferred income tax assets and liabilities are determined based upon the net tax effects of the differences between the consolidated financial statements carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed. Deferred tax assets are evaluated for recoverability each reporting period by assessing all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. A valuation allowance is used to reduce some or all of the deferred tax assets if, based upon the weight of available evidence, it is more likely than not that those deferred tax assets will not be realized. To the extent sufficient positive evidence becomes available, all or a portion of the valuation allowance may be released in one or more future periods. A release of the valuation allowance, if any, would result in the recognition of certain deferred tax assets and an income tax benefit for the period in which such release is recognized.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized. We recognize interest and penalties accrued related to our uncertain tax positions in income tax (expense) benefit in the consolidated statements of operations.

Revenue

We recognize revenue in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”), when control of the promised good or service is transferred to the customer in an amount that reflects the consideration for which we are expected to be entitled to in exchange for those services. Given the time between us transferring a promised good or service to the customer and the customer paying for that good or service is one year or less based on the terms of our revenue arrangements, as a practical expedient, we do not adjust the promised amount of consideration for effects of a significant financing component.

For the years ended December 31, 2022, 2021 and 2020, revenue comprised the following:

	Year Ended December 31,
(in thousands)	2022		2021		2020
Prescription transactions revenue	$	550,536	$	593,359	$	488,257
Pharma manufacturer solutions revenue (1)		99,425		73,348		20,488
Subscription revenue		96,167		59,925		29,386
Other revenue		20,426		18,792		12,569
Total revenue	$	766,554	$	745,424	$	550,700

(1)Pharma manufacturer solutions revenue is presented separately from other revenue beginning in 2022. Prior period amounts have been recast to conform with the current period presentation.

Prescription Transactions Revenue

Prescription transactions revenue is primarily generated from PBMs, or customers, when a prescription is filled with our code provided through our platform. The nature of our promise in our contracts with customers is to direct prescription volume through our platform, which may include marketing through our mobile apps, websites, and cards. These activities are not distinct from each other and are not separate performance obligations. Our performance obligation is to connect consumers with pharmacies that are contracted with our customers. We have no performance obligation to fill prescriptions.

Contracts with PBMs provide that we are entitled to either a percentage of fees that PBMs charge to the pharmacy or a fixed amount per type of drug prescription, when a consumer uses our code from our platform. Our performance obligation is satisfied upon the completion of pharmacies filling prescriptions. We recognize revenue for our estimated fee due from the customers at a point in time when a prescription is filled.

We receive reporting from the customers of the number of prescriptions and amount of consideration to which we are entitled at a prescription level. Certain arrangements with PBMs provide that the amount of consideration we are entitled to is based on the volume of prescription fills each month. In addition, the amount of consideration for which we are entitled may be adjusted in the event that a fill is determined ineligible, or based upon other adjustments allowed under the contracts

with customers. We estimate the amount expected to be entitled to using the expected value method based on historical experience of the number of prescriptions filled, ineligible fills and applicable rates.

We generally receive payment within thirty days of the month end in which the prescriptions were filled. However, portions of payments may not be received for up to five months to the extent of adjustments for ineligible fills.

Incentives to customers are recognized as a reduction of revenue if we do not receive a distinct good or service or cannot reasonably estimate the fair value of the good or service received. We do not provide material incentives to customers. We also offer incentives principally in the form of discounts to consumers (who are not our customers) that reduce the prices on a limited number of prescription drugs displayed on our platform during a limited time period. None of our contracts with customers require us to provide discounts to consumers. These discounts are generally offered to a limited number of consumers in a market to acquire, re-engage, or generally increase consumer utilization of our platform. We recognize the cost of these discounts to consumers as sales and marketing expense in the consolidated statements of operations at the time the prescription is filled and was $24.7 million for 2022. There were no material discounts to consumers in 2021 and 2020.

Pharma Manufacturer Solutions Revenue

Pharma manufacturer solutions revenue consists primarily of advertisements purchased by pharma manufacturers and other customers for a fixed fee that appear on our apps and websites for a specified period of time, and revenue is recognized over the term of the arrangement. Customers may also purchase advertisements where we charge fees on a cost-per-click basis, advertisements placed in our direct mailers, or other content used in advertising. Revenue for these arrangements is recognized at a point in time when the advertisements are clicked, when the direct mailers are shipped or when other content used in advertising is delivered, respectively. Pharma manufacturer solutions revenue also includes fees generated when pharmacies fill prescriptions for products sold by pharma manufacturers via our pharmacy services solution acquired through our acquisition of vitaCare Prescription Services, Inc. ("vitaCare"). We are entitled to a fixed fee per prescription from the pharma manufacturer for each of their patients assisted by us. Revenue for these arrangements is recognized at a point in time when the prescriptions are processed and filled through our pharmacy services solution.

We generally invoice pharma manufacturers and other customers in advance, in the month end in which services are rendered, or in accordance with other specific contractual provisions. Payments are due generally within thirty to ninety days of invoice but may extend up to twelve months for a limited number of contracts.

Subscription Revenue

Subscription revenue consists of subscriptions to the GoodRx Gold offering (“Gold”) and the Kroger Rx Savings Club powered by GoodRx offering (“Kroger Savings”). Under Gold, subscribers pay an upfront fee to purchase a monthly or annual subscription that provides access to lower prices for prescriptions and telehealth visits. Subscribers can cancel the Gold subscription at any time. Monthly Gold subscription fees are generally nonrefundable while annual Gold subscription fees are generally nonrefundable to the subscriber after the first two weeks. We recognize revenue for Gold on a straight-line basis over the subscription period. Under the Kroger Savings offering, subscribers pay an annual upfront fee, a portion of which we share with Kroger, for a subscription that provides access to lower prices on prescriptions at Kroger pharmacies. Subscribers may enroll in the Kroger Savings through July 1, 2023 with the expected sunset of the program in July 2024. Kroger Savings subscription fees are generally nonrefundable to the subscriber after the first thirty days unless we cancel the subscription, in which case the subscriber is entitled to a pro rata refund. We recognize revenue for Kroger Savings on a straight-line basis over the subscription period, net of the fee shared with Kroger.

Other Revenue

Other revenue consists principally of telehealth revenue. Telehealth revenue consists of revenues generated from consumers who complete a telehealth visit with a member of our network of qualified medical professionals. Consumers pay a fee per telehealth visit and we recognize the fee as revenue at a point in time when the visit is complete.

Cost of Revenue

Cost of revenue consists primarily of costs related to outsourced consumer support, healthcare provider costs, fulfillment costs for certain solutions provided to customers under our pharma manufacturer solutions offering, personnel costs, including salaries, benefits, bonuses and stock-based compensation expense, for our consumer support employees, hosting and cloud costs, merchant account fees, processing fees, and allocated overhead. Cost of revenue excludes depreciation and amortization of capitalized software development costs, developed technology, and other hosting and data

infrastructure equipment used to operate our platform, which are included in depreciation and amortization in the consolidated statements of operations.

Product Development and Technology

Costs related to the development of products are charged to product development and technology expense as incurred. Product development and technology expense consists primarily of personnel costs, including salaries, benefits, bonuses and stock-based compensation expense, for employees involved in product development activities, third-party services and contractors related to product development, information technology and software-related costs, and allocated overhead.

Sales and Marketing

Sales and marketing costs consist primarily of advertising and marketing expenses that are expensed as incurred and production costs expensed as of the first date the advertisement takes place. Advertising costs were $226.3 million, $296.6 million and $222.4 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Sales and marketing expenses also include personnel costs, including salaries, benefits, bonuses, stock-based compensation expense and sales commissions, for sales and marketing employees, consumer discounts and incentives, third-party services and contractors, and allocated overhead. Sales commissions relate to contracts with a duration of one year or less and are expensed as incurred.

General and Administrative

General and administrative costs are expensed as incurred and primarily include personnel costs, including salaries, benefits, bonuses and stock-based compensation expense, for executive, finance, accounting, legal, and human resources functions, as well as professional fees, occupancy costs, other general overhead costs, and as applicable, change in fair value of contingent consideration, loss on operating lease assets, gain on sale of business and charitable donations.

Depreciation and Amortization

Our depreciation and amortization expenses include depreciation of property and equipment, and amortization of capitalized internal-use software costs and intangible assets.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:

Level 1	Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2	Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are derived principally from or corroborated by observable market data by correlation or other means, or inputs other than quoted prices that are observable for the asset or liability; and
Level 3	Unobservable inputs for the asset or liability based on management’s assumptions.

When determining the fair value measurements for assets and liabilities which are required to be measured at fair value, we consider the principal or most advantageous market in which to transact and the market-based risk. Goodwill, intangible assets, and other long-lived assets are measured at fair value on a nonrecurring basis, only if impaired. The carrying amounts reported in the consolidated financial statements approximate the fair value for accounts receivable, accounts payable, and accrued liabilities, due to their short-term nature. The estimated fair value of our debt was approximately $649.6 million as of December 31, 2022, which was based on inputs categorized as Level 2 in the fair value hierarchy, and approximated its carrying value as of December 31, 2021. For contingent consideration, which is remeasured to its estimated fair value on a recurring basis, see “Note 3. Business Combinations and Disposition."

Stock-Based Compensation

Compensation cost is allocated to cost of revenue, product development and technology, sales and marketing, and general and administrative expenses in the consolidated statements of operations for stock options, restricted stock awards (“RSAs”), and restricted stock units (“RSUs”) based on the fair value of these awards at the date of grant. For awards that vest based on continued service, stock-based compensation cost is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the awards. For awards with performance vesting conditions, stock-based compensation cost is recognized on a graded vesting basis over the requisite service period when it is probable the performance condition will be achieved. The grant date fair value of stock options that contain service or performance conditions is estimated using the Black-Scholes option-pricing model and the grant date fair value of RSAs and RSUs that contain service or performance conditions is estimated based on the fair value of our common stock. For awards with market vesting conditions, the fair value is estimated using a Monte Carlo simulation model that incorporates the likelihood of achieving the market condition. Stock-based compensation cost for awards that contain market vesting conditions is recognized on a graded vesting basis over the requisite service period, even if the market condition is not satisfied. The requisite service period for awards with service, performance and market conditions is the longer of the service period, the performance period or the derived service period from the Monte Carlo simulation model. For awards that contain service, performance and market vesting conditions, we commence recognition of stock-based compensation cost once it is probable that the performance condition will be achieved. If the performance condition is an initial public offering ("IPO") or a change in control event, the performance condition is not probable of being achieved for accounting purposes until the event occurs. Once it is probable that the performance condition will be achieved, we recognize stock-based compensation cost over the remaining requisite service period under a graded vesting model, with a cumulative adjustment for the portion of the service period that occurred for the period prior to the performance condition becoming probable of being achieved. Thereafter, expense is recognized even if the market condition was not or is not achieved, provided the employee continues to satisfy the service condition. To the extent that the market vesting conditions are achieved earlier than the end of the requisite service period, then stock-based compensation cost is accelerated. Forfeitures are recognized when they occur.

Determining the fair value of stock-based awards requires judgment. The Black-Scholes option-pricing model is used to estimate the fair value of stock options, while the fair value of our common stock at the date of grant is used to measure the fair value of RSAs and RSUs. The assumptions used in the Black-Scholes option-pricing model requires the input of subjective assumptions and are as follows:

•For periods prior to our IPO in September 2020, because there was no public market for our common stock, the fair value of the common stock underlying our stock-based awards was determined by our board of directors, with input from management, by considering several objective and subjective factors including our actual operating and financial performance, market conditions and performance of comparable publicly traded companies, our developments and milestones, the likelihood of achieving a liquidity event transaction, and the results of third-party valuations. The third-party valuations used methodologies, approaches and assumptions in accordance with applicable elements of the practice aid issued by the American Institute of Certified Public Accountants, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Subsequent to our IPO, the fair value of common stock was determined on the grant date using the closing price of our common stock.

•Expected volatility is based on a blended approach that utilizes our historical and implied volatility for periods in which we have sufficient information and the historical and implied volatility of a publicly traded peer group based on daily price observations over a period equivalent to the expected term of the stock option grants.

•The expected term is based on historical and estimates of future exercise behavior. For stock options considered to be “plain vanilla” options, the expected term is based on the simplified method, as our historical share option exercise experience does not provide a reasonable basis upon which to estimate the expected term. Substantially all of our stock options granted after our IPO are considered to be "plain vanilla" options.

•The risk-free interest rate is based on the U.S. Treasury yield of treasury bonds with a maturity that approximates the expected term of the options.

•The dividend yield is based on our current expectations of dividend payouts.

The assumptions used in our Black-Scholes option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation could be materially different in the future.

Basic and Diluted Loss Per Share

We have two classes of common stock, Class A and Class B. Basic and diluted loss per share attributable to common stockholders of our Class A and Class B common stock are the same because they are entitled to the same liquidation and dividend rights.

We compute earnings or loss per share using the two-class method required for participating securities. The two-class method requires net income to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. In periods where we have net losses, losses are not allocated to participating securities as they are not required to fund the losses. Prior to its conversion to common stock in connection with our IPO in September 2020, we considered our redeemable convertible preferred stock to be participating securities as preferred stockholders had rights to participate in dividends with the common stockholders.

Basic earnings or loss per share is computed by dividing net income or loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Weighted average number of common shares outstanding includes contingently issuable shares where there is no circumstance under which those shares would not be issued. The vested but not yet issued Co-Chief Executives’ Performance-Vesting Founders Awards (see “Note 15. Stock-Based Compensation”) will settle in shares of common stock in October 2023 or, if earlier, upon a qualifying change in control event. At the time of vesting, these shares are contingently issuable and are included in the weighted average number of common shares outstanding for basic earnings or loss per share.

We compute diluted earnings or loss per share under a two-class method. For periods when we have net income, net income is reallocated between common stock, potential common stock and participating securities. Stock-based awards that contain vesting provisions contingent on achievement of performance or market conditions are included in the computation of diluted earnings per share, if dilutive, from the beginning of the period or date of issuance if later, if all necessary conditions to vest have been satisfied during the period. If all conditions have not been met by the end of the period, dilutive earnings per share includes the number of shares that would be issuable if the end of the period were the end of the contingency period. Potential common stock includes stock options, RSAs, and RSUs computed using the treasury stock method. For periods where we have net losses, diluted loss per share is the same as basic loss per share, because potentially dilutive shares are excluded from the computation of loss per share as their effect is anti-dilutive.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606. Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. This ASU results in the acquirer recognizing acquired contract assets and liabilities on the same basis that would have been recognized by the acquiree before the acquisition under ASC 606. The amendments in this ASU do not affect the accounting for other assets or liabilities that may arise from revenue contracts with customers in accordance with ASC 606, such as refund liabilities, or in a business combination, such as customer-related intangible assets and contract-based intangible assets. The new guidance is effective for us for annual and interim periods beginning after December 15, 2022. Early adoption of this ASU is permitted, including adoption in an interim period. This update should be applied prospectively to business combinations occurring on or after the effective date of the amendments. We early adopted this guidance on January 1, 2022, and the adoption did not have a material impact to our consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting as the publication of the LIBO Screen Rate maturities are expected to cease immediately after June 30, 2023. As a result, it is possible that beginning in July 2023, the LIBO Screen Rate will no longer be available as a reference rate. The ASU applies only to contracts, hedging relationships and other transactions that reference LIBO Screen Rate or another reference rate expected to be discontinued because of the reference rate reform. The amendments in this ASU were effective upon issuance and may be applied through December 31, 2022. In December 2022, the FASB issued ASU 2022-06, Deferral of the Sunset Date of Topic 848, which deferred the application period of ASU 2020-04 from December 31, 2022 to December 31, 2024, effective immediately for all entities. We adopted this guidance on January 1, 2022, and the adoption did not have a material impact to our consolidated financial statements. Under the terms of our existing debt agreements, in the event of the discontinuance of the LIBO Screen Rate, a mutually agreed-upon alternate benchmark rate will be established to replace the LIBO Screen Rate. We and lenders under our debt agreements will in good faith establish an alternate benchmark rate which places the lenders and us in the same economic position that existed immediately prior to the discontinuation of the LIBO Screen Rate. We intend to apply this guidance for contract modifications related to the reference rate reform as they occur through December 31, 2024.

Recently Issued Accounting Pronouncements - Not Yet Adopted

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions ("Topic 820"), which clarifies the guidance when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. This guidance is effective for annual periods beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption of this ASU is permitted. This ASU should be applied prospectively and recognize in earnings on the adoption date any adjustments made as a result of adoption. We early adopted this guidance effective January 1, 2023, and will apply this guidance prospectively, however we do not expect the adoption of this guidance to have a material impact on our consolidated financial statements and disclosures.