| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, and include the accounts of Riskified Ltd. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Immaterial Prior Period Error Correction During the year ended December 31, 2023, we identified an immaterial error relating to the period over which certain sales commissions were amortized. We assessed the materiality of the error on the financial statements for prior years individually and in the aggregate, and concluded that it was not material to any previously issued consolidated financial statements. We corrected the error by revising the consolidated financial statements appearing herein. The impact of the errors on the Company’s consolidated balance sheet as of January 1, 2021 was an overstatement of deferred contract acquisition costs of $0.7 million and an understatement of accumulated deficit of $0.7 million. There was no impact of the error on the consolidated statements of cash flows for the periods presented. The following tables summarize the effects of the corrections on the Company’s consolidated financial statements for the years ended December 31, 2022 and 2021: Year Ended December 31, 2022 As Previously Reported Adjustment As Revised (in thousands) Deferred contract acquisition costs $ 16,364 $ (1,981) $ 14,383 Accumulated deficit (350,553) (1,981) (352,534) Sales and marketing expenses 87,722 716 88,438 Operating profit (loss) (108,632) (716) (109,348) Profit (loss) before income taxes (97,947) (716) (98,663) Net profit (loss) (103,989) (716) (104,705) Net profit (loss) per share attributable to Class A and B ordinary shareholders, basic and diluted $ 0.62 $ — $ 0.62 Year Ended December 31, 2021 As Previously Reported Adjustment As Revised (in thousands) Deferred contract acquisition costs $ 11,630 $ (1,265) $ 10,365 Accumulated deficit (246,564) (1,265) (247,829) Sales and marketing expenses 70,165 545 70,710 Operating profit (loss) (55,398) (545) (55,943) Profit (loss) before income taxes (177,327) (545) (177,872) Net profit (loss) (178,885) (545) (179,430) Net profit (loss) per share attributable to Class A and B ordinary shareholders, basic and diluted $ (2.34) $ (0.01) $ (2.35) Initial Public Offering On August 2, 2021, we completed our initial public offering (“IPO”), in which we issued and sold 19,925,000 shares of our Class A ordinary shares at an offering price of $21.00 per share, including 2,625,000 shares of our Class A ordinary shares pursuant to the exercise in full of the underwriters’ option to purchase additional shares. We received net proceeds of $386.6 million after deducting underwriting discounts and commissions of $26.2 million, and other issuance costs of $5.7 million. Immediately prior to the closing of the IPO, 962,940 shares of Series E-1 convertible preferred shares were issued upon the exercise of the Series E-1 convertible preferred share warrants. In addition, all convertible preferred shares then outstanding automatically converted into 32,291,470 shares of our Class A ordinary shares. Prior to the IPO, deferred offering costs, which consist primarily of accounting, legal and other fees related to our IPO, were capitalized within other assets, noncurrent in the consolidated balance sheets. Upon the consummation of the IPO, $5.7 million of deferred offering costs were reclassified into shareholders’ equity as an offset against IPO proceeds. Recapitalization On July 28, 2021, we adopted new Articles of Association (“AoA”), in which, among other things, we implemented, upon the closing of the IPO: (i) a dual class ordinary share structure pursuant to which we have two classes of ordinary shares: Class A ordinary shares and Class B ordinary shares. The rights of the holders of our Class A ordinary shares and Class B ordinary shares are identical, except with respect to voting, conversion and transfer rights. Class A ordinary shareholders are entitled to one vote per share and Class B ordinary shareholders are entitled to ten votes per share. The dual class ordinary share structure concentrates voting power with our pre-IPO shareholders. Holders of Class A ordinary shares and Class B ordinary shares will vote together as a single class on all matters (including the election of directors) submitted to a vote of our shareholders, unless otherwise required by law or our amended and restated articles of association; (ii) the elimination of the par value per ordinary share; and (iii) a two-for-one reverse share split of our Class A ordinary shares (the “Reverse Share Split”). Immediately after the effectiveness of the Reverse Share Split, we issued and distributed Class B ordinary shares to holders of the Class A ordinary shares on a two-for-one ratio, such that each holder of Class A ordinary shares received two Class B ordinary shares for each Class A ordinary share (the “Additional Class B Issuance”). The historical financial statements have not been retroactively adjusted for the (i) dual class structure, (ii) elimination of par value, and (iii) Additional Class B Issuance. As a result, all information associated with these items related to our ordinary shares and their associated par value, convertible preferred shares and their associated par value, share options, restricted share units (“RSUs”), and warrants to purchase convertible preferred shares are being presented prospectively. All information related to our ordinary shares and their associated par value, convertible preferred shares and their associated par value, share options, RSUs, and warrants to purchase convertible preferred shares have been retroactively adjusted to give effect to the Reverse Share Split for all periods presented. Treasury Shares In August 2023, the board of directors authorized the Company to repurchase up to $75.0 million of its Class A ordinary shares (the “Repurchase Program”). Costs associated with the acquisition of Class A ordinary shares are presented as Treasury Shares on the consolidated balance sheet as a reduction of shareholders' equity. Refer to Note 10 for more information on the Repurchase Program. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to the estimated period of benefit on deferred contract costs, the capitalization of certain costs to fulfill a contract, the allowance for credit losses, the fair value of financial assets and liabilities including the fair value of derivatives and investments, the useful lives of property and equipment, capitalization and estimated useful life of internal-use software, share-based compensation including the determination of the fair value of our ordinary shares (prior to IPO), the fair value of indemnification guarantees and the associated systematic and rational amortization method, provisions for chargebacks, the fair value of convertible preferred share warrant liabilities and convertible preferred share tranche rights (prior to IPO), incremental borrowing rate (“IBR”) used for operating lease right-of-use (“ROU”) assets and operating lease liabilities, and the valuation of deferred tax assets and uncertain tax positions. We base our estimates on assumptions, both historical and forward-looking, trends, and various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Foreign Currency The U.S. dollar is our functional currency and the functional currency of a majority of our subsidiaries. For the subsidiaries where the U.S. dollar is the functional currency, monetary assets and liabilities denominated in currencies other than the U.S. dollar are remeasured into U.S. dollars at exchange rates in effect at the end of each period. Foreign currency transaction gains and losses from these remeasurements are recognized in other income (expense), net, within the consolidated statements of operations. Foreign currency transactions resulted in net gains of $1.4 million, $2.5 million, and $0.2 million for the years ended December 31, 2023, 2022, and 2021, respectively. For subsidiaries where the functional currency is not the U.S. dollar, we use the period-end exchange rates to translate assets and liabilities, the average monthly exchange rates to translate revenue and expenses, and historical exchange rates to translate shareholders’ equity, into U.S. dollars. We record translation gains and losses in accumulated other comprehensive profit (loss) as a component of shareholders’ equity in the consolidated balance sheets. Concentration of Risks Our financial instruments that are exposed to concentrations of credit risk primarily consist of cash and cash equivalents, restricted cash, short-term deposits, short-term investments, accounts receivable and derivative financial instruments. We maintain our cash, cash equivalents, restricted cash, short-term deposits, and short-term investments with high-quality financial institutions mainly in the United States and Israel, the composition of which are regularly monitored by us. We have not experienced any material losses in such accounts. Our derivatives expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We seek to mitigate such risk by limiting our counterparties to major financial institutions and by spreading the risk across a number of major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis. Our customers are online merchants. For accounts receivable, we are exposed to credit risk in the event of nonpayment by online merchants to the extent the amounts are recorded in the consolidated balance sheets. We extend different levels of credit to online merchants and maintain reserves for potential credit losses based upon the expected collectability of accounts receivable. We manage credit risk related to our merchants by performing periodic evaluations of credit worthiness and consumer indebtedness and applying other credit risk monitoring procedures. The following table summarize our merchants that represented 10% or more of Accounts receivable and Revenue: Accounts Receivable Revenue As of December 31, Year Ended December 31, 2023 2022 2023 2022 2021 Customer A 17 % 22 % 11 % 13 % 16 % Customer B 11 % * * * * ________________ * Represents less than 10% Cash, Cash Equivalents, and Restricted Cash Cash and cash equivalents consist of cash in banks, bank deposits, and money market funds. We consider all highly liquid investments, with an original maturity of three months or less at the date of purchase, to be cash equivalents. Our restricted cash primarily consisted of cash deposits to back letters of credit related to certain operating leases. Short-Term Deposits Short-term deposits consist of bank deposits with original maturities between 4 and 12 months and that mature within 12 months of the balance sheet date. Short-term deposits are reported at cost. Short-Term Investments Short-term investments consist of marketable debt securities that we have classified and accounted for as available-for-sale. We determine the appropriate classification of our investments in marketable debt securities at the time of purchase and reevaluate such designation at each balance sheet date. After consideration of our risk versus reward objectives, as well as our liquidity requirements, we may sell these debt securities prior to their effective maturities. As a result, we classify our investments, including those with maturities beyond 12 months, as current assets in the Consolidated Balance Sheets. We carry these securities at fair value, and report the unrealized gains and losses, net of taxes, as a component of shareholders’ equity, except for changes in allowance for expected credit losses, which is recorded in other income (expense), net, within the consolidated statements of operations. We periodically evaluate our available-for-sale debt securities for impairment. If the amortized cost of an individual security exceeds its fair value, we consider our intent to sell the security or whether it is more likely than not that we will be required to sell the security before recovery of its amortized basis. If either of these criteria are met, we write down the security to its fair value and record the impairment charge in other income (expense), net within the consolidated statements of operations. If neither of these criteria are met, we determine whether credit loss exists. Credit loss is estimated by considering changes to the rating of the security by a rating agency, any adverse conditions specifically related to the security, as well as other factors. Fair Value Measurements 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. We measure financial assets and liabilities at fair value for each reporting period using a fair value hierarchy which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value: Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Financial instruments consist of cash and cash equivalents, restricted cash, short-term deposits, short-term investments, accounts receivables, derivative financial instruments, accounts payables, accrued liabilities, indemnification guarantees. Cash and cash equivalents, short-term deposits, restricted cash, accounts receivable, accounts payable, and accrued liabilities are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date. Short-term investments and derivative financial instruments are stated at fair value on a recurring basis as disclosed in Note 4 below. We record indemnification guarantees that we issue upon approving a transaction at fair value when issued using the income approach. To measure this guarantee, we consider the premium that would have been received for the same guarantee if it were issued in a stand-alone transaction. The fair value of these indemnification guarantees is determined based on historical chargeback claims, a risk premium fee that would be required for a third party to assume this liability, and an appropriate discount rate due to the time period between issuance of the guarantee and settlement or expiration. Historical chargeback guarantee claims are not readily observable in the marketplace and are generally classified as Level 3 inputs. Indemnification guarantees are recorded at fair value when issued and not remeasured to fair value each period. Refer to Note 8 below for more information regarding indemnification guarantees. Because of the inherent uncertainty of valuation, the estimated fair value of our financial instruments, in particular our indemnification guarantees, may differ significantly from the values that would have been used had a ready market for the financial instruments existed, and the differences could be material to our consolidated financial statements. Refer to Item 5. “ Operating and Financial Review and Prospects — Critical Accounting Policies and Estimates .” Accounts Receivable, Net Accounts receivable are recorded at the invoiced amount, net of an allowance for credit losses. The allowance for credit losses is based on our assessment of the collectability of accounts. We regularly review the adequacy of the allowance for credit losses based on a combination of factors, including an assessment of the current merchant’s credit worthiness, the age of the balance, the nature and size of the merchant, the financial condition of the merchant, and the amount of any receivables in dispute. Accounts receivable deemed uncollectible are charged against the allowance for credit losses when identified. The allowance for doubtful accounts was $0.5 million and $0.5 million as of December 31, 2023 and 2022, respectively. The following table represents a roll-forward of the allowance for credit losses: Year Ended December 31, 2023 (in thousands) Beginning balance $ 487 Current period provision 198 Uncollectible accounts charged against the allowance (170) Recoveries of amounts previously deemed uncollectible — Ending balance $ 515 Derivative Financial Instruments We enter into derivative instruments to manage risks relating to our ongoing business operations. We enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks attributable to our exposure to changes in the exchange rates of (a) the New Israeli Shekel (“NIS”) against the U.S. dollar and (b) the Euro against the U.S. dollar. Our primary objective in entering into these contracts is to reduce the volatility of forecasted earnings and cash flows associated with changes in foreign currency exchange rates. We do not use derivative instruments for trading or speculative purposes. We account for our derivative instruments as either assets or liabilities and carry them at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Derivative instruments are recorded as either prepaid expenses and other current assets or accrued expenses and other current liabilities in the consolidated balance sheets. We record changes in the fair value of derivative instruments that are designated as hedging instruments in accumulated other comprehensive profit (loss) in the consolidated balance sheets, until the forecasted transaction occurs upon which we reclassify the related gain or loss on the derivative to the same financial statement line item in the consolidated statements of operations to which the derivative relates. Other derivatives not designated as hedging instruments consist primarily of foreign currency forward contracts that we use to hedge monetary assets or liabilities denominated in currencies other than the functional currency of a subsidiary. Changes in the fair value on these contracts, as well as the related costs, are recognized in Other income (expense), net, along with the foreign currency gains and losses on the related monetary assets and liabilities. Refer to Note 5 for additional information. Property and Equipment, Net Property and equipment are stated at cost net of accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the respective assets. Expenditures for maintenance and repairs are expensed as incurred. The estimated useful lives of our property and equipment are as follows: Computer equipment 3 years Furniture and office equipment 7 years Leasehold improvements Shorter of remaining lease term or estimated useful life Capitalized Software Costs Costs related to software acquired, developed, or modified solely to meet our internal requirements, with no substantive plans to market such software at the time of development are capitalized. Costs incurred during the preliminary project stage and during the post implementation operational stage are expensed as incurred. Eligible costs incurred during the application development stage of the project are capitalized. Capitalized software development costs are recorded as part of other assets, noncurrent in the consolidated balance sheets. Maintenance costs are expensed as incurred. Capitalized software development costs are amortized on a straight-line basis over the software’s estimated useful life, which is four years and are recorded in cost of revenue in the consolidated statements of operations. As of December 31, 2023 and 2022, we have capitalized $3.5 million, net and $5.0 million, net, respectively, of qualifying software development costs. Amortization expenses related to capitalized software costs were $1.5 million, $0.7 million, and $0.4 million for the years ended December 31, 2023, 2022, and 2021, respectively. Cloud Computing Arrangement Implementation Costs We capitalize certain implementation costs incurred in a cloud computing arrangement during the application development stage pursuant to Accounting Standards Codification, or ASC, 350-40, Internal Use Software. These costs are amortized over the term of the hosting arrangement on a straight-line basis, and are included within operating expenses in the consolidated statements of operations. Costs incurred in the preliminary stages of development are analogous to research and development activities and are expensed as incurred. These capitalized costs are included in other assets, noncurrent in the consolidated balance sheets. We have capitalized $0.7 million and $0.2 million of qualifying cloud computing arrangement implementation costs as of December 31, 2023 and 2022, respectively. Amortization expenses related to capitalized cloud computing arrangement implementation costs were $0.2 million, $0.2 million, and $0.2 million for the years ended December 31, 2023, 2022, and 2021, respectively. Leases Our lease accounting policy under ASC Topic 840, “ Leases ” until January 1, 2022, prior to the adoption of the new lease guidance was as follows: Leases are reviewed and classified as either capital or operating leases at their inception. In certain lease agreements, we may receive renewal or expansion options, rent holidays, and other incentives. For operating leases, we recognize lease costs on a straight-line basis once we take control of the space, without regard to deferred payment terms such as rent holidays that defer the commencement date of required payments. Additionally, incentives received are treated as a reduction of costs over the term of the agreement. On January 1, 2022, we adopted the new lease guidance for our operating lease agreements. Refer to Note 7 below for additional information. Our lease accounting policy under ASC Topic 842, “ ASC 842 ” from January 1, 2022, following the adoption of the new lease guidance is as follows: We determine if an arrangement meets the definition of a lease at the inception of the lease, and leases are classified at commencement as either operating or finance leases. We do not have any finance leases. Operating lease ROU assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease agreement. Operating lease ROU assets are measured based on the discounted present value of the remaining lease payments, initial direct costs incurred and prepaid lease payments, excluding lease incentives received prior to lease commencement. Operating lease liabilities are measured based on the discounted present value of the remaining lease payments. The discounted present value of remaining lease payments is computed using our IBR based on the information available at the commencement date of the lease as our leases generally do not provide an implicit rate. Our IBR was estimated to approximate the interest rate for collateralized borrowing with similar terms and payments and in economic environments where the leased asset was located. The lease term may include options to extend or terminate the lease when it is reasonably certain that we would exercise that option. We made an accounting policy election for lease agreements with a term of 12 months or less and do not recognize operating lease ROU assets and operating lease liabilities in respect of those agreements. Payments under our lease agreements are primarily fixed; however, certain lease agreements contain variable payments, which are expensed as incurred and not included in the operating lease ROU assets and operating lease liabilities. Variable lease payments are mainly comprised of common area maintenance, utilities, real estate taxes, and payments affected by changes in indexes. We elected the practical expedient to not separate lease and non-lease components for our leases. We sublease certain office spaces to third parties. Operating sublease income is recognized on a straight-line basis over the term of the agreement. Impairment of Long-Lived Assets We evaluate the recoverability of long-lived assets, including property and equipment, for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be fully recoverable. Such events and changes may include significant changes in performance relative to expected operating results, significant changes in asset use, significant negative industry or economic trends, and changes in our business strategy. Recoverability of these assets is measured by comparing the carrying amounts with the future undiscounted cash flows that the assets are expected to generate. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. We determined that there were no material events or changes in circumstances that indicated that our long-lived assets were impaired during the periods presented. Indemnification Guarantees We provide contractual assurances around the accuracy of our approvals so that our merchants can confidently automate a transaction’s execution. Our contracts obligate us to stand ready to indemnify our merchants for any costs incurred from a chargeback due to fraud (i.e., the “guarantee obligation”). Accordingly, we account for the guarantee obligation as an indemnification under the general provisions of ASC 460, Guarantees , or ASC 460, and recognize a liability at fair value upon approving a transaction at an amount that represents what we would need to pay a third party to relieve ourselves from this obligation. This liability is presented as Guarantee obligations on the consolidated balance sheets and will be released to revenue in the consolidated statements of operations. We are relieved from our guarantee obligation at the earlier of (a) paying a chargeback or (b) expiration of the guarantee which is generally six months from the date of the transaction. We recognize the guarantee obligation as revenue through a systematic and rational amortization method over a six-month period that is representative of our historical pattern of being released from risk under the guarantee obligation. While no individual transaction is probable of a chargeback occurring, when we analyze a portfolio of transactions, if we believe a future chargeback is probable and reasonably estimated, we accrue a liability and an associated expense through cost of revenue in accordance with ASC 450, Contingencies , or ASC 450 . Inputs and assumptions used by management to calculate this provision are based on the transactions approved and the features of those transactions as well as historical information about chargebacks. It is possible that the estimate may change in the near term, and the effect of the change could be material. These liabilities are recorded within Provision for chargebacks, net on the consolidated balance sheets and will be reduced by credits issued or cash paid to merchants. Refer to Note 8 below or Item 5. “ Operating and Financial Review and Prospects — Critical Accounting Policies and Estimates” for additional information. Ordinary Share Warrants Prior to IPO, warrants to purchase our Series B/C and E-1 convertible preferred shares were recorded as a liability at fair value on our consolidated balance sheets as the underlying convertible preferred shares were contingently redeemable, upon a deemed liquidation event that is outside of our control, and therefore could have obligated us to transfer assets. The Series B/C convertible preferred share warrants were remeasured to fair value at the end of each reporting period with changes in fair value recognized as a gain or loss within other income (expense), net in the consolidated statements of operations until the earlier of the exercise of the warrants, the expiration of the warrants, or upon the completion of a qualified IPO. Upon IPO, the Series B/C convertible preferred share warrants were converted to warrants to purchase ordinary shares, and the then outstanding liability was reclassified to additional paid-in capital in the consolidated balance sheets. The warrants to purchase ordinary shares may be exercised any time prior to, and shall expire upon, the earlier of (a) April 29, 2025 or (b) immediately prior to the consummation of certain deemed liquidation events. In November 2023, the outstanding warrants to purchase ordinary shares were exercised. Refer to Note 9. The Series E-1 convertible preferred share warrants were remeasured to fair value at the end of each reporting period with changes in fair value recognized as a gain or loss within other income (expense), net in the consolidated statements of operations until the earlier of the exercise of the warrants, the expiration of the warrants, or the completion of a deemed liquidation event, including a qualified IPO. Upon IPO, the Series E-1 convertible preferred share warrants were automatically exercised. In conjunction with a SaaS Agreement entered into in 2021, we issued a warrant to a customer to purchase ordinary shares. The warrant vests annually, in equal amounts, over a five-year period commencing on the effective date of the SaaS Agreement. The warrant is accounted for as consideration payable to a customer under ASC 606 and will reduce revenue as we recognize revenue under the SaaS Agreement over a period of five years. As of December 31, 2023, the warrant is outstanding. Revenue Recognition We primarily generate revenue by granting merchants access to our eCommerce risk intelligence platform and reviewing and approving eCommerce transactions for legitimacy. Revenue is also generated from the issuance of indemnification guarantees as noted above within “Indemnification Guarantees”. For the majority of our revenue, merchants pay us a percentage of every dollar of the gross merchandise volume, or GMV, that we approve and guarantee on their behalf. Our fee, as determined by our risk-based pricing model, in these situations is a percentage of the GMV of our merchants’ orders that we approve, prior to taxes or other charges. These arrangements do not provide merchants with the right to take possession of our software platform. Rather, merchants are granted continuous access to our software platform under a hosting arrangement over the contractual period. As noted above within “Indemnification Guarantees”, our contracts with our merchants obligate us to review eCommerce transactions for legitimacy as well as to stand ready to indemnify merchants for costs incurred associated with an approved transaction in the event of a chargeback due to fraud. Our fee is allocated between the consideration owed to us for our fraud review service performance obligation accounted for under ASC 606 and the consideration owed to us for issuing indemnification guarantees that are accounted for under ASC 460 and are recorded at fair value. Consideration allocated to fraud review is recognized as revenue over the contract period in the month that the transactions are approved while consideration allocated to the indemnification guarantee is recognized as we are released from risk under the guarantee, generally over a six-month |
