ZIPRECRUITER, INC. (ZIP) FY 2023 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and the related notes included in Item 8 “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the sections titled “Risk Factors” and “Note Regarding Forward-Looking Statements” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

OVERVIEW

Our Mission is to actively connect people to their next great opportunity.

ZipRecruiter is a two-sided marketplace for work. We generate substantially all of our revenue from fees paid by employers to post jobs and access other features in our marketplace. We offer our employers flat rate pricing on terms typically ranging from a day to a year, or performance-based pricing, such as cost-per-click, to align with each employer’s hiring needs.

ZipRecruiter is free to use for job seekers. Job seekers come to ZipRecruiter in search of their next opportunity. After establishing a profile, job seekers are able to apply to jobs with a single click. Our artificial intelligence-powered career advisor, Phil, curates jobs and proactively sends alerts for new opportunities where they are a Great Match, which is a designation assigned by ZipRecruiter’s technology to indicate a high potential fit between a job seeker and a job. As our matching technology learns more about job seekers’ preferences and attributes, our technology offers increasingly higher quality matches.

We plan to continue to invest aggressively in our marketplace to improve functionality and drive growth for the foreseeable future. We have made significant investments in our business to expand our employer and job seeker footprints, increase their engagement and enhance our datasets and machine learning.

For the year ended December 31, 2023, our revenue was $645.7 million and we generated net income of $49.1 million and Adjusted EBITDA of $175.3 million. For the year ended December 31, 2022, our revenue was $904.6 million and we generated net income of $61.5 million and Adjusted EBITDA of $184.9 million. Adjusted EBITDA is a financial measure not presented in accordance with GAAP. For a definition of Adjusted EBITDA, an explanation of our management’s use of this measure and a reconciliation of net income to Adjusted EBITDA, see the section titled “Key Operating Metrics and Non-GAAP Financial Measures.”

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KEY OPERATING METRICS AND NON-GAAP FINANCIAL MEASURES

In addition to the measures presented in our consolidated financial statements, we use the following key operating metrics and non-GAAP financial measures to identify trends affecting our business, formulate business plans, and make strategic decisions:

Quarterly Paid Employers

We quantify the revenue-generating customer base as the number of Paid Employers in our marketplace. The Quarterly Paid Employer metric includes all actively recruiting employers (or entities acting on behalf of employers) on a paying subscription plan or performance marketing campaign for at least one day in a given quarter. Paid Employers excludes employers from our third-party sites or other indirect channels, employers who are not actively recruiting and employers on free-trials. This group of employers excluded from our Paid Employer count does not contribute a significant amount of revenue.

In the last quarter of the year ended December 31, 2023, Quarterly Paid Employers decreased when compared to the prior-year period. The record-setting levels of hiring activity we saw throughout the first half of 2022 started to show signs of softening near the end of June 2022 and proceeded to slow down significantly during the latter half of 2022. This trend continued throughout the year ended December 31, 2023, as the U.S. labor market continued to be impacted by high interest rates and high inflation, which posed challenges for many businesses. As employers continued to feel the impact of rising operating expenses and other macroeconomic headwinds, we continued to observe employers moderating hiring plans and reducing recruitment budgets in response to economic uncertainty. This has resulted in atypical seasonal hiring patterns, with online hiring demand declining throughout 2023.

Revenue per Paid Employer

We evaluate Revenue per Paid Employer as a key indicator of our efforts to increase value provided to employers in our marketplace. We define Revenue per Paid Employer as total company revenue in a given period divided by Quarterly Paid Employers in the same period.

In the last quarter of the year ended December 31, 2023, Revenue per Paid Employer decreased slightly when compared to the prior-year period. While we believe our products and services continued to improve, providing more value for employers of all sizes by offering solutions with the best matching technology to help employers identify and recruit standout candidates, we saw a decline in employer spending on our marketplace products and services during the quarter ended December 31, 2023. We believe the decline reflects the prevailing softness in hiring demand amidst the challenging economic conditions.

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Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA as our net income (loss) before interest expense, other (income) expense, net, income tax expense (benefit) and depreciation and amortization, adjusted to eliminate stock-based compensation expense. Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA for a period by revenue for the same period.

We believe Adjusted EBITDA and Adjusted EBITDA margin are helpful to investors, analysts and other interested parties because they can assist in providing a more consistent and comparable overview of our operations across our historical financial periods. In addition, these measures are frequently used by analysts, investors and other interested parties to evaluate and assess performance. Adjusted EBITDA is not intended to be a substitute for any U.S. GAAP financial measure and, as calculated, may not be comparable to other similarly titled measures of performance of other companies in other industries or within the same industry.

Our Adjusted EBITDA and Adjusted EBITDA margin fluctuate from quarter to quarter depending on a variety of factors including, but not limited to, our investments in research and development, sales and marketing, headcount and our ability to generate revenue.

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

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(1)Net income includes one-time charges resulting from our restructuring plan announced on May 31, 2023 to reduce our global workforce by approximately 20%. Restructuring activity for the year ended December 31, 2023 reflects $7.6 million net costs primarily related to employee severance and continuation of health benefits.

(2)Includes a one-time charge of $7.5 million due to an acceleration of unrecognized stock-based compensation expense from future periods into the fourth quarter of 2023 resulting from the cancellation of the market-based RSUs in connection with the CEO Performance Award (as defined below).

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The following tables present net income margin and Adjusted EBITDA margin for each of the periods indicated:

FACTORS AFFECTING OUR PERFORMANCE

We believe that the growth and future success of our business depends on many factors. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to sustain our growth, improve our results of operations and maintain or increase profitability.

Attract More Employers

Our ability to maintain and grow an expansive universe of employers and job opportunities in our marketplace over time is critical to our business’s future. We acquire new employers primarily through marketing programs and our sales teams.

Our ability to cost effectively attract both employers and job seekers is critical to our success. Given that our marketplace remains free for job seekers, employers’ spending funds our continued investment in matching technology. The majority of our marketing efforts to date have been toward reaching employers. Our investment in employer-specific marketing has driven a significant increase in brand awareness. We believe scaling our brand has a positive impact on our ability to attract both employers and job seekers to our marketplace. We plan to continue to invest in the sales and marketing channels that we believe will drive further brand awareness and preference amongst both employers and job seekers. We are focused on the effectiveness of our sales and marketing spend and will continue to be disciplined in how we measure and re-invest in growing both sides of our marketplace.

Most of the employers in our marketplace use our self-serve tools to gain access to our marketplace and do not require a salesperson to help them initially onboard and begin using ZipRecruiter. Other employers have more sophisticated needs or require greater assistance from our sales team. We expect that our sales teams will continue to become more efficient over time, even as we scale the team to appropriately meet demand from our employer customers.

Create More Value for Employers

While our marketplace serves a wide variety of employers, all employers benefit from finding the right candidate quickly. We bring employers and job seekers together using industry-leading matching

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technology. This technology benefits from the billions of data points we gather as job seekers and employers interact, leading to better matches over time. As a result of our advancements with matching, we delivered nearly 40 million Great Match candidates in 2023, an increase of 24% over the prior year.

Average Monthly Revenue per Paid Employer by Employer Cohort Start Year

Satisfied employers continue to expand their relationship with us in terms of additional jobs and tenure in our marketplace. Those with recurring hiring needs remain active in our marketplace over time and tend to increase their spend each year, posting additional jobs and purchasing job enhancement products.

Despite the impact on employer hiring demand, our cohort trends remained intact: employers across annual cohorts continue to spend more over time. However, the more difficult hiring environment in 2023 did slow down the rate of growth in Average Monthly Revenue per Paid Employer among prior cohorts. We see these disruptions to the long term cohort dynamics as temporary, driven by the unique slowdown in hiring particularly among larger customers. Over the long-term, we continue to believe that there is meaningful opportunity to grow revenue from large customers.

Attract More Job Seekers

For job seekers, we operate like a personal recruiter, presenting strong fit potential candidates to employers before they have applied. Phil, our AI-powered career advisor, engages job seekers on their journey and provides technology that makes their job search and application process more efficient. Our ability to cost effectively grow the number of job seekers and increase their engagement in our marketplace is critical to strengthen our marketplace. We compete for job seekers on many fronts, including our ability to surface unique and attractive jobs, our ability to simplify the hiring process, the transparent feedback job seekers receive on the status of their applications and our trusted brand. We believe our offering to job seekers compares favorably versus alternatives due to the combination of our large and unique set of jobs to choose from, plus our proven matching technology that continues to get smarter over time. Historically, we have largely focused our marketing spend on employers, and despite being the highest rated job seeker app on iOS and Android, we are not yet the most well-known. Starting in 2021 and continuing in 2022 and 2023, we have made significant investments in media campaigns focused on job seeker acquisition and engagement. In 2023, organic visits from job seekers grew by more than 40% over 2022, and installs for our #1 rated job search app of iOS & Android grew app installs by

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over 20% year-over-year. We believe that this is a testament to our high aided brand awareness and superior job seeker products.

We will continue to invest in growing the number of job seekers in our marketplace that are either actively or passively open to evaluating new opportunities through a variety of acquisition strategies.

Investments in Technology

The technology that drives high-quality matches between our job seekers and employers remains a significant investment priority. We are continuously improving our data science and machine learning models, leveraging the billions of interactions taking place in our marketplace to drive meaningful improvements in the quality of matches we share with our users. Our continued improvement of the technology underpinning our marketplace and product experience is paramount to our user experience, driving our ability to attract and retain employers and job seekers and generate revenue. As such, we will continue to invest in our technology to continue to evolve our marketplace to provide improved experiences and impact for both employers and job seekers.

We have invested in research and development to improve our matching technology and deliver a high-quality experience to employers and job seekers. In 2023 and 2022, we spent $141.8 million and $127.7 million, or 22% and 14% of total revenue, respectively, on research and development. We believe the return on these investments will create operating leverage over time while continuing to drive top-line growth.

Seasonality

Our business is seasonal, reflecting typical behavior in hiring markets. Hiring activity tends to decelerate in the fourth quarter. The COVID-19 pandemic interrupted the patterns we typically see in our quarterly seasonality. In 2020, we experienced a decrease in sequential revenue of 23% in the quarter ended June 30, 2020 as a result of the pandemic, but saw consecutive quarters of revenue growth of 17% and 11% in the third and fourth quarters of 2020, respectively, as employers started to return to and join our marketplace. In 2021, we saw sequential revenue growth in each quarter. However, growth from third to fourth quarter of 2021 decelerated to 4%, reflecting more typical seasonal patterns. While sequential growth during the first half of 2022 was more reflective of our typical seasonality, we saw consecutive quarters of revenue decline of 5% and 7% in the third and fourth quarters, respectively. We believe this decline was primarily driven by a macroeconomic cooling in the hiring market. This trend continued throughout 2023, as we continued to observe employers moderating hiring plans and reducing recruitment budgets in response to economic uncertainty. This has resulted in atypical seasonal hiring patterns, with online hiring demand declining throughout 2023.

Impact of Macroeconomic Conditions

We had a lower number of Quarterly Paid Employers in our marketplace in the last quarter of the year ended December 31, 2023 compared to the prior year period. In the year ended December 31, 2023, we delivered $645.7 million in revenue, a 29% decrease compared to the year ended December 31, 2022. The record-setting levels of hiring activity we saw throughout the first half of 2022 started to show signs of softening near the end of June 2022 and proceeded to slow down significantly during the latter half of 2022. This trend continued throughout the year ended December 31, 2023, as the U.S. labor market continued to be impacted by high interest rates and high inflation, which posed challenges for many businesses. As employers continued to feel the impact of rising operating expenses and other macroeconomic headwinds, we continued to observe employers moderating hiring plans and reducing recruitment budgets in response to economic uncertainty. Also, while in 2021 and 2022, workers left jobs for higher wages, wage inflation has abated and macroeconomic uncertainty keeps people in their current roles, resulting in fewer job openings and lower employee turnover, This has resulted in atypical seasonal hiring patterns, with online hiring demand declining throughout 2023.

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Components of Our Results of Operations

Revenue

We generate revenue primarily from fees paid by employers to post and distribute jobs in our marketplace, as well as multiple sites managed by Job Distribution Partners, which are third-party sites who have a relationship with us and advertise from our marketplace, and include job boards, newspaper classifieds, search engines, social networks, talent communities and resume services.

Our subscription revenue consists of time-based job posting plans, upsells which complement or expand visibility and prominence to job posting plans and resume database plans.

We offer job posting plans with terms typically ranging from a day to a year on a flat rate subscription basis to access our marketplace, where customers may create and manage job postings and review incoming candidate applications. We recognize revenue ratably over the subscription period beginning on the date the subscription service is made available to the customer. Our nonrefundable subscriptions are typically subject to renewal at the end of the subscription term.

Our upsell services complement or expand visibility to job posting plans and are typically sold on a subscription basis. Upsell services revenue is recognized ratably over the term of the agreement beginning on the date the upsell services are made available to the customer. Additionally, upsell services include job posting enhancements which are applied to individual job postings. Such services enhance job postings by providing customers with a temporary boost in the prominence of their job postings, expanding visibility to job postings by inviting strong fit potential candidates to apply to the job, or highlighting key attributes of job postings to make them stand out to job seekers. Revenue from job posting enhancements is recognized as the customer uses the enhancements on its job postings.

Resume database plans allow our customers to search and view resumes and revenue is recognized ratably over the subscription period.

Performance-based revenue is recognized when a candidate clicks on or applies to a job distributed by ZipRecruiter on behalf of a customer. For performance-based revenue, our customers pay an amount per click or per job application usually capped at a contractual maximum per job recruitment campaign.

For a description of our revenue accounting policies, see the section titled “Critical Accounting Policies and Estimates” below.

Cost of Revenue and Gross Profit

Cost of Revenue

Cost of revenue consists of third-party hosting, credit card processing fees, personnel-related costs (including salaries, bonuses, benefits, and stock-based compensation) for customer support employees, partner revenue share amounts, job distribution costs from performance-based revenue, and amortization of capitalized software costs associated with our marketplace technology to provide services for our customers. In addition, we allocate a portion of overhead costs, such as rent, IT costs, supplies and depreciation and amortization, to cost of revenue based on headcount.

We expect cost of revenue to increase in absolute dollars in future periods due to payment processing fees, third-party hosting fees, personnel-related costs to support additional transaction volume, and amortization expense associated with our capitalized internal-use software and development cost. We expect our cost of revenue as a percentage of revenue to remain relatively flat from year to year but may vary from quarter to quarter as a percentage of our revenue due to the timing and extent of these expenses.

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Gross Profit and Gross Margin

Our gross profit may fluctuate from period to period. Such fluctuations may be influenced by our revenue, timing and amount of investments to expand hosting capacity, our continued investments in our support teams, and the amortization expense associated with our capitalized internal-use software and development cost. We expect our gross margin to remain relatively flat from year to year but may vary from quarter to quarter as a percentage of our revenue due to the timing and extent of these expenses.

Costs and Operating Expenses

Sales and Marketing

Sales and marketing expense consists of personnel-related costs (including salaries, sales commissions, bonuses, benefits, and stock-based compensation) for our sales and marketing employees, marketing activities, and related allocated overhead costs. Marketing activities include advertising, online lead generation, customer and industry events, and candidate acquisition. We allocate a portion of overhead costs, such as rent, IT costs, supplies, and depreciation and amortization, to sales and marketing expense based on headcount. Sales and marketing costs are expensed as incurred.

We expect that sales and marketing expenses will increase on an absolute dollar basis as we plan to continue to invest in sales and marketing to attract both employers and job seekers to our marketplace and to increase our brand awareness. However, sales and marketing expenses may vary from period to period as a percentage of revenue for the foreseeable future as we constantly measure the expected returns of specific sales and marketing initiatives and adjust spend levels up or down accordingly. This discipline has been a key aspect of our strong financial performance through a wide range of macroeconomic conditions. We expect that these expenses will continue to be our largest operating expense category for the foreseeable future as we continue to expand on our sales and marketing efforts over time.

Research and Development

Research and development expense consists of personnel-related costs (including salaries, bonuses, benefits, and stock-based compensation) for our research and development employees, amortization of capitalized software costs associated with the development of internal databases, candidate insights, and reporting that support our marketplace technology and the cost of certain third-party service providers. We allocate a portion of overhead costs, such as rent, IT costs, supplies, and depreciation and amortization, to research and development expense based on headcount. Research and development costs, other than software development costs qualifying for capitalization, are expensed as incurred.

We believe continued investments in research and development are important to attain our strategic objectives, and expect research and development expense to increase in absolute dollars. This expense may vary as a percentage of total revenue for the foreseeable future as we continue to invest in research and development activities related to ongoing improvements to, and maintenance of, our marketplace, expansion of our services, as well as other research and development programs, including the hiring of engineering, product development, and design employees to support these efforts.

General and Administrative

General and administrative expense consists of personnel-related costs (including salaries, bonuses, benefits, and stock-based compensation) for employees in our executive, finance, human resource and administrative departments, and fees for third-party professional services, including consulting, legal and accounting services. In addition, we allocate a portion of overhead costs, such as rent, IT costs, supplies, and depreciation and amortization, to general and administrative expense based on headcount.

We expect to continue to invest in corporate infrastructure and incur additional expenses associated with operating as a public company, including expenses related to compliance and reporting obligations

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pursuant to the rules and regulations of the SEC, and higher expenses for investor relations costs, professional services, and director and officer liability insurance.

Interest Expense

Interest expense consists of interest costs associated with our outstanding borrowings, undrawn fees associated with our credit facility, and amortization of issuance costs for our credit facility and senior unsecured notes.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income recognized on cash, cash equivalents and marketable securities, gains and losses from foreign currency exchange transactions, and realized gains and losses recognized on sales of available-for-sale debt securities. We have foreign currency exposure primarily related to personnel-related expenses that are denominated in currencies other than the U.S. Dollar, principally the Canadian Dollar, British Pound and the Israeli New Shekel. Other income (expense), net also includes sublease income which consists of income earned from noncancellable sublease agreements related to some of our office facilities.

Income Tax Expense (Benefit)

We are subject to federal and state income taxes in the United States, as well as several international jurisdictions. The effective tax rate for the year ended December 31, 2023 differed from the U.S. federal statutory rate of 21% primarily due to state taxes, state valuation allowances on certain tax credit carryforwards, and non-deductible expenses such as limitations on the amount of deductible executive compensation partially offset by research and development tax credits and a reduction in our Israeli subsidiary’s statutory tax rate for years 2020 through 2023.

Results of Operations

A discussion regarding our financial condition and results of operations for fiscal year 2023 compared to fiscal year 2022 is presented below.

A discussion regarding our financial condition and results of operations for fiscal year 2022 compared to fiscal year 2021 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which is available free of charge on the SEC’s website at http://www.sec.gov.

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The following table sets forth our consolidated results of operations for each of the periods presented:

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(1)Revenue is comprised as follows:

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

(3)Includes one-time charges resulting from our restructuring plan announced on May 31, 2023 to reduce our global workforce by approximately 20%. Restructuring activity for the year ended December 31, 2023 reflects $7.6 million net costs primarily related to employee severance and continuation of health benefits, presented as $3.4 million in sales and marketing, $3.2 million in research and development, and $1.0 million in general and administrative expenses.

(4)Includes a one-time charge of $7.5 million due to an acceleration of unrecognized stock-based compensation expense from future periods into the fourth quarter of 2023 resulting from the cancellation of the market-based RSUs in connection with the CEO Performance Award.

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Comparison of the Years Ended December 31, 2023 and 2022

Revenue

Revenue decreased by $258.9 million, or 29%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 reflecting the lower number of Quarterly Paid Employers in our marketplace primarily due to the labor market continuing to be impacted by high interest rates and high inflation in the current period which posed challenges to many businesses. Subscription revenue decreased by $188.0 million, or 27%, and performance-based revenue decreased by $71.0 million, or 34%, for the same period. While we believe our products and services continued to improve, providing more value for employers of all sizes by offering solutions with the best matching technology to help employers identify and recruit standout candidates, we saw a decline in employer spending on our marketplace products and services during the year ended December 31, 2023. We believe the decline reflects the prevailing softness in hiring demand amidst the challenging macroeconomic conditions.

Cost of Revenue and Gross Margin

Cost of revenue decreased by $22.0 million, or 25%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to a decrease of $9.3 million in job distribution costs from performance-based revenue, a decrease of $5.8 million in credit card processing fees, and a decrease of $5.7 million in partner revenue share. Total gross margins remained flat at 90% in the years ended December 31, 2023 and December 31, 2022, reflecting our continued commitment to operational efficiencies and maintaining costs proportionate to revenue.

Sales and Marketing

Sales and marketing expenses decreased by $219.2 million, or 45%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was primarily due to a $207.2 million decrease in marketing and advertising compared to the prior-year period reflecting our discipline in proactively adjusting marketing spend levels in relation to the macroeconomic conditions. Personnel-related costs for our sales and marketing employees decreased by $17.2 million, primarily due to a decrease in headcount as a result of our May 2023 reduction in force. These decreases were

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partially offset by one-time restructuring costs of $3.4 million related to our reduction in force and an increase of $1.7 million in stock-based compensation expense.

Research and Development

Research and development expenses increased by $14.1 million, or 11%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to a $7.9 million increase in our personnel-related expenses for our research and development employees attributable to an increase in headcount, an increase of $4.4 million in stock-based compensation expense, and one-time restructuring costs of $3.2 million related to our May 2023 reduction in force.

General and Administrative

General and administrative expenses decreased by $14.0 million, or 13%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily driven by a $10.3 million decrease in personnel-related costs, a $6.1 million decrease in stock-based compensation expense related to awards with only service-based vesting conditions for our general and administrative employees, attributable to a decrease in headcount as a result of our reduction in force, and a $1.3 million decrease in our director and officer liability insurance expenses. These decreases were partially offset by a one-time charge of $7.5 million in stock-based compensation expense attributable to an acceleration of unrecognized stock-based compensation expense from future periods into the fourth quarter of 2023 resulting from the cancellation of the market-based RSUs in connection with the CEO Performance Award, and one-time restructuring costs of $1.0 million related to our reduction in force.

Total Other Income (Expense), Net

Total other income (expense), net, decreased by $14.3 million, or 62%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily driven by a $9.1 million increase related to income accretion for our marketable securities purchased at a discount, as well as a $5.9 million increase in interest income earned on both our marketable securities and cash equivalents. During the three months ended September 30, 2022, we began investing in our investment portfolio to manage our excess cash reserves.

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Income Tax Expense

Income tax expense increased by $8.9 million, or 70%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase in income tax expense is primarily due to an increase in state taxes and a decrease in taxable benefits from both stock-based compensation and research and development tax credits, net of valuation allowance.

Our effective tax rate in the years ended December 31, 2023 and 2022 was 30.4% and 17.0%, respectively. Our effective tax rate for the year ended December 31, 2023 differed from the U.S. federal statutory rate of 21% primarily due to state taxes, state valuation allowances on certain tax credit carryforwards, and non-deductible expenses such as limitations on the amount of deductible executive compensation, partially offset by research and development tax credits and a reduction in our Israeli subsidiary’s statutory tax rate for years 2020 through 2023. Our effective tax rate for the year ended December 31, 2022 differed from the U.S. federal statutory rate of 21% primarily due to net favorable adjustments related to prior years and research and development tax credits, partially offset by state taxes, state valuation allowances on certain tax credit carryforwards, and non-deductible expenses such as limitations on the amount of deductible executive compensation.

Liquidity and Capital Resources

As of December 31, 2023, we had cash, cash equivalents, and marketable securities totaling $520.1 million and $245.7 million available in unused borrowing capacity under our current credit facility. We have financed our operations and capital expenditures primarily through cash generated from operations, sales of shares of common and preferred stock and from our senior unsecured notes, bank loans, and convertible notes. As of December 31, 2023, we had no amounts outstanding under our credit facility.

We believe our existing cash, cash equivalents, marketable securities, cash flow from operations, and amounts available for borrowing under our bank loan agreement will be sufficient to meet our working capital requirements for at least the next 12 months. To the extent existing cash, cash equivalents, marketable securities, cash from operations, and amounts available for borrowing are insufficient to fund future activities, we may need to raise additional funds. In the future, we may attempt to raise additional capital through the sale of equity securities or through equity-linked or debt financing arrangements. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of additional indebtedness, we may be subject to increased fixed payment obligations and could also be subject to additional restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. Any future indebtedness we incur may result in terms that could be unfavorable to equity investors. There can be no assurances that we will be able to raise additional capital. The inability to raise capital could adversely affect our ability to achieve our business objectives.

Credit Facility

In April 2021, we entered into a $250.0 million credit facility agreement with a syndicate of banks. The credit facility has a maturity date of April 30, 2026 and bears interest at a rate based upon our Net Leverage Ratio. Our Net Leverage Ratio is defined as total debt less total cash and permitted investments outstanding at period end, with a maximum total cash and permitted investments adjustment of $550.0 million, divided by the trailing 12 months of earnings, adjusted for items such as non-cash

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expenses and other nonrecurring transactions. We are also obligated to pay other customary fees including a commitment fee on a quarterly basis based on amounts committed but unused under the credit facility at a rate between 0.25% to 0.35%, depending on our Net Leverage Ratio. The amount available under the credit facility is reduced by letters of credit outstanding, which totaled $4.3 million as of December 31, 2023. The letters of credit outstanding relate to various leased office spaces.

The credit facility is collateralized by security interests in substantially all of our assets and includes customary events of default such as non-payment of principal, non-payment of interest or fees, inaccuracy of representations and warranties, violation of certain covenants, cross default to certain other indebtedness, bankruptcy and insolvency events, material judgments against us, and a change of control. The occurrence of an event of default could result in the acceleration of the obligations under the credit facility.

The credit facility agreement contains customary representations, warranties, affirmative covenants, such as financial statement reporting requirements, negative covenants, and financial covenants, such as maintenance of certain net leverage ratio requirements. The negative covenants include restrictions that, among other things, restrict our ability to incur liens and indebtedness, make certain investments, declare dividends, dispose of, transfer or sell assets, make stock repurchases and consummate certain other matters, all subject to certain exceptions.

For more information on the credit facility, please see Note 9 – Debt to the audited financial statements included in this report.

We have no amounts outstanding under the credit facility and are in compliance with our debt covenants as of December 31, 2023.

Issuance of Senior Unsecured Notes

On January 12, 2022, we issued an aggregate principal amount of $550.0 million senior unsecured notes due 2030 in a private placement. The senior unsecured notes were issued pursuant to an indenture dated as of January 12, 2022, or the Indenture. Pursuant to the Indenture, the senior unsecured notes will mature on January 15, 2030 and bear interest at a rate of 5% per year. Interest on the senior unsecured notes is payable semi-annually in arrears on January 15 and July 15 of each year.

The Indenture contains certain customary negative covenants, including, but not limited to, limitations on the incurrence of debt, limitations on liens, limitations on consolidations or mergers, and limitations on asset sales. The Indenture also contains customary events of default.

At any time prior to January 15, 2030, we have the option, at our sole discretion, to redeem all or a portion of our senior unsecured notes subject to the payment of certain premiums, make-whole provisions, and accrued and unpaid interest. Upon the occurrence of a change of control triggering event, we must offer to repurchase the senior unsecured notes at a repurchase price equal to 101% of the aggregate principal amount to be repurchased, and any accrued and unpaid interest.

For more information on the senior unsecured notes, please see Note 9 – Debt to the audited financial statements included in this report.

Share Repurchase Program

During the year ended December 31, 2022, our board of directors authorized us to repurchase up to $450.0 million of our outstanding common stock, with no fixed expiration. In May 2023, our board of directors authorized an increase to the share repurchase program of $100.0 million. During the year ended December 31, 2023, we repurchased 9.6 million shares of our Class A common stock for $147.3 million under our share repurchase program, including 6.9 million shares of our Class A common stock delivered under a Rule 10b5-1 plan totaling $110.7 million, 2.6 million shares of our Class A common stock purchased in the open market totaling $36.6 million, and 0.1 million shares of our Class A common

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stock delivered upon the final settlement of an accelerated share repurchase agreement that we entered into in December 2022 with a major financial institution for which the payment was made in December 2022.

Approximately $63.4 million remains available for future repurchases of our Class A common stock under our share repurchase program as of December 31, 2023. For more information, see Note 14 – Share Repurchase Program to the audited financial statements included in this report.

Investments

During the year ended December 31, 2023, we continued investing in highly rated debt securities and money market mutual funds to manage our excess cash reserves. The primary objectives in investing our excess cash reserves are to preserve capital, provide sufficient liquidity to satisfy both operational cash flow requirements and potential strategic investment opportunities, and to obtain a reasonable or market rate of return on investments. We consider all of our investments as available for use in current operations, including those with maturity dates beyond one year, and therefore classify these securities within current assets in our Consolidated Balance Sheets.

As of December 31, 2023, we held $283.0 million in total investments, consisting of money market mutual funds and available-for-sale debt securities. These investments are included within cash and cash equivalents and marketable securities within our Consolidated Balance Sheets. For more information, see Note 11 – Financial Instruments to the audited financial statements included in this report.

Institutional Insured Liquid Deposit

In March 2023, we entered into a cash management program called Institutional Insured Liquid Deposit, or IILD, with Wells Fargo & Company, which acts as our agent and the custodian of our funds. With the IILD, our funds are placed into interest-bearing FDIC-insured accounts at participating network banks in increments of slightly less than the FDIC insurance limit of $250,000. Both principal and interest earned are eligible for FDIC insurance under our IILD program. As of December 31, 2023, we had $120.6 million in the IILD program.

Cash Flows

The following table summarizes our cash flows for the periods presented (in thousands):

Operating Activities

The primary source of operating cash inflows is cash collected from our customers for our services. Our primary uses of cash from operating activities are for personnel-related expenditures, marketing costs and third-party costs incurred to support our marketplace.

For the year ended December 31, 2023, cash provided by operating activities was $103.2 million resulting from our net income of $49.1 million, adjusted by non-cash charges of $74.6 million and a net decrease of $20.5 million in our operating assets and liabilities. The non-cash charges primarily resulted from $84.2 million for stock-based compensation expense, $11.6 million pertaining to amortization of intangible assets and depreciation, and $4.2 million pertaining to non-cash lease expense, partially offset by $18.4 million related to the change in our deferred tax assets driven by an increase to our current year

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capitalization of software and research costs from a tax perspective partially offset by a decrease in our operating loss and tax credit carryforwards, net of valuation allowances, and $11.3 million in amortization and accretion of marketable securities. The decrease of $20.5 million related to changes in our operating assets and liabilities was primarily driven by a $25.2 million decrease in our accrued expenses and other liabilities and accounts payable, a $6.7 million decrease in deferred revenue, and a $6.0 million decrease in operating lease liabilities, partially offset by a $14.4 million decrease in our accounts receivable.

For the year ended December 31, 2022, cash provided by operating activities was $128.8 million resulting from our net income of $61.5 million, adjusted by non-cash charges of $96.2 million and a net decrease of $28.9 million in our operating assets and liabilities. The non-cash charges primarily resulted from $77.0 million for stock-based compensation expense, $10.7 million pertaining to amortization of intangible assets and depreciation, and $4.4 million pertaining to non-cash lease expense. The decrease of $28.9 million related to changes in our operating assets and liabilities was primarily driven by a $22.7 million decrease in our accrued expenses and other liabilities and accounts payable, a $6.7 million increase in our accounts receivable, a $6.7 million decrease in operating lease liabilities, and a $3.7 million decrease in deferred revenue, partially offset by an increase of $12.7 million in accrued interest associated with our senior unsecured notes.

Investing Activities

For the year ended December 31, 2023, cash provided by investing activities was $106.7 million resulting from $538.7 million received from paydowns, maturities and redemptions of marketable securities, partially offset by $421.3 million used in purchases of marketable securities and an increase in capitalized software development costs of $9.7 million.

For the year ended December 31, 2022, cash used in investing activities was $351.1 million resulting from purchases of marketable securities of $367.1 million, capitalized software development costs of $7.9 million, and capital expenditures of $2.7 million primarily related to purchases of computer supplies and equipment, partially offset by $25.6 million received from paydowns, maturities, and redemptions of marketable securities and $0.9 million received from sales of marketable securities.

Financing Activities

For the year ended December 31, 2023, cash used in financing activities was $154.3 million which consisted of $147.6 million used for the repurchase of common stock, and $17.4 million for the net settlement of taxes on RSUs, partially offset by $6.4 million of proceeds from the issuance of stock under the employee stock purchase plan, and $4.3 million of proceeds from the exercise of stock options.

For the year ended December 31, 2022, cash provided by financing activities was $195.1 million which consisted of $550.0 million of proceeds from the issuance of our senior unsecured notes, $8.1 million of proceeds from the issuance of stock under the employee stock purchase plan, and $4.7 million of proceeds from the exercise of stock options, partially offset by $339.3 million for the repurchase of common stock, $19.2 million for the net settlement of taxes on RSUs, and $9.4 million for the payment of the issuance costs related to the issuance of our senior unsecured notes.

Obligations and Other Commitments

See Note 10 – Commitments and Contingencies to the audited financial statements included in this report for our future minimum commitments related to certain software service agreements. Through December 31, 2023, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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Critical Accounting Policies and Estimates

Critical accounting policies and estimates are both the most important to the portrayal of our net assets and results of operations and require difficult, subjective, or complex judgments. We often need to make estimates about the effect of matters that are inherently uncertain and these estimates are developed based on historical experience and various other assumptions that we believe to be reasonable under the circumstances.

Critical accounting estimates are accounting estimates where the nature of the estimates are material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and the impact of the estimates on financial condition or operating performance is material.

The critical accounting policies and estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

Revenue Recognition

We derive our revenue primarily from fees for subscription services and performance-based job posting activities. Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

We determine revenue recognition through the following steps:

•Identification of the contract, or contracts, with a customer

•Identification of all performance obligations in the contract

•Determination of the transaction price

•Allocation of the transaction price to the performance obligations in the contract

•Recognition of revenue when, or as, the performance obligation or obligations are satisfied

We identify enforceable revenue contracts when the terms are agreed to by the customer. Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the products sold, and the number and types of users within our contracts.

Revenue is recognized as performance obligations are satisfied and is presented net of sales allowances.

We derive our revenues from the following sources:

Subscription Revenue

Subscription revenue consists of time-based job posting plans, upsells which complement or expand visibility and prominence to job posting plans, and resume database plans. Plans are priced at a flat rate based on plan size and whether the plan is for a daily, monthly, or annual term. Customer contracts are typically subject to renewal at the end of the subscription term. Contracts are only cancelable at the end of the term and are nonrefundable.

Time-based job posting plans: Job posting plans provide customers access to cloud-based software services, where they may create job postings that are posted to our marketplace in addition to numerous

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other job sites or partner networks with job seeker communities. Customers may also access our software to review job applications and manage job postings. We recognize revenue from job posting plans ratably over the term of the agreement beginning on the date the subscription service is made available to the customer. Once a customer requests a cancellation of their subscription, the open job postings are closed at the end of the term; however, the customer may still access the software to review past job postings or prior applications received under a separate upsell subscription. Job posting plans are billed in advance of the subscription period, which typically ranges from one to twelve months, except for daily subscription plans, which are billed in arrears based on how many days the customer uses the services.

Upsell services: Additional features to complement or expand visibility to job posting plans may be purchased as an upsell service. For these services, we bill the customers in advance and recognize revenue ratably over the term of the agreement beginning on the date the upsell services are made available to the customer, which typically ranges from one to twelve months.

Upsell services also include job posting enhancements which are applied to individual job postings. Such services enhance job postings by providing customers with a temporary boost in the prominence of their open jobs, expanding visibility to job postings by inviting strong fit potential candidates to apply to the job, or highlighting key attributes of job postings to make them stand out to job seekers. Individual job posting enhancements may be purchased by a customer when needed, or in recurring monthly prepaid bundles to complement their job posting subscription plan, and are billed in advance of use. Typically these prepaid bundles can be used over a period ranging from one to twelve months. Revenue from job posting enhancements is recognized as the customer uses the enhancement on their job postings. Unused prepaid job posting enhancements are not refundable, and we recognize revenue for the estimated portion of prepaid job posting enhancements that are expected to expire unused, or breakage, based on estimates considering historical breakage levels for upsell services. Breakage is recognized as revenue in proportion to the pattern of actual usage by customers.

Resume database plans: Access to our resume database is purchased on a subscription basis and allows a customer to search for and view resumes. Resume database plans are priced based on how many resumes the customer would like to view in a month and may be purchased independent of, or in addition to, a job posting plan. Resume database plans are billed in advance of the subscription period, which typically ranges from one to twelve months. Revenue is recognized ratably over the subscription period.

Performance-based Revenue

Performance-based revenue consists of customers who pay on a per click by job applicant or per job application basis for the job postings they wish to distribute through our software. Customers pay an amount per click or per application that is usually capped at a contractual maximum per recruitment campaign, with campaigns typically lasting from one to three months. Customers on this pricing model do not have access to our applicant tracking software for subscription customers though they may purchase resume database subscription plans separately. Customers that use performance-based revenue plans are typically companies with consistent hiring needs and sophisticated recruitment campaigns where they manage incoming applications and job postings on their own applicant tracking systems.

Performance-based revenue is typically billed monthly, in arrears, and revenue is recognized as job applicants click on or apply to the distributed job postings, up to the contractual maximum per recruitment campaign.

Sales Allowance

We establish a sales allowance to estimate refunds and credits that we may grant to customers in the future for cancellations of subscriptions and concessions to customers who are not satisfied with services received. While subscriptions are noncancelable once the contract term has commenced, we may at times allow customers who miss their cancellation window prior to an autorenewal to cancel their contract, and we may issue refunds or credits to maintain overall customer satisfaction. The sales allowance is

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estimated by considering historical results and trends, and is accounted for as a reduction to revenue or deferred revenue for contracts where payments are received upfront and revenue is recognized over time.

Stock-Based Compensation

Compensation expense related to stock-based awards is measured and recognized in the financial statements based on the fair value of the awards granted. We estimate the fair value of employee stock-based compensation awards on the grant date and recognize forfeitures as they occur. The fair value of restricted stock units, or RSUs, is estimated based on the fair value of our common stock. The fair value of each option award and employee stock purchase right associated with our Employee Stock Purchase Plan is estimated on the grant date using the Black-Scholes option-pricing model. We have elected to treat stock-based awards with graded vesting schedules and only time-based service conditions as a single award and recognize stock-based compensation expense on a straight-line basis over the requisite service period.

For awards that contain both market or performance conditions and service conditions, the grant date fair value is recognized as stock-based compensation expense using a graded vesting attribution model. No expense is recognized for awards with performance conditions until the performance condition is probable of being met.

The Black-Scholes option pricing model requires us to make certain assumptions including:

Fair Value of our Common Stock. See the section titled “Determination of the Fair Value of Common Stock on Grant Dates” below.

Expected Term. Given that we do not have sufficient exercise history to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior, we determine the expected term for our “plain vanilla” stock options using the simplified method, which is calculated as the midpoint of the stock option vesting term and the expiration date of the stock option.

Expected Volatility. Because our common stock has limited trading history, we estimate the expected volatility of the awards from the historical volatility of selected public companies that represent similar but alternative investment opportunities to an investment in us. Characteristics considered in identifying guideline public companies include similarity in size, lines of business, market capitalization, revenue and financial leverage. We determined the expected volatility assumption using the frequency of daily historical prices of comparable public company common stock for a period equal to the expected term of the option. We assess the comparable companies and other relevant factors used to measure expected volatility for stock option grants on an as-needed basis.

Risk-free Rate. The risk-free interest rate assumption is based upon observed interest rates on the U.S. government securities appropriate for the expected term of our employee stock options.

Dividend Yield. The dividend yield assumption is based on our history and expectation of dividend payouts. We have never declared nor paid any cash dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.

The determination of stock-based compensation is inherently uncertain and subjective and involves the application of valuation models and assumptions requiring the use of judgment. If we had made different assumptions, our stock-based compensation expense and our results of operations for the years ended December 31, 2023 and 2022 may have been significantly different.

Determination of the Fair Value of Common Stock on Grant Dates

Prior to the completion of our Direct Listing on May 26, 2021, our common stock was not publicly traded, and therefore, our board of directors exercised significant judgment in determining the fair value of our common stock on the date of each stock-based grant, with input from management and the

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assistance from an independent third-party valuation firm based on several objective and subjective factors. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. In determining the fair market value of our common stock prior to the Direct Listing, the board of directors considered the following:

•the prices of our redeemable convertible preferred stock sold to outside investors in arms-length transactions;

•the rights, preferences and privileges of our redeemable convertible preferred stock relative to our common stock;

•our operating and financial performance;

•the present value of our anticipated future cash flows;

•our stage of development and current business conditions and projections affecting our business, including the introduction of new products and services;

•the likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, such as an initial public offering or sale of our company, in light of prevailing market conditions;

•any adjustment necessary to recognize a lack of a liquid trading market for our common stock;

•the market performance of comparable publicly traded companies; and

•the overall U.S. economic, regulatory and capital market conditions.

In valuing our common stock, our board of directors determined the equity value of our business using various valuation methods including market and income approaches with input from management.

The market approaches we used prior to the Direct Listing were the Guideline Public Company Method and the Guideline Transaction Method. The Guideline Public Company Method estimated our equity value by applying a representative market value multiple from comparable companies to our financial forecasts. The Guideline Transaction Method estimated our equity value by using pricing multiples derived from sales of companies with similar characteristics to us. Under the income approach, a Discounted Cash Flow, or DCF, model was used, where net cash flows attributable to our business and an assumed terminal value were discounted to present value using a discount rate, based on our estimated weighted average cost of capital that reflected the risks inherent in the cash flows.

After determining our equity value, we then allocated the equity value to our classes of stock using either an Option Pricing Method, or OPM, or a hybrid of OPM and Probability Weighted Expected Return Method, or PWERM.

The OPM allocated values to each equity class by creating a series of call options on our equity value, with exercise prices based on the liquidation preferences, participation rights, and strike prices of the equity instruments. In determining the estimated fair value of our common stock, we considered the fact that our stockholders could not freely trade our common stock in the public markets. Accordingly, we also applied a discount for lack of marketability to the equity value.

Under the hybrid OPM and PWERM, the allocation was based on the likelihood of a near-term liquidity exit or an alternative exit scenario. For a near-term liquidity scenario, the allocation was based on the expected pricing and timing of the liquidity event. For the alternative exit scenario, an OPM with an appropriate time to liquidity was used to estimate the fair value of the share classes assuming the near-term liquidity scenario does not occur, with the resulting share values under each scenario weighted by

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management’s estimate of their respective probabilities. We also applied a discount for lack of marketability.

In valuing our common stock at various dates in 2019 through September 30, 2020, our board of directors determined the equity value of our business using the Guideline Public Company Method and the equity value was then allocated to our classes of stock using an OPM given the uncertainty with regards to the timing and type of future exit scenario.

In valuing our common stock as of December 31, 2020 and March 31, 2021, our board of directors determined the equity value of our business using the Guideline Public Company Method, the Guideline Transaction Method, and a DCF. The equity value was then allocated to our classes of stock using the hybrid OPM and PWERM based on management’s estimate of the likelihood of a near-term liquidity event or an alternative exit scenario.

Application of these approaches involves the use of estimates, judgment, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue and costs, future cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of possible future exit events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.

For stock awards granted after the completion of our Direct Listing on May 26, 2021, our board of directors determined the fair value of each share of underlying common stock based on the New York Stock Exchange, or NYSE, closing price on the date prior to the date of grant.

We have granted RSUs to certain of our employees and directors. RSUs granted prior to our Direct Listing vest upon the satisfaction of both a time-based service condition and a liquidity event requirement. The time-based service condition for these awards is generally satisfied over four years. The liquidity event requirement is satisfied upon the earliest to occur of a qualifying event, defined as a change of control transaction or after a set period of time following the effective date of our initial public offering pursuant to an effective registration statement under the Securities Act for the offer and sale of shares by ZipRecruiter. A direct listing in which we did not sell our equity securities would not have satisfied the liquidity event performance condition; however, on April 19, 2021, our board of directors waived the liquidity event performance condition for the 6.9 million RSUs then outstanding so those that had satisfied the service condition would vest upon the earlier of the first day of trading of our common stock on the NYSE, or March 15, 2022. As the satisfaction of the performance condition was not probable for accounting purposes prior to the waiver, the waiver of the liquidity event-based performance condition resulted in the remeasurement of the modified awards at fair value on the date of the waiver, which management estimated to be $25.04 per share or approximately $172.6 million.

Stock-based Compensation for Awards with a Market Condition

In April 2021, we granted an RSU award to Ian Siegel, our Chief Executive Officer, or the CEO, and such award, the CEO Performance Award, which included service, market, and performance-based vesting conditions. The fair value of the award is determined using a Monte Carlo simulation model. The associated stock-based compensation expense is recorded over the requisite service period, using a graded attribution method. The requisite service period is the longer of the service period derived from the Monte Carlo simulation model and the explicit service period the CEO is required to remain employed to vest in the award. The market condition is satisfied upon achieving certain stock price targets for a period following the completion of our Direct Listing. The CEO Performance Award also contains an implied performance-based vesting condition as the CEO’s ability to earn the award was contingent upon the completion of the Direct Listing. Accordingly, no expense was recognized prior to the completion of our Direct Listing on May 26, 2021, as vesting was not considered probable for accounting purposes until the Direct Listing occurred. Provided that Ian Siegel continues to be the CEO of ZipRecruiter, stock-based compensation expense is recognized over the requisite service period, regardless of whether the stock

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price targets are achieved. If the stock price targets are met sooner than the derived service period, we will accelerate the recognition of stock-based compensation expense to reflect the cumulative expense associated with the vested shares. In December 2023, we cancelled the CEO Performance Award and incurred a one-time charge of $7.5 million resulting from an acceleration of unrecognized stock-based compensation expenses from future periods into the fourth quarter of 2023.

Income Taxes

We account for income taxes in accordance with Accounting Standards Codification 740, Income Taxes. Current tax liabilities and assets are recognized for the estimated taxes payable or refundable, respectively, on the tax returns for the current year. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

We record valuation allowances against our deferred tax assets, when necessary. Realization of deferred tax assets is dependent upon future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be realized against future taxable income. To the extent we believe that realization is not likely, we establish a valuation allowance against our net deferred tax asset, which increases our income tax expense in the period when such determination is made. Although we incurred a current year pretax profit and maintain a recent history of cumulative earnings, during the year ended December 31, 2023, we recorded an incremental valuation allowance of $2.3 million against the deferred tax asset associated with carried forward California Research and Development Credits as we believe that it is more likely than not that we will not generate sufficient California sourced taxable income in future years to utilize that deferred tax asset.

On a quarterly basis, we evaluate the probability a tax position will be effectively sustained, and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in income tax expense.

Investments

We maintain an investment portfolio of highly rated debt securities and money market mutual funds to manage our excess cash reserves. Our primary objectives in investing our excess cash reserves are to preserve capital, provide sufficient liquidity to satisfy both operational cash flow requirements and potential strategic investment opportunities, and to obtain a reasonable or market rate of return on investments.

Our investments are all highly liquid and available for use in current operations, including those with maturity dates beyond one year, and therefore we classify these securities within current assets in our Consolidated Balance Sheets. We consider our highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Investments not considered cash equivalents are classified as marketable securities in our Consolidated Balance Sheets.

We classify and account for our money market mutual funds which have readily determinable fair values as equity securities, and we carry such securities at fair value with unrealized gains and losses reported in other income (expense), net in our Consolidated Statement of Operations. We classify and account for our debt securities as available-for-sale, and we carry such securities at fair value with unrealized gains and losses excluded from earnings and reported net of tax as a separate component of

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stockholders’ equity in accumulated other comprehensive income (loss) until the security is sold or matures.

We determine any realized gains and losses on the sale of our available-for-sale debt securities using a specific identification method, and we record such gains and losses through other income (expense), net in our Consolidated Statement of Operations.

If an available-for-sale debt security’s fair value declines below its amortized cost basis, we evaluate whether we intend to sell the security, or whether we more likely than not will be required to sell the security before the recovery of its amortized cost basis. If either condition is met, we record an impairment loss on the security through other income (expense), net in our Consolidated Statement of Operations. If neither condition is met, we evaluate whether the decline is the result of credit-related factors, in which case we record the credit-related portion of the impairment loss through other income (expense), net in our Consolidated Statement of Operations, and record the non-credit-related portion of the impairment loss, net of tax, through other comprehensive income (loss) in the Consolidated Statement of Comprehensive Income.

Recent Accounting Pronouncements

See Note 2 – Basis of Presentation, Principles of Consolidation, and Summary of Significant Accounting Policies to the audited financial statements included in this report for more information.